Future public sector pension costs 'hugely underestimated'

3 Mar 11
There is an ‘air of unreality’ about the future cost assumptions of public sector pensions, MPs have been told.
By Lucy Phillips

4 March 2011

There is an ‘air of unreality’ about the future cost assumptions of public sector pensions, MPs have been told.

Giving evidence to the Public Accounts Committee on March 2, independent pensions expert Ros Altman said that Treasury assumptions about how much public sector pensions were going to cost future generations were too low, and based on unpredictable gross domestic product and inflation figures.

She said: ‘The costs of providing the kind of pensions we have promised is much higher than any volume ever realised or budgeted for.

‘The issue for me is that the private sector has already recognised the kind of pension promises we have been making in the UK are unaffordable and have voted with their feet and closed schemes but the same reality has not been recognised in the public sector. 

‘I would suggest taxpayers need protecting from the unexpected which is already happening.

‘Spending on public sector pensions is already being overshot... There’s an air of unreality about the assumptions of costs being made.’

Altman also said that public sector employees were often not aware of the value of their pensions. Replicating public sector pensions schemes in the private sector, meant additional costs of 30-50% on top of an individual’s salary, she said. 

It emerged during the session that Cabinet Secretary Sir Gus O’Donnell is in line for a pension of £100-£105,000 a year when he retires, which has a total market value of more than £4m.

Altman called for a ‘fairer’ distribution of public resources that would see savings on public sector pensions used to boost the state pension. She refuted claims from the MPs that a substantial rise in the basic state pension was currently ‘unaffordable’, claiming billions of pounds could be saved from removing the contracting out element of public sector pensions.

Tax relief for all higher rate pensions should also be reduced, she said.

Sir Nicholas Macpherson, permanent secretary at the Treasury, also gave evidence to the committee of cross-party MPs, whose inquiry is looking into the impact of recent changes made to public service pensions.

Macpherson said that public sector pension costs were ‘reasonably under control’ as a result of ‘meaty’ measures undertaken by the current and previous government. These included uprating payments in line with the lower consumer price index measure of inflation, rather than the retail price index, and the introduction of capping and sharing arrangements.

Admitting that Altman’s estimate of the market rate of public sector pensions was ‘broadly right though perhaps on the high side’, he said: ‘The glory days enjoyed by the cabinet secretary and his predecessors will not apply to the likes of myself… because we will come across a cap before we get a pension of that value.’

He also revealed that ‘someone in the wider public sector’ was in line for a pension pot of £5m which ‘does seem to be excessive’.

But looking ahead to Lord Hutton’s final report and a subsequent announcement in the March 23 Budget, Macpherson warned against moving too far in the direction of the private sector, which has largely moved away from generous final salary schemes.  ‘It would be a pity if it moved all the way because there is some benefit to the state in [public sector] pension provision and we don’t want there to be a race to the bottom.’

He expected public sector pension schemes to be in a state of flux for two to three years as a result of impending changes.  

The PAC inquiry comes as the government launched a public consultationon the ‘Fair Deal' policy, which protects public sector pension arrangements when employees are transferred into another sector.

Unions immediately launched a defence. TUC general secretary Brendan Barber said: ‘The Fair Deal on pensions provides an essential safeguard for staff where public services are transferred to private sector providers. Removing it would allow private contractors to boost profit margins by slashing staff pensions.’

But pension consultants LCP said ‘increasingly complicated and demanding’ Fair Deal rules had deterred many companies and charities from bidding for public sector work.

Bart Huby, partner and head of public sector outsourcing at LCP, said: ‘The government needs to find a way round this issue if it is to successfully encourage more varied and cost effective provision of public services. Equally, it needs to ensure that transferred employees do not lose out on their reasonable expectations of a decent pension.’


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