False economies?_2

10 May 13
The Treasury’s plan to cut public sector pension costs by raising staff contributions has been stymied by workforce cuts and a related surge in early retirements

By Nigel Keogh

The Treasury’s plan to cut public sector pension costs by raising staff contributions has been stymied by workforce cuts and a related surge in early retirements

Nurses, Photo: Alamy

In June 2010, the chancellor’s terms of reference for Lord Hutton’s Independent Public Service Pensions Commission included a request to ‘consider the case for delivering savings on public service pensions within the Spending Review period… to contribute towards the reduction of the structural deficit’.

When the commission produced its interim report in September 2010, it concluded that the only discernible change that could take effect within the Spending Review period would be a rise in employee pension contributions.

In the unfunded, pay-as-you-go public sector schemes – which include those for the NHS, teachers, civil service and armed forces – today’s pensions are paid from contributions made by today’s employees and their employers. Any shortfalls are funded by the Treasury. Increasing the amount raised from staff contributions therefore reduces the call on public funds.

Acting on the interim report, the chancellor’s 2010 Autumn Statement announced that employee contributions would be increased over the Spending Review period to generate an additional £2.8bn income. This would help reduce the Treasury top-up funding from the £10.3bn forecast in the June 2010 Budget to £7bn per annum by 2015/16.

However, the latest figures from the Office for Budget Responsibility suggest that these savings are no longer expected to materialise, with the Treasury top-up figure now set to be higher than the June 2010 forecast. The reason for this reversal is that the impact of public sector staffing reductions over the past two years has been under-estimated. While savings might be being made by cutting staff across Whitehall and the NHS, this is pushing up costs elsewhere for the Treasury.

Since 2010, the number of contributing members in the NHS Pension Scheme has fallen by 110,000 (8%), the first recorded fall in membership of the scheme. Over the same period, membership of the civil service scheme has also fallen by 51,000 (around 9%). With so many fewer members, total employee contributions have fallen.

In addition, this fall in membership occurred before the first of the phased increases in contributions came into effect on April 1, 2012.

At the same time, there has been a dramatic rise in pensions in payment. This in itself is not surprising. In avoiding the use of compulsory redundancies, both central government and the NHS have used voluntary early retirement schemes as a means of reducing head count. This in turn has swelled the numbers taking up their pensions. Historically, in the NHS scheme, the number of pensions in payment has grown at a rate of around 3% per annum. In the past few years, however, this has grown to 5%. In the year ending March 31, 2012, 44,300 new pensions came into payment, more than double the number in 2002/03.

This surge in retirements has caused a spike in the pensions bill for the unfunded schemes. It will rise to £35bn per annum by 2015/16, some £2.1bn higher than forecast in June 2010.

Taken together, these two effects – falling contributions and rising pensions payments – have combined to increase the net call on Treasury funding by £3.6bn per annum above that forecast at the 2010 Autumn Statement. This more than cancels out the impact of the contribution increases.

There is no reason to assume that this drop in membership of the NHS and civil service pension schemes has now ended. Public sector employment continued to fall in 2012. With further public spending cuts to come, the downward trend is likely to continue.

The Treasury acknowledged in October 2010 that it was ‘possible that a small number of individuals will choose to leave their pension scheme as a result of these changes’. But it judged that, ‘given the generosity of the schemes, there is little economic rationale to do so, and policy will be designed to mitigate these impacts’.

Certainly, the contribution increases have been structured to protect the very low paid. But anyone with a salary of over £15,000 per annum will be paying more in contributions, some significantly more. Set against a backdrop of continuing pay restraint, rising inflation and subsequent declining living standards, many public sector employees may already be considering whether they can afford pension scheme membership, no matter how generous. Taken together, further workforce reductions and scheme opt-outs could yet add to the decline in contributing members, placing greater strain on Treasury funding.

So, while increases in employee pension contributions may have mitigated the various adverse pension cost pressures, they haven’t been the panacea the Treasury envisaged.

Nigel Keogh is technical manager for pensions at CIPFA

Transparent

CIPFA logo

Did you enjoy this article?

AddToAny

Top