Cutting the generous pensions received by doctors, teachers and civil servants is becoming a go-to suggestion from politicians looking to cut spending or boost upfront pay in the public sector, in order to make it more attractive.
Yet, doing so might not be as simple as it seems – and could cause problems for workers and the Government down the line.
Most public sector workers get so-called gold-plated pensions, which see them receive a guarantee of an annual income each year for life in retirement.
In contrast, those in the private sector generally save into their own pension pots and hold responsibility for making it last in their later years.
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The gold-plated pension schemes the public sector runs are very expensive and to keep them functioning, the sector pays huge sums of money for each worker who wants to be part of their pension scheme.
With teachers, it’s 28.6 per cent of each employee’s pensionable earnings, while for civil servants, it’s 28.97 per cent.
In the private sector, employers are obligated to pay just 3 per cent.
And so it’s unsurprising that politicians of various parties have opted to make reforming public sector pensions a target.
A year ago, the Labour Government mooted the idea of cutting pensions and in turn increasing public sector pay.
More recently, Richard Tice of Reform suggested the party would be interested in looking at changes to the system, with the aim of reducing the generosity of the system for new starters.
The general public – many of whom are on far less generous pensions than those working for arms of the state – will wonder why their public sector counterparts are deserving of such high payments.
Although change seems like such an obvious answer, there are reasons why cuts to public sector pensions are not the silver bullet many think, and could cause problems financially for the exchequer.
The key reason is the way they are funded.
Defined benefit (DB) pension schemes, like those seen in the public sector, pay the pensions of retired staff from current staff contributions.
If the schemes were made less generous for future joiners, the pensions of ex-staff who are currently retired would still have to be paid.
And if current contributions to the pension scheme were cut, it would risk not being able to pay what it is obligated to.
If that were to happen, then the payments to our retired teachers, doctors and civil servants would have to come from other sources – extra taxation, or extra borrowing.
The alternative is to keep employer and employee contributions exactly the same as they are now, while getting new staff to accrue worse pensions.
That would not save any money in the short-term, until the current batch of new staff retire in 30 or 40 years’ time, and would also make the public sector far less attractive to work in, unless coupled with upfront increases to pay – which would again mean higher taxation or more borrowing.
There is also a risk that new public sector workers would then choose to opt out of pensions en-masse, creating a funding problem of its own.
Those who think that public sector pension reform is an easy solution to spending issues need to be asked which of these two scenarios they would prefer to pursue, or whether they have an alternative answer up their sleeves.
If we were designing a public sector pension system from scratch, there’s no doubt we’d pick something different to what we have today.
But with the tools that we have, it needs to be understood just how difficult wholesale change would be.