From the TUC

Are public sector pensions going broke?

29 Jun 2011, by in Pensions & Investment, Public services

Update: I have a more general post on public sector pensions at False Economy

David Cameron’s speech to the Local Government Association on public sector pension reform has been endorsed by Channel 4 News’s generally admirable Fact Check blog. Yet they only test one statement:

I can look you in the eye and say public service pensions will remain among the very best… much better, indeed, than for many private sector workers. ”

This is simply a statement of the bleeding obvious. Fully two out of three private sector workers get no pension help  from their employer. Any pension will be much better than that enjoyed by someone with no pension at all.

But there are two statements that do not stand up to a fact-check. Nicola has already looked at his claim on pay. But what about this statement?

the pension system is in danger of going broke.”

This is not what the National Audit Office, the Public Accounts Committee or even Lord Hutton’s review say. And when the similar statement that public sector pensions are unaffordable was put to Treasury Minister Justine Greening on this morning’s Today programme, she collapsed under persistent questioning from Evan Davies.

So what are the facts?

Two big changes have already been made to public sector pensions – one through negotiation and one through imposition by the coalition.

Changes agreed with the last government made substantial changes to public sector pensions. These include a novel way of dealing with the costs of unexpected increases in longevity. A band of extra costs is shared between members and employer. Once that band is exceeded the cost falls entirely on members. This will result in an extra billion pounds from contributions next year.

There is no dispute with Lord Hutton’s conclusion that this agreement reduced the value of public sector pensions by ten per cent.

The National Audit Office and Public Accounts Committee have both endorsed these changes as making a substantial difference. The NAO said:

In addition to saving significant sums of money, the changes are projected to stabilise costs in the long-term around their current level as a proportion of GDP.

The Public Accounts Committee said:

Government projections suggest that the 2007-08 changes are likely to reduce costs to taxpayers of the pension schemes by £67 billion over 50 years, with costs stabilising at around 1% of Gross Domestic Product (GDP) or 2% of public expenditure. This would be a significant achievement.

And in a dig at the kind of things said by the Prime Minister yesterday they added:

Officials appeared to define affordability on the basis of public perception rather than judgement on the cost in relation to either GDP or total public spending.

On top of this the coalition has changed the way that pensions in payment are linked to inflation. Traditionally RPI has always been used as the cost of living for wage negotiations and pensions indexing. Switching to the usually lower CPI measure has no rationale other than it will cost less.

Lord Hutton says that this takes a further 15 per cent off the value of pensions. It also breaks coalition promises to protect acrrued benefits as members thought they were building up an RPI linked pension. Court cases are pending.

The Government Actuary’s Department worked out what impact this would have on the cost of pensions in the future.

The chart shows that the cost of pensions in payment is set to fall as a proportion of GDP.

GAD projection of future costs of public service pensionsIt should be stressed that this does not include members’ contributions.

This does not show a system going broke, nor one that is unsustainable, nor one that is unaffordable.

One Response to Are public sector pensions going broke?

  1. Frank Rossa
    Jul 5th 2011, 5:08 pm

    Why is it that Members of Parliament have a contributory pension which is based on 1/40th or 1/50th, whereas other public sector workers are at 1/80th. MPs Pensions should be brought into line with other public sector workers. After 40 yrs of service a nurse will retire on about half their salary, about £18,000, after 40 years service a MP will retire on the whole of their salary, about £60,000 (minimum).