Mortgaging the future
This hornets’ nest of saving iniquities looks set to sting millions of savers for years to come…and the finger of blame can be pointed squarely at the Government.
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 – if you’re a private sector worker – you’ll most likely be grappling with your 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 sectors including teachers – and employers, e.g. the schools themselves – do contribute from their own pay towards this, the way that the pension scheme operates leaves it grossly underfunded…. in other words, a vast chunk of the pensions are simply paid directly out of today‘s – and the future – tax revenues from all of us.
Yet precisely what personal contributions are made by workers to public sector pension funds is extraordinarily diverse. For example, it’s estimated the majority of civil servants pay 1.5% towards their pension, although newer recruits must fork out between 3.5% and 6%.
Compare this, then, 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’s worth stressing that not all public sector pension funds are run in such a manner: a number are funded by investments – including most notably the local government scheme (see below) and 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…
By contrast, if you’re a private sector worker, you face increasingly uncertain retirement income as employers close final salary schemes to new members and the shift to defined contribution pensions carries on its relentless march.
Meanwhile, the debt racked up by public sector pensions is truly eye-watering and – unfortunately – is set to worsen horribly. 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.
In particular, 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 actually applied….? Well, the figure now comes out in the wash at far higher: a staggering £915bn to £1,000bn.
To be fair, the separate UK Local Government Pension Scheme (LGPS) is not much better. This scheme – you’re entitled if you work for a local authority or council – is at least funded with ear-marked cash but has a far higher deficit than the Government would like to admit.
Independent pension consultant John Ralfe estimates that the deficit for the whole of the UK’s LGPS is a massive £100bn – one 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 staying buoyant over the longer term.
And what if it doesn’t work out? Yes, you’ve guessed it – the trusty taxpayer will be lumbered with the deficit through higher council taxes.
In fact, roughly 20 per cent of your council taxes go towards local government pensions, and – of course – this diverts vital cash away from local amenities and services. It’s not difficult to see that 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.