Letter to Financial World Magazine

by Dr. Ros Altmann

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As final salary schemes have closed, employer contributions are cut and market mayhem damages private pensions, public sector schemes remain immune. A pensions aristocracy is developing among today’s nearly 6 million public sector workers.

It is not for me to judge whether this is wrong or right, but it is essential that the Government is open about the costs.

The complexity of our pension system has allowed anomalies to build up which have gone virtually unnoticed. For example, the value of future liabilities is based on different discount rates from those used to calculate contributions. Also, 3.4 million public workers in unfunded pension schemes are still ‘contracted out’ of the state second pension. This is an economic nonsense.

The idea of contracting out is that the money saved by paying lower national insurance contributions for workers (9.4% instead of 11%) and their employers (9.1% instead of 12.8%) is invested in private pension funds that will replace state pensions on retirement. However, in an unfunded scheme, there is no fund building up so all the money will still have to be found by future taxpayers!

Contracting out amounts to a hidden pay boost for public workers, hidden subsidy for public employers, costs billions of pounds each year and I suspect public workers themselves do not even realize this. In effect, civil servants, NHS workers, teachers etc, will get their state second pension for free.

Public sector employees do marvellous work for the nation and without them our country could not function. Public sector unions have rightly done an excellent job in improving their members’ remuneration – but no-one is explaining the true costs to future taxpayers.

It is time for proper transparency about public sector pensions. An independent inquiry is long overdue.