Headlines: November 6th, 2012

Leading pensions analyst Michael Johnson reveals that the cashflow shortfall between public sector contributions and pensions in payment are rising to unsustainable levels.

A report from the Centre for Policy Studies claims that another round of public sector pension reforms will be required before 2020. By this time there will be an annual burden on taxpayers of some £32 billion compared to £15.4 billion in 2016-17. This is equivalent to £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 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 per cent of the workforce in the private sector, almost none of whom have that security.

Michael Johnson recommends that the Coalition should put all its modelling assumptions for the reduction of the liability into the public domain and 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.

It is argued that this approach would 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, said: “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?”