NEARLY £4 IN EVERY £5 PAID IN PENSIONS TO PUBLIC SECTOR WORKERS WILL COME FROM THE TAXPAYER
As the Public Bill Committee starts scrutiny of the Public Service Pensions Bill on Tuesday 6 November, leading pensions analyst Michael Johnson reveals that the cashflow shortfall between public sector contributions and pensions in payment are rising to unsustainable levels. As a result, he demonstrates that another round of public sector pension reforms will be required, probably before 2020.
The OBR forecasts that, even after the latest reforms, the cashflow shortfall will rise from an irrelevant £200 million in 2005-06 to £15.4 billion in 2016-17 – a 77-fold increase in 11 years. This shortfall will have to be paid for by taxpayers. With employers’ contributions of an extra £17.2 billion, the annual burden on taxpayers will then be over £32 billion – the equivalent of £1,230 for every household in the country. Nearly £4 out of every £5 paid in pensions to former public sector workers will come from the taxpayer.
The Coalition has justified its reforms on the grounds that they achieve a material reduction in the total public sector pensions liability. But this liability is a nebulous concept; and its modelling techniques unclear. The cashflow shortfall, as it emerges, will on the other hand be both clear and tangible.
The current reforms will only produce significant cashflow savings after 20 to 30 years, far too late to assuage pressure for further reform. That said, the public’s opprobrium could be fuelled as much by unfairness as unaffordability. During this time, public sector workers will enjoy certainty of income in retirement until the day they die, mostly paid for by the 80% of the workforce in the private sector, almost none of whom have that security.
Michael Johnson recommends that the Coalition should now:
– put all its modelling assumptions for the reduction of the liability into the public domain;
– start to prepare the public sector for a risk-sharing arrangement such as a cash balance scheme, en route, ultimately, to a wholly Defined Contribution framework.
This approach would, at long last, provide comparable pensions across the UK, irrespective of the employment sector. Not to express such a vision would be to accept that the quality of pension provision in the (wealth-creating) private sector will, from hereon, be second class.
Tim Knox, Director of the Centre for Policy Studies, commented:
“We must recognise that the Coalition reforms to public sector pensions do not go nearly far enough, are unaffordable – and cannot last. Why should future generations pick up the bill for the pensions of public sector workers, people who on average are likely to be far better off in their retirement than their wealth-creating private sector peers?”
- Daily Express: £1,200-a-year tax bill over public sector pensions and
- Daily Telegraph: Households face £1,230 bill to plug public sector pension black hole
- Daily Express lead comment article:Pensions Crisis Deepens
- Daily Mail: Families face £1,200 bill for public sector pensions as expert reveals 80 per cent of funds is paid for by taxpayer
- Money Marketing: No public sector pension savings for 20 years warns CPS report
- Money Marketing: Think-tank: Public sector pension reforms set to fail
- Financial News: UK’s £3bn pensions ‘cashflow crunch’ will not be solved
- Professional Pensions: Public sector pensions will be 80% taxpayer-funded by 2016 – Johnson
- City Wire: Public sector pensions to cost UK households £1,230 a year
- Public Net: Public sector pensions facing a cashflow crunch
- Local Gov: Taxpayers to fund 80% of public sector pensions, says report
The Sun also ran a print story on the report.