CBI says public pensions are costing billions of pounds a year

6 Apr 10
Business leaders have called for sweeping reform of public sector pensions, which they say are adding £10bn to government spending every year
By Lucy Phillips

6 April 2010

Business leaders have called for sweeping reform of public sector pensions, which they say are adding £10bn to government spending every year.

A survey published today by the CBI business lobby found that the total taxpayer liability for pensions for public sector workers, such as civil servants, teachers and health workers, stands at £1 trillion, or £40,400 for every UK household. This is well above the last official government estimate in 2008, which put the black hole at £770bn.

According to the employers’ group, pensions are now worth on average 26% of every state worker’s salary, far more than in the private sector. The cost to the taxpayer has been compounded by a 1 million increase in the number of public sector workers over the past decade, and is only likely to increase as people live longer.

The CBI called for an end to the current defined benefit model, which guarantees future payouts related to length of service or final salary. The report suggests moving to the Swedish ‘notional defined contribution’ approach, linking pensions more directly with how much an employee puts in rather than relying on taxpayer contributions. The retirement age for existing and new state workers should also be raised to match the state pension age.

CBI deputy director general John Cridland said: ‘Public sector workers deserve a good retirement, but they and their employers should pay their own way. The pensions black hole is over £1 trillion and rising, and taxpayers cannot be left to make up the difference.’ He called on the next government to set up an independent commission to ‘acknowledge the problem, establish the true costs and let the taxpaying public decide what they are prepared to pay for’.

The CBI also said that public sector earnings were now higher than in the private sector, at an average of £23,660 compared to £21,528,meaning that pensions no longer needed to ‘make up’ the difference.

But commentators condemned the CBI for not giving more credit to cost-saving reforms introduced by the government over recent years.

Chris Johnson, head of human capital at consultancy Mercer, told Public Finance that important changes, such as a commitment to cap the employer contribution, had been overlooked. But he added: ‘There’s still a need for further reform because these are very generous and expensive pensions.’

Johnson, who was previously a civil service director of reward, advocated a hybrid model, giving lower-paid workers the protection of a defined benefit scheme and more highly paid workers an underpinning defined benefit scheme topped up by some form of defined contribution scheme. ‘There is value for the taxpayer in lower-paid public sector workers having some assurance of their financial stability in retirement – otherwise they become a liability on the social security system,’ he said.

Unions hit back at ‘increasingly hysterical’ pensions cost estimates, which failed to take account of the recent reforms.

Christine Blower, general secretary of the National Union of Teachers, said: ‘The critics of public sector pensions are deceiving the public about their costs and promoting the politics of envy. The NUT will continue to defend decent pensions for all workers, in the private and public sectors, to protect us all against poverty in old age.’

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