Why doesn’t Chancellor raid public sector pensions instead of always coming after private sector workers? STEVE WEBB replies
There’s something that’s been puzzling me for a while. There is always talk of ‘raiding’ private pensions in one way or another, but there is little discussion of the cost to the public purse of public servant pension schemes (Civil Service, NHS, local government etc).
Those of us who have saved heavily for retirement run the risk of seeing the rug pulled out from under us and being left financially vulnerable.
We don’t have the luxury of income certainty in retirement, and now we’re being punished for being sensible again.
If the Chancellor has a hole this big inside Budget and if the government plans to raise the retirement age in the future, why isn’t it considering outsourcing the gold-plated pensions of public sector workers?
If he puts pensions on par with those of us who will lose a large chunk of our income, that would certainly benefit everyone, wouldn’t it?
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Steve Webb replies: There is no doubt that there is now a huge gap between the pensions available to those working in the public sector and the pensions of those working in most private companies.
In most cases teachers, nurses, civil servants, local government employees and people working in the ‘uniformed services’ are members of traditional salary-linked or defined benefit pension schemes.
The main feature of these plans is that the pension you receive depends on how many years you have paid in and how much you have earned. The pension is paid and fully protected for as long as you live. inflation.
In contrast, the vast majority of private sector workers form a different type of pension, known as a ‘pot of money’ or defined contribution pension.
With DC pensions, the worker and the company typically pay money into an investment fund, the money is invested, and you have a variety of options in retirement.
The first is to use the pot to buy a lifetime annuity (an annuity), but you can also buy it all at once (taxable) or take some and leave the rest invested.
Modern DC annuities are quite attractive in many ways because you can access them earlier (usually at age 55, rising to 57 in 2028) and have more flexibility in how you use them.
But the downside is that creating them and managing them in retirement is at your own risk as an individual.
This means you need to think about things like ups and downs in investment markets, how inflation can erode the value of your savings, and how to manage money when you don’t know how long you’ll live.
More importantly, the big appeal of public sector DB pensions is that your employer also makes a huge contribution overall; much more than a typical private sector employer.
As a result, for any given salary level, a public sector employee will generally receive a much larger pension than their private sector counterpart.
One option, as you suggest, would be to change the rules to enable everyone to switch to a DC pension.
But there is a problem.
Most public sector programs (except local government and Parliamentary pensions) have no funding behind them.
Instead, this year’s contributions from workers and employers are being used to fund the pensions of today’s retired public servants.
For example, if we moved to a system where today’s nurses and hospitals contribute money to the nurse’s DC pension, we would not be able to use the same contributions to pay retired nurses. Therefore, we will have to increase everyone’s taxes in order to fulfill the retirement promises we made in the past.
This is the main reason why successive governments have allowed the system to continue in this way.
It is fair to say that efforts are being made to reduce the cost of public sector pensions.
Some of the big changes in recent years have included the following moves.
– The *age* at which you can receive public sector pensions has been increased; Someone who starts working today will not receive their full civil service pension until they reach state pension age.
In the past, many public service pensions were available at age 60 or earlier; so this was a huge cost savings
– Changed the way public sector pensions are protected against inflation; In the past, pensions were linked to the Retail Price Index (RPI) but now only rise in line with the generally lower Consumer Price Index (CPI).
In this way, a significant cost saving was achieved for the taxpayer.
– Modern public sector pensions are based on people’s ‘career average’ salary, rather than being based on the last salary they received when they left the scheme.
This isn’t fundamentally a cost saving, but it’s fairer to those on more modest wages or whose careers don’t extend to the top of the public sector.
Essentially, good public service pensions are part of the package we offer to encourage people to become teachers, nurses, civil servants or local authority workers.
We could of course make these pensions less generous if we wanted. But we may find that this will lead to demands for better pay now to compensate, leading to increased short-term costs for taxpayers; This is something most governments try to avoid.
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