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Public sector 'to cost taxpayers £335bn'

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  • Public sector 'to cost taxpayers £335bn'

UK - The Institute of Directors (IoD) has suggested public sector workers should be switched to defined contribution (DC) pension arrangements as public sector pensions as funding shortfalls could cost taxpayers £335bn (€371bn) in employer controbutions over the next 50 years. 

In the IoD policy paper, ‘The Pensions Apartheid: The problem, the cost and the tough choices that need to be made' Corin Taylor, senior policy adviser at the IoD, warned recent reforms to public sector reforms are "inadequate" leaving the gap between public and private pension provision "wider than ever".

The report admitted lower salaries in the public sector justified higher pension benefits in the past, but argued public sector workers are now "better paid than those in the private sector at all but the highest levels", which means "the pensions apartheid can no longer be defended".

Research from the IoD claimed 90% of public sector workers are members of defined benefit (DB) schemes, compared to 12% in the private sector, and it warned the current economic conditions "will lead to even faster falls in private sector DB membership, as pension funds perform poorly and companies no longer have the cash to keep DB schemes going".

In addition, the findings showed taxpayers effectively pay twice for public sector pensions, firstly for employer contributions and then for an "annual bailout" to make up the shortfall between current contributions and pensions in payment.

The report also warned liabilities are also building up for the future, as in the five years between 2006/07 and 2010/11 HM Treasury estimates taxpayers will pay a total of £14bn, or £2.8bn a year, in addition to employer/employee contributions, which the IoD has calculated amounts to £140bn in the next 50 years.

However, the IoD claimed the actual figure could be much higher, as the data does not include the growing liabilities of unfunded schemes, which the Treasury forecast will increase by £3.6bn, or £6.7bn a year, over the five-year time period. 

As a result, the report warned taking these figures into account the total cost for taxpayers to fund public sector schemes over the next 50 years could reach £335bn, which is more than £13,000 per household.

Taylor argued in the report that recent reforms to the public sector, such as increasing normal pension age (NPA) for new entrants to 65, are "inadequate", as changes to the NHS, teachers' and civil service schemes are estimated to save just £13bn over 50 years.

In addition, the report said while cost-sharing and cost-capping agreements "provide some safeguard" against future unanticipated increases in longevity, instead it ‘locks-in' "the enormous cost of public sector pensions to taxpayers, now and in the future, that is currently projected".

To try and reduce the burden on taxpayers the IoD has outlined a number of policy recommendations, of which the "central" idea is to raise the NPA of public sector schemes for new members, and for new accrual of existing members, in line with increases to the State Pension Age that will reach 68 by 2046.

It stressed the changes should not affect past benefit accrual, but instead suggested the NPA for new accrual of existing members should increase in stages to 65 by 2020, and then for both new members and new accrual of existing members, this would rise to 68 by 2046.

However the IoD warned that while personal accounts, and more flexible instruments such as Individual Savings Accounts (ISAs), should help increase private pension saving overall, "ultimately the only way to manage longevity risk is to move away from pension arrangements where current contributions by employees pay for current pensions paid to retirees, to funded provision".

It added: "In the long run, the only way of bridging the pensions apartheid and ensuring the sustainability of the public finances may be for the public sector to move to DC arrangements."

That said, the IoD admitted, "there will need to be a greater consideration of how to manage transition costs, which may be considerable" of moving to DC in the public sector.

The report concluded: "The pensions apartheid is real, unfair, unsustainable and urgently in need of change. The current recession will make the divide even greater and the enormous deficits being run intensify the need to reduce long term costs to help bring the public finances back to sustainability. There really is no alternative."

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

 

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