The claim
“Can we really ask [private sector workers] to keep paying their taxes into unreformed gold-plated public sector pension pots? It’s not just unfair, it’s not affordable.”
Nick Clegg, Deputy Prime Minister, speech, 14 June 2010
Cathy Newman checks it out
The Daily Mail loved it. (UNFAIR – AND UNAFFORDABLE screamed today’s headline). The unions didn’t. Unison, the biggest public sector union, accused Clegg and his coalition of “scaremongering, peddling myths” and “breathtaking double-speak”. They say cushy pensions for pen-pushers are a rarity. And they blame the government’s decision to freeze pay for the soaring shortfall in public sector workers’ pensions. So who’s right?
Over to the team for the analysis
Clegg seized on shocking figures published yesterday by the OBR – that the Treasury will spend £4bn this year topping up public sector workers’ pensions payments. In four years’ time this will have more than doubled, to £9.4bn. This is the first time the figure has been published more than a year ahead.
So why is it so high – and getting higher?
That £4bn is the difference between what’s paid into public pension schemes by state employers and by employees, and the amount being paid out in the same year. The taxpayer makes up the difference.
In theory, pension contributions now should be funding payments in future – a complex set of calculations. These numbers just look at the actual amount the Treasury will end up having to pay in the near future.
The Treasury said the expected increase was down to several things. The number of public sector employees increased around 40 years ago and more of those baby boomers are now reaching retirement age. Pensioners now also tend to be living longer – so they’re drawing on their pension for longer.
But unions say the main source of the problem lies elsewhere: staff redundancies and pay freezes. Although the size of the state increased under Labour, the tide is now turning. And because contributions are a percentage of salary, pay freezes mean the amount being paid into the scheme is on the slide.
Affordable?
One simple way to make pension payments affordable – at least in the short term – would be to hire a lot more public sector workers now. Then contributions into the scheme on their behalf would increase and cover the £4bn shortfall. But clearly the coalition government wants to reduce the public sector payroll, not increase it.
Gold-plated?
Regardless of whether we can afford public servants’ pensions, are they all they’re cracked up to be anyway? Unions say gold-plating is a misnomer – bronze would be more appropriate. They often give the example of local government pensions – which average just £4,000 a year; less for women. If you look beyond the town hall, the average public sector pension is only around £7,000 a year, according to the TUC.
But then, most pensions aren’t overwhelmingly generous – latest figures from the Pensions Policy Institute put the average occupational pension at worth £8,320 a year, or just £5,600 for a single pensioner.
In addition, most public sector pension schemes are final salary – where a guaranteed pension is paid out based on earnings in the year or years before retirement. Such guaranteed schemes are increasingly rare now in the private sector.
Unreformed?
Unions say there has been considerable pension reform in recent years. For example, most state schemes have increased the age at which new entrants can draw a pension from 60 to 65 – bringing them into line with their private sector colleagues. NHS pensions, for example, changed for new entrants in 2008. And the TUC says nurses, teachers and local government employees are now paying more on average towards their pensions than they did before reforms. But the IFS described the reforms as “very modest”, saying they would only close about half the gap between the average generosity of public and private sector schemes – and that only for new workers.
The government still thinks there is some way to go.
A Cabinet Office spokesman said Nick Clegg wasn’t singling out a particular scheme yesterday, but pointing to the fact public sector pensions hadn’t felt the pain in the way private schemes had.
Cathy Newman’s verdict
The public sector may have carried out some reforms to their pensions, but it simply doesn’t compare to the pain endured by their private colleagues. Just yesterday, a report by PricewaterhouseCoopers revealed that nine out of 10 private sector businesses in the UK are set to close their final salary pensions to existing members – not just new ones. The unions are right to point out that not all public sector pensions are worth their weight in gold. And, in the short term at least, pay freezes will increase the shortfall. But on balance, “unfair and unaffordable” isn’t double speak but plain speech.
