'Ponzi' public sector pensions threaten economic stability

Public sector pensions have been run like an "unstable Ponzi scheme" which threatens to impoverish future generations, according to an independent report.

The Public Sector Pensions Commission accuses successive governments of hiding the true cost of public sector pensions, and raises fresh concerns about the State's £1trn of retirement promises.

Its report, out today, calls for urgent reform of the civil servants' gold-plated benefits in which it says pensions are worth an average of at least 40% of salary.

The main unfunded schemes have combined employer and employee contribution rates artificially set at around 20% of salary.

But the report says the true value of such schemes, when measured using a discount rate based on the current yields on index-linked gilts, is more than twice as much.

The shortfall has left taxpayers with a growing bill to plug the gap.

Including employer contributions made by Government departments, the cost to taxpayers in 2011 is forecast to be £18bn, or £700 per household.

However, the Commission claimed "properly measured, the current service cost is actually over £35bn a year".

In 2008, the top-up was £2.29bn. By 2011, it is expected to be £4.6bn.

The report also found a lack of transparency over the true costs of public sector pensions has made it easier to delay reform in the past and said that, without more
transparency, the true costs are "unreasonably forced" onto future taxpayers.

The Commission's recommendations include:

• reducing the accrual rate to 1/80 or switching to a career average revalued earnings benefit structure would each save around £10bn per annum and an increase to a pension age of 65 for all members would save around £5bn.
• increasing employee contribution rates - a two percentage point increase could raise up to £2bn a year.
• ending the contracted-out status of public sector pensions, as they are generally paid from age 60, compared with 65 rising to 68 or even higher for the state second pension.
• switching to funded defined contribution or notional defined contribution arrangements, which would reduce the risk to the taxpayer. There would, however, be considerable transitional issues with a move to funded defined contribution.
• using hybrid schemes, combining a core DB benefit and flexible DC top-ups.
• transparency of costs. Meaningful agreements between public sector employers and employees are not possible unless both sides understand the baseline from which reform can be measured.

Commission chairman Peter Tompkins says: "A true assessment of the value of pensions in the public sector today shows they are worth twice what the Government suggests in its calculation of the contributions that public sector employers pay.

"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."

He adds: "As Greece has been experiencing, increases to retirement ages or cuts in benefits are not popular at the best of times, but implementing them as part of a package of crisis cuts is the least palatable option of all."

The Public Sector Pensions Commission comprises of seven commissioners and one secretary:

• Peter Tompkins, chairman
• Philip Booth, Institute of Economic Affairs, vice chairman
• David Acland, CHK Charities
• Ros Altmann
• Andrew Lilico, Policy Exchange
• Neil Record, Institute of Economic Affairs
• Malcolm Small, Tax Incentivised Savings Association
• Corin Taylor, Institute of Directors, secretary