Some real figures on public sector pensions – now with added charts
The National Audit Office today releases a report on the costs of public sector pensions. I write this before I can see whether it has provoked the usual barrage of hostile stories about the alleged gold-plating of public pensions, but if you actually read it, it tells a rather different story.
(To be strictly accurate the report only deal with the four biggest unfunded pay-as-you-go schemes – NHS, teachers, civil service and armed forces. While that covers the vast bulk of the unfunded schemes, it ignores the funded local government scheme).
Here are some nuggets that I have picked out:
- Employee contributions to these schemes have increased faster (56%) than pension payments (38%) since 2000.
- There has only been a 2% real terms increase in the average pension in payment since 2000 – the average teachers’ pension has actually fallen by 4% over that period and the NHS average pension is unchanged.
- The vast majority of pensions in payment are modest. The NAO have some facinating charts showing the distribution of pensions in payment by £1,000 bands. (UPDATE: I’ve put the graphs below) This is information which I have never seen before – (and I have waded through a lot of official documents on public sector pensions in my time). These charts show that most pensions paid in both the NHS and civil service are below £110 a week – and a quarter of NHS pensions are less than £40 a week and a quarter of civil service pensions are less than £60 a week. Of course such a distribution chart does not tell us to what extent these small pensions flow from short periods of active membership by the better off or longer periods of membership by the low paid.
- The biggest number of both NHS and civil service schemes is between £1,000 and £2,000. 14% of NHS pensions lie in this range. These pensions then drop away from this early peak.
- The distribution of teachers’ pensions is very different. They build up to a modal range of £9,000 to £10,000 and then gradually drop away. These differences reflect both a smaller range in teachers’ pay and presumably average longer periods of active membership of the teachers’ scheme.
- Fewer than 0.2% of teacher pensioners, 1.8% of civil service pensioners and 2.5% of NHS pensioners get pensions of more than £40,000.
- Future projections show that the cost of pensions in payment will rise by just 0.2% of GDP to peak at 1.9% from 2018 and then fall again to their current level by 2059. These figures do not take into account employee contributions they are simply the cost of all the pension cheques.
The critics of public sector pensions often zero in on the extra contribution the Treasury makes to pensions in payment (£2.5 billion on top of employee and employer contributions).
But the NAO report is clear that this is justified:
Overall, contributions to mature pension schemes in the private and public sectors are generally less than pension payments in the long-term. Investment income and capital gains make up the difference in the case of funded schemes. In pay-as-you-go schemes, again over the long term, Treasury payments reflect the benefit of past alternative use of pension contributions to fund government activities without additional taxation or borrowing.”
This is a particularly important point.
The pension critics forget that for many years contributions were greater than pensions in payment. That money just went into the general public finance coffers, and was cash that did not have to be borrowed or raised in taxation. The point of unfunded pensions is that the government does not have to invest in assets to try and chase GDP growth as tax revenue is already broadly linked to GDP.
Here are the charts: