Public sector pensions are twice as valuable as previously assumed, reports the Public Sector Pensions Commission, with the true value of the main unfunded public sector schemes worth over 40 per cent of salary.

The report, launched by the independent body, also found that a lack of transparency over the true costs of these pensions has made it easier to delay reform in the past, and are ‘unreasonably forced onto future taxpayers’.

Following nine months of research and consultation, the report established that the Government uses artificially high discount rates to report unfunded liabilities, and to calculate the employer and employee contribution rates, which in turn seem to lower the cost of providing public sector pensions. The main unfunded schemes have combined contribution rates artificially set at around 20 per cent of salary, although when measuring using a discount rate based on the current yields on index-linked gilts, this should be over 40 per cent.

The Commission also looked at reform, and concluded that there are a number of options that could bring down the cost of the main unfunded pensions towards the 20 per cent of salary that is currently contributed by employees and employers.

The recommendations would see a reformed defined benefit pension delivering substantial savings; a reduction of accrual rate to 1/80 or a switch to career average revalued earnings, with the benefit structure saving around £10bn per annum and an increase to a pension age of 65 for all members, which would save around £5bn; and an increase in employee contribution rates. The Commission said an increase of two per cent could raise up to £2bn a year, although this is not a substitute for longer-term reform.

The scrapping of the contracted-out status of public sector pensions should be considered, as well as a switch to funded defined contribution or notional defined contribution arrangements, an introduction of hybrid schemes, and transparency of costs.

“A true assessment of the value of pensions in the public sector today shows that they are worth twice what the Government suggests in its calculation of the contributions that public sector employers pay,” commented Peter Tompkins, fellow of the Institute of Actuaries, and chairman of the Commission. “It is a matter both of justice and good economics that public sector employees and employers should bear the full cost of their pension provision.”

Tompkins defended the proposals of retirement age increases and cuts to benefits, and said “implementing them as part of a package of crisis cuts is the least palatable option of all. It is essential that reforms are conducted early in a measured way rather than waiting until we have a crisis”.

Stuart Southall, chairman of the Association of Consulting Actuaries (ACA), welcomed the need to reform public sector provision that is highlighted in the report. “There is a danger in the ‘cuts’ mentality that is dominating debate at present that we ignore the importance of building a climate where pension savings are encouraged, across society, so retirement, when it comes, is enjoyable and not a misery. Levelling down is a threat to all. Reinvigorating pensions – a Government pledge – will require legal reforms to stimulate ‘good’ provision and the retention of positive financial incentives for both employers and employees of all types.”

Share Story: