Cost of public sector pensions increases despite Hutton reforms (WSB)

The annual cost of unfunded public sector schemes has increased since the introduction of the Hutton reforms according to figures from the Office for Budget Responsibility (Tuesday 2 April 2013).

To view article, visit The WSB website

“This year’s Budget report forecasts a £10.5bn cashflow shortfall for the schemes in 2012-13, a third higher than predicted in the 2011 budget report.

The difference between projections from 2011, before reforms designed to make public sector schemes more sustainable were factored in, and 2013 grows to 40% by 2015-16.

The latest figures project the gap between contributions received and benefits paid will have grown from £200m in 2005-6 to £16.2bn by 2017-18.

This is partly due to public sector jobs cuts and restraints on pay rises which have reduced contributions to the scheme.

It is also the result of out-dated assumptions and an “enormous clash” between the reforms and plans for a single tier state pension, according to Centre for Policy Studies fellow Michael Johnson.

Speaking at a Knowledge Transfer Network conference, he said updating longevity assumptions used by Hutton would add £2bn a year to costs.

State pension reform is more significant, bringing an end to contracting out by 2016, meaning employers will lose National Insurance rebates.

Johnson said: “Private sector contracted-out employers can reduce benefits to compensate, but public sector employers are banned from doing that because of a pledge not to make changes for 25 years.”

He put the annual cost of this change at £3.2bn and said the growing cashflow pressures would derail reform.

“Cashflow is king,” he said. “It will exert political pressure for change. The benefits will only emerge in 20 or 30 years, but the government needs cashflow benefits now and Hutton’s reforms deliver nothing other than increased contributions.”

However, Pensions Policy Institute research director Chris Curry warned against comparing estimates based on different underlying assumptions and said annual cashflow costs would have been approximately £5bn greater without the reforms.

“The cashflow gap is higher than expected because the underlying economic situation has changed,” he said.

“Public sector employment has fallen further than expected, and the pay restraints are probably greater than those factored into the calculations.”

Curry said analysis suggested the reforms would cut cashflow costs by about 0.2% of GDP each year by 2016.”

To view article, visit The WSB website

For more on this see Micheal Johnson’s blog article: Public service pensions: Parliamentary Ping-Pong anyone?

Date Added: Wednesday 3rd April 2013