21 June 2010

Reality Revealed - Public Sector Pensions

I'm glad to see that public sector pensions are into the news. They need to be! We have moved on from thinking about "classes" in society (working class, middle class, upper class), but we now have a two-tier society - those with a public sector pension and those without.

That may be a bit harsh since the various public sector schemes do vary from each other in terms of how valuable they are, but I certainly believe that public sector employees are generally unaware of the value of what they have, and of the cost to the rest of us!

The BBC's Stephanie Flanders has provided a great analysis of the current situation:

These are the key points from that blog (and elsewhere) for me:
  • Most public sector pensions are "unfunded" - in other words it will be down to our children's taxes to pay for the pensioners in years to come, depending on how many pensioners there are (the exceptions are the local government scheme and the MPs' scheme)
  • The greater the number of people in the public sector and the higher their wages the more the schemes are self-funded (i.e. by today's public sector workers' pension contributions paying today's pensioners)
  • The shortfall in funding has to be picked up by the Treasury (that means the rest of us who pay taxes), so, reducing the number of people in the public sector will actually make that aspect of public finances worse!
  • It's not fair (or contractually possible) to change employment benefits that have already been accrued by staff (and certainly not fair to pensioners already receiving a pension!) so the cost of funding public sector pensions will unavoidably increase massively whatever we do due to the large number of those who joined the public sector 30-40 years ago now retiring
  • That liability would - if bought on the open market rather than being guaranteed by our taxes - cost around £26bn in a year (according to the recent Office of Budget Responsibility report)
  • And the benefit to public sector employees? - a public sector pension could be worth an additional 30% - 40% on their salary - that would be the "real" cost if it were paid for up front like private sector schemes must be

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