- The Importance of Encouraging Personal Financial ResponsibilityPosted 2 weeks ago
- Why saving is vital to everyone’s futurePosted 7 months ago
- Why interest rates HAVE to rise and soonPosted 8 months ago
- How DO you buy Bitcoins?Posted 9 months ago
- Does Labour finally get the point with pensions?Posted 9 months ago
Failure – Inequalities between public and private pensions
Mortgaging the future
The cost of public sector pension provision is loading an intolerable and unsustainable burden on all of us who are taxpayers. Most worryingly, this is happening at a time when private sector works are probably grappling with their own pension fund inadequacies.
Public sector pension schemes – paid to doctors, nurses, teachers, police, firemen and civil servants – are terrifyingly expensive, since the vast majority of members will retire aged 60 on guaranteed, inflation-proofed pensions paid for by the state.
While many public sector workers including teachers – and employers, e.g. the schools themselves – do contribute from their own pay, the way that the pension scheme operates leaves it grossly underfunded. As a result, a vast chunk of public sector pensions are simply paid directly out of tax revenue.
The personal contributions made by workers to public sector pension funds are extraordinarily diverse. For example, the majority of civil servants are estimated to pay 1.5% towards their pension, while newer recruits must fork out between 3.5% and 6%.
Compare this with fire-fighting staff who had to contribute as much as 11% until 2006 when they hammered out an agreement to retire at 60 instead of 55, and changed their level of contribution to 8.5% of their salary.
It is worth stressing that not all public sector pension funds are run in this manner; a number are funded by investments, most notably the local government scheme (see below) and the Universities Superannuation Scheme.
So has the Government at least tried to wrestle with this problem? Well, despite recent reforms such as the raising of the pension age to 65 for those who join the public sector after 1 January 2007, the change will only generate savings of £13bn over the next 50 years.
Now take a deep breath…
If you’re a private sector worker, by contrast, you face increasingly uncertain retirement income as employers close final salary schemes to new members and the shift to defined contribution pensions continues its relentless march.
Meanwhile, the debt racked up by public sector pensions is truly eye-watering and is set to worsen considerably. The number of public sector workers has increased rapidly in the 10 years since Labour came to power to 6 million, with 5 million of them accruing pensions. Yet the Government continues to hide its head in the sand over the very cost of providing these pensions.
The Treasury claims the cost of unfunded public sector pension funds will be £650bn up to 2050. But if the same assumptions that private pensions schemes are required to use are applied, the figure is far higher: a staggering £915bn to £1,000bn.
The separate UK Local Government Pension Scheme (LGPS) is not much better. This scheme which covers those who work for local authorities or councils is at least funded with ear-marked cash, yet has a far higher deficit than the Government admits. Independent pension consultant John Ralfe estimates that the deficit for the whole of the LGPS is a massive £100bn, which he says still understates the true cost because the scheme uses an over-generous so-called ‘discount rate’ which is used to try and work out its actual size. Equally disturbing, the scheme is also highly exposed to shares – effectively making it a high-risk gamble on stock market returns remaining buoyant over the longer term.
And what if it doesn’t work out? Then of course the hard-pressed taxpayer will be saddled with the deficit through higher council taxes.
In fact, roughly 20% of your council taxes already go towards local government pensions which diverts vital cash away from local amenities and services. This is a wholly intolerable situation that cannot be allowed to continue for much longer. Every public sector pension scheme – including the LGPS – requires root and branch reform.