The Government has based its argument for public sector pension reform on the wrong figure in the Office for Budget Responsibility’s (OBR) report, claims Towers Watson.

The financial consultant said that Deputy Prime Minister Nick Clegg’s speech at the Institute for Government yesterday (14 June 2010) highlighted the OBR’s projection that spending on net public service pensions will rise from £4.0bn in 2010/11 to £9.4bn in 2014/15. Clegg reportedly said: “we cannot ignore a spending area which will more than double within five years”.

However, Towers Watson said the projections used relate to the difference between the cost of pensions paid out to retired public servants in unfunded pay-as-you-go pension schemes and the contributions collected from public sector employers and current employees. This, they said, is an odd way to measure the cost as it ignores the billions of pounds of taxpayers’ money that are channelled through Government departments before being used to help meet the cost of payments to pensioners; takes no account of how the eventual cost of new pension promises may exceed the contributions paid now; and is related to things the Government cannot control, such as people retiring. It also would show a big immediate saving from some public sector pension reforms, such as increasing employee contributions, and not from others, like promising pensions payable from 65 years old rather than 60.

The most important numbers, Towers Watson said, is the estimate that new pension promises made in 2007/08 were worth around £26bn.

“The number Nick Clegg highlighted just shows how the cost of pension promises made in the past are catching up with us as more people retire,” commented John Ball, head of defined benefit pension consulting at Towers Watson. “This may be happening at the worst possible moment but it is the inevitable consequence of decisions taken long ago. The Government has said it will not renege on pension promises already made so it should forget about water under the bridge and focus on how much future taxpayers will have to pay for pensions being promised now.”

Brendan Barber, Trades Union Congress (TUC) general secretary Brendan Barber, said the costs of public sector pensions are being presented in a highly selective way. “They are not comparing like with like – and have not been clear that a main cause of the increased net cost of public sector pensions is their decision to freeze public sector pay.

“The cost of public sector pensions they talk about is the difference each year between how much it costs to pay pensions to staff who have already retired and the contributions that current staff and employers are making – even though contributions are to pay tomorrow’s pensions, not today’s.”

He said that as ministers have chosen to freeze pay, so contributions are also frozen.

“As pensions rise with inflation, inevitably the gap between pensions and contributions will grow even though the cost of pay and pensions will fall as the freeze bites.”

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