Public Sector Staff 'Should Lose Final Salary Pensions'
By James Kirkup, Telegraph.co.uk
September 5, 2008
Public sector workers should lose their guaranteed final salary pensions to avoid a divisive "pensions apartheid," an independent report says today
The study also calls on private sector workers to be given more generous pensions by their employers to help narrow the gap in retirement with state employees' benefits.
Pensions analysts at Hargreaves Lansdowne say that the disparity in retirement provision between public and private workers will become a growing political and financial problem in the years ahead.
Around four out of five private sector final salary schemes are closed to new members as companies consider them too expensive in an era of rising life expectancies. But around 5 million public sector workers still enjoy final salary pensions, many of them funded from general taxation.
According the Hargreaves Lansdowne, in 2007/08 the average public sector worker accrued approximately £5,800 worth of pension benefits. Meanwhile the average earner in a private sector "defined contribution" scheme had a total annual pension contribution of £2,650.
Most public sector pensions are "unfunded," meaning there is no money set aside for future payments. Instead, the state will pay for future pensioners' retirements at the time, out of contributions and tax revenue at the time.
The latest Government estimate of public sector pension liabilities is £650 billion, but independent analysts say the real figure will be much higher, perhaps as much as £1 trillion.
Warning that funding those liabilities will place a growing burden on the state, the Hargreaves Lansdowne analysts say the best solution is to make public sector pensions less generous.
"The burden of pension promises made to today's public sector workers will fall on the shoulders of our children and grandchildren," the report says.
Instead of having a guaranteed income in retirement, public sector workers should have "defined contribution" pensions. "In a defined contribution scheme the taxpayer would simply pay an agreed proportion of public sector workers' salaries into a pension with their name on it. The door is not then open for contributions from taxpayers and public sector workers to escalate," the report says.
The analysts say that a defined contribution would still give public sector workers a "an attractive level of income" if they went on making contributions similar to their current payments.
But detailed projections showed the change would mean future public sector pensioners would have smaller pensions than their counterparts today.
For example, a teacher who today has a £28,000 annual pension would get around £19,000 in exchange for similar contributions under a defined contribution system. For an NHS doctor, the pension would drop from £45,000 a year to £30,000.
Jenny Willott, the Lib Dem pensions spokeswoman, backed the call for public sector pensions to be reformed.
She said: "It is unfair and irresponsible to keep heaping this burden on future generations. Public sector workers deserve good pensions but this could still be achieved without placing the onus on our children's children."
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