The public sector pensions debate is focused on the short term. Only an independent commission could find a long-term solution
The future of public sector pensions is high on the media and political agendas. However, the current debate is generating more heat than light, with claims about trillion-pound deficits aimed more at making headlines than illuminating our understanding of the situation.
We need an informed debate about the future of public sector pensions, but the frenzied pre-election atmosphere is not allowing it to take place. That’s why the National Association of Pension Funds is calling for an independent public sector pensions commission.
Pensions need a long-term perspective. A commission would be able to find a solution that meets the long-term needs of both taxpayers and public sector workers. It should be made up of employers and employees, as well as pension experts.
There are four main public sector schemes: the Local Government Pensions Scheme, the NHS Pension Scheme, the Teachers Pension Scheme and the Civil Service Pension Scheme. They all have different rules, benefits and costs. As such, there is unlikely to be one answer.
For instance, the Local Government Pension Scheme is different from the other large schemes as it is funded, and is administered locally with 99 different funds across the country. It is the largest of the schemes with 1.7 million active members. The scheme is final salary with 1/60th accrual and employee contributions between 5.5% and 7.5%, depending on salary. It was always seen as less generous than its central government counterparts, has always had a retirement age of 65, and the average pension is only £4,000 a year.
At the last valuation in 2007, the scheme was 82% funded with £122bn of funding, but liabilities of £149bn. The scheme’s 2010 valuation is expected to show that this funding level has fallen again, putting the scheme under the spotlight with pressure to put up employer contributions.
The next biggest example is the NHS Pension Scheme, the largest centrally administered scheme in Europe. It has 1.3 million active members and is also a final-salary scheme with 1/60th accrual. Employee contributions are graduated, ranging from 5% to 8.5%, with the NHS paying an employer’s contribution of 14%.
However, as the pension is an unfunded pay-as-you-go scheme, current pensions are funded directly from the Treasury, and future employees and taxpayers will pay the pensions of today’s workers.
All the main schemes have had reforms in recent years. Retirement ages for new members have been increased to 65; employee contributions have risen in some cases, and the civil service scheme provides benefits based on average rather than final salary. Ministers have also tried to cap future liability by introducing cost-sharing arrangements for unexpected liabilities.
But even with these changes, the Pensions Policy Institute has predicted that the public cost of the unfunded public sector pension schemes will increase by 40% over the next 20 years. With an ageing population, it is inevitable there will be a rise in all pension costs, but these figures suggest there is a case for change.
But reform must not be kneejerk. Pension liabilities stretch over many decades, and any changes would take a long time to make an impact.
Politicians find it difficult to take the long-term view, especially when there is an election due. That’s why we need to take the politics out of the public sector pensions debate. If we do this, there is no reason why we can’t reform these pension schemes to make them fair and affordable for both taxpayers and public sector workers.
Richard Wilson is the senior policy adviser at the National Association of Pension Funds
