Public sector pension costs – hiding the truth

by Dr. Ros Altmann

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Highlights:

• Public sector pension costs to rise 45% in 2010-11 relative to 2008-09
• Public sector pension costs will not be capped – don’t be fooled by the words, read the small print. The cap only applies to longevity changes!
• Personal accounts to be further delayed – let’s hope they will be abandoned altogether
• Government recognises the need to encourage older people to keep working, especially part-time work after age 65. This requires changes in age discrimination laws and pension credit rules

Detail:

1. Public sector pension costs set to rise sharply – 45% increase next year relative to last year
   In Annex B of the PBR, the Treasury has hidden the fact that costs for 2010-2011 will rise sharply. Table B15 shows the net cost of paying public sector pensions (i.e. cost of pensions paid to public sector pensioners, less contributions received from current employees) is forecast to rise from £3.3billion in 2008-09 to £4.8billion in 2010-11. This is a 45% increase! Paragraph B.82 states ‘higher than expected pension payments increases net expenditure in 2010-2011 compared to the Budget forecast’.
2. Don’t be fooled by the pretence of a cap on taxpayer contributions to public pensions – the cap is not a cap at all, it only applies to longevity!
   The Chancellor’s speech stated that ‘public pensions need to be broadly in line with the private sector’. He then claimed that there would be a cap on taxpayer contributions to public pensions by 2012. Examining the detail, this turns out to be highly misleading. In fact, paragraph 6.51 states that any cap only applies to changes in longevity. If pension costs rise due to changes in interest rates or inflation, then there is no cap at all! Given that current assumptions used to calculate pension liabilities in the public sector do not reflect realistic discount or inflation rate assumptions, it is highly likely that public sector pension costs will keep overshooting Budget forecasts – as they have already done in the past few months. We urgently need an independent review of public sector pension costs and a proper comparison between arrangements for public and private sector workers.
3. Personal accounts:
   The PBR (Table 1.2) outlines substantial cost savings from delaying the introduction of personal pension accounts. The savings are detailed as £100million in 2012-13, £700million in 2013-14 and £1.6billion in 2014-15. Why not save even more money and abandon them altogether? The DWP were this morning apparently denying that there would be any change and have now outlined that the new changes only apply to start-up businesses and most of the cost savings relate to the measures already announced. The personal accounts have been dogged by problems, two of the companies bidding to administer the programme have already pulled out of the running and a delay in implementation was first announced in September 2009. This latest announcement will see further delays and I would expect that a Tory Government will announce first a review of the entire scheme and then abandon it in favour of a private sector solution. Personal accounts are dangerous for lower earners, since money is locked away for decades and can never be used even in an emergency, while the ultimate pension might be lost in the means test.
4. Recognition that pensioners will need to keep working requires other policy changes
   The PBR recognises the need to help older people stay economically active. It outlines help for workers over 50 to find new jobs if they become unemployed and also highlights measures to help those over age 65 to work part-time. This is welcome, but in practice it cannot work effectively unless pension credit rules and age discrimination legislation are changed. Pension credit penalises anyone who earns over £5 per week (the level of the earnings disregard) and age discrimination legislation does not protect workers over age 65. The very low level of the state pension and the inadequacy of private pensions mean that most people need private income to avoid an impoverished old age, but policy currently works against this. The PBR seems to be a tentative first step in the much needed encouragement of part-time work for older citizens.

Ends:

Dr. Ros Altmann
9th December 2009