New independent analysis shows that public sector employees are getting an average windfall of £150 a week in the form of pension rights, putting them far ahead of private sector workers and incurring a £3.5 billion a year cost to taxpayers.
The figures don’t come from some biased think-tank but from Ros Altman, the London School of Economics governor who almost single-handedly forced the government to raise its compensation for workers who lost their pension rights when their employing company collapsed.
She points out that good public sector pensions used to be thought of as compensation for poor pay. Not any more - the average public sector wage is now £500 per week compared with £440 for the private sector. And those final salary pension schemes are astoundingly expensive. To provide the promised final salary pension rights costs a private sector employer about 30% of salary- £150 a week on a £500 per week wage.
Yet the public sector doesn’t actually set any money aside for this. The pensions of public sector workers are paid out of taxation, so the huge rise in public sector employment over the past decade is clocking up a vast extra burden that will have to be paid by future taxpayers. Yet it doesn’t appear anywhere in the national accounts.
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Monstrous liabilities
Analysts have bandied around vast figures for the total public sector pension liability - £700 billion seems plausible. Ros Altman doesn’t focus on that, or on the estimated cost of these public sector pensions of £900 per year per household – her request is simply that we bring all the actual costs out into the open. In particular, she is scathing about the smoke-and-mirror accounting that goes on for the State Second Pension (S2P), which provides earnings-related top-ups to the flat-rate state old age pension.
Final salary pension schemes ‘contract out’ of S2P. The employer’s pension scheme takes on the liability of providing the equivalent of the extra annual pension you would have accrued if you had stayed contracted in to S2P. In return, the state reduces the National Insurance contributions paid by employer and employee.
Now in the case of private sector pension schemes, where money is being set aside to meet those pension obligations, these NI rebates make sense. But with public sector schemes, all the pension costs will be met by future taxpayers.
So why are these public sector pension schemes collecting NI rebates worth £3.5 billion a year? Or to put it another way, why are the rest of us paying public sector employers and employees £3.5 billion a year when we get literally nothing back for that money? Why should Fred Bloggs, who works for the government for £30,000 a year, get an NI ‘bung’ of £392.60 a year when taxpayers will end up paying his pension?
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Public sector workers are the pension elite
Public sector workers could argue that this is a relic of the old system, but the fact that they can retire at 60 on a full pension while private sector workers have to wait till 65 or later, and that they get inflation-proof pensions when almost nobody else does, shows that public sector workers really are the pension elite and are getting a far better deal than the rest of us.
Altman doesn’t say this, but my conclusion is that these pension rights are so valuable that they should be fully explained to public sector workers along with an annual pay cut, which should continue until their wages-plus-pension package is reduced to a figure equivalent to what they’d get in the private sector. Or a tough government would simply cut their future pension benefits – unless the workers themselves decided to chip in more money of their own, which is what the rest of us have to do.
At the very least, as Altman argues, we should get rid of contracting out completely and reduce our pension system from ludicrously complicated to just complicated.
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