Public sector pensions should be reformed. Not just because of the unfunded off-balance sheet £1.4 trillion liability, but because they are fundamentally unfair.

It would be unjustifiable for public sector workers to be paid three or four times as much as private sector workers for performing comparable jobs. Morally, politically, economically, it would be intolerable. Yet in respect of deferred pay, the money set aside by our employers to pay for our retirement, that is exactly what happens.

Comparisons between public and private sector employment are always imperfect; it is not like for like. Organisations such as the think tanks the Institute for Fiscal Studies and the Resolution Foundation, and the Office for National Statistics tell us that, broadly, private sector employees are, on average, paid a few per cent more than their public counterparts. There is a difference, but it is not significant.

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On pension funding, however, the difference is far bigger. On average, private sector workers get employer contributions of about 6 per cent of pay, compared with an average of about 24 per cent in the public sector. What’s more, not only are the contributions radically different, so are the benefits.

Public sector pensions are defined benefit (DB), paying a guaranteed income in retirement; very few private ones are. In the private sector, pensions are usually defined contribution (DC), where the amount you get in retirement depends on the amount you have saved and how your investments have performed. A crucial development in this comparison is the impending imposition of inheritance tax on remaining DC pension pots after death.

A compensating benefit of the non-guaranteed DC pensions has been the ability to leave a pension lump sum to any beneficiaries, such as adult children. From April 2027, this valuable advantage is undermined by the threat of 40 per cent inheritance tax. This issue doesn’t arise with DB pensions as there isn’t any pot of money to inherit.

All our public services — the NHS, the army, local government — depend on the tax revenue generated from individuals and businesses trading goods and services and in the process, creating wealth and economic growth.

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Without the taxation of the private sector, there is no public sector. There is therefore a moral issue in the imposition of taxes across the economy if that tax revenue is then used to make egregiously generous provision for public sector workers.

The alternative model would be some variation of a planned economy, where ruling officials dictate what jobs people do, how much they get paid, what factories are built and what products are made. This version has failed everywhere it has been tried; let’s not go there.

A counter-argument is to advocate for more generous pension provision across the board: private sector employers should just provide generous guaranteed pensions too. Except private sector employers, exposed to the competitive pressures of market forces have elected to dispense with such provision.

Yet public sector employees are shielded from these competitive pressures. This is manifestly unfair.
So what could reform look like? There are two important and under-reported consequences of the unfunded nature of public sector schemes.

Firstly, it is a disincentive to reduce the workforce. A cut in employees means a reduction to the inflows of new money in the form of contributions, while the outflows are already baked in.

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Secondly — and more importantly — any reform of public sector pensions involving a shift to a funded model, such as the DC schemes which dominate the private sector, means the government would have to pay twice over: once to fund the benefits for today’s retired members, and a second time to meet the cost of employees’ new DC contributions.

This poison pill has deterred any government from tackling this challenge. My answer would be a more balanced and proportionate reward system for public sector employees. Many might be interested in sacrificing a little of their deferred pay in exchange for a slightly higher salary today.

Phase out the DB schemes and replace them with collective defined contribution schemes. These are a hybrid model, involving shared investment and longevity risk but without the guarantees of DB schemes.

The Department for Work and Pensions is overwhelmingly in favour of such schemes for the private sector, so let’s see it put its money where its mouth is. We should start with the MPs’ scheme, even though it is funded, they should lead by example.

The trickier part is paying for it. Some cost savings can be achieved simply through the switch: for example, if you have a budget of, say, 24 per cent of pay to play with, move to a 15 per cent employer contribution to a collective DC scheme, give your employees a 5 per cent pay rise and bank the remaining 4 per cent.

Over time, I would also look to save money for the government across the entire pension system by phasing out pension contribution tax relief (older homeowners will remember getting mortgage interest relief at source; it went, we survived) and compensating with a gradual increase to the mandatory employer contribution.

At this point we are straying into a more fundamental and wide-ranging reform of the pension system than simply tackling the public sector schemes. I don’t think it is possible to achieve one without the other. But I am convinced that reform is essential.