Public sector pensions cost £57bn per year more than is declared, finds new IEA research
26 October 2021
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IEA report referenced in I News
26 October 2021
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PUBLIC SECTOR PENSIONS COST £57BN PER YEAR MORE THAN IS DECLARED, FINDS NEW RESEARCH
- Government is misleading Parliament and the public over the cost to the taxpayer of public sector pensions.
- Members of Parliament and the public are only told the discretionary cost, rather than the official cost – and the difference between the two is significant.
- The author estimates the unreported annual cost at £57bn in 2020-21, or some 30 per cent of the public sector payroll.
- Were this a government department it would be the fourth largest, in terms of expenditure, in Whitehall.
The unreported annual cost of public sector pensions is £57bn – more than we spend on the police or the Ministry of Defence – according to a new report from the Institute of Economic Affairs.
Authored by IEA Chairman Neil Record, it reveals government has been running two “books of accounts,” leading to a general misunderstanding of pension costs in the public sector.
Because Members of Parliament, the general public and public sector workers are only told the discretionary cost, which is based on an arbitrary assumption about investment returns (i.e. a discretionary interest rate), not any market rate, they are in the dark on the true cost to the taxpayer.
The government declares the true cost, calculated according to the international standard for pension funds, only deep in its pensions accounts (as required by regulation). This makes the position understandable only by experts.
This approach has, in the view of the author, subverted the concept of independent reporting, and has brought UK public sector pension accounting into disrepute.
The difference between the discretionary and official costs is huge. By way of example, for the NHS Pension Fund, in 2020-21 the discretionary pension cost as a percentage of salary was 30.4 per cent, while the official cost was 62.2 per cent.
The effect on the labour market and intergenerational fairness is equally significant. These public sector pensions are not funded, and will therefore have to be paid by future generations of workers, through their taxes.
The author asks a number of questions of the government, including:
- Why does it consider it appropriate to encourage an increasingly wide gap between public and private sector pension provision?
- Why are Parliament and the public not able to compare, on a common basis, pensions on offer in the public and private sectors? Unless they can, no sensible debate about the future of public sector pensions can take place, nor will the labour market be able to operate transparently. If public sector workers are being paid (through their pensions) about 30 per cent more than is being reported, all public/private pay comparisons are hopelessly distorted.
Neil Record, IEA Chairman and author of The Great British Rake-Off, said:
“The UK government employs 5.7m employees, and offers almost all of them very generous, heavily subsidised, pensions. For fairness; for the labour market to work properly; and for younger taxpayers to be accurately told how much they owe the old, it is vital that the government uses internationally agreed standards to report these pensions’ costs. It does not do so, pretending to the electorate and to Parliament that their pensions are worth about half their true value. The government is marking its own homework, and claiming that wrong answers are correct. This is morally and financially wrong, and must stop.”
ENDS
Notes to Editors
Contact: Annabel Denham, adenham@iea.org.uk, 07540770774
IEA spokespeople are available for further comment.
The Great British Rake-Off is under embargo until 00.01 Tuesday 26th October 2021. An embargoed copy of the report can be found here: https://iea.org.uk/wp-content/uploads/2021/10/DP103_Great-British-Rake-Off_web.pdf
3 thoughts on “Public sector pensions cost £57bn per year more than is declared, finds new IEA research”
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In the private sector dipping into pension funds I thought was outlawed following the likes of Maxwell doing this and robbing his workers of a secure retirement future. Surely what was subsequently deemed right for the private sector should also be the case for public sector pensions. The treasury should not be diverting these funds and expecting future taxpayers, the majority of whom are private sector taxpayers with inadequate pension provision, to keep picking up the tab for those in the public sector!
I emailed the economics editor of a major newspaper about an extremely misleading report on the spending pressures on local councils – the report being by a major accountancy firm. The cost of the Local Government Pension Scheme was carefully avoided. I asked if he could put me in touch with a journalist who might be interested in the story.
That editor told me that I clearly hadn’t kept up with recent gov’t actions to reduce the cost of public sector pensions, that they were on track to cost less, and quoted a recent OBR report saying that while the cost of those pensions was currently 2% of GDP, that would fall to 1.8% in 20 years and 1.7% in 50 years. What??? Three tenths of 1% in 50 years???!!! Pure fantasy!
Would this economics editor be typical of economists working for the OBR and government? I despair.
Sir
Your exposure of the difference between discretionary cost of public sector pensions and the official cost (as apparently given to the general public) is, if not incorrigible certainly dripping with obfuscation and could be construed as government misleading the electorate. I notice the piece was published around 2021/22. Does the same situation still exist today?
Various members of parliament continuously bleed on about the cost of the pensions triple lock which pales into insignificance compared to the difference set out by you in regard to public sector pensions.
As I understand it the Cameron government were persuaded that the British old age pensions were the lowest paid in Europe and rightly recognising that there was a huge conservative vote catch in pensioners, most of whom actually voted, he resolved to do something about it.
A total lump sum paid to pensioners to right the wrong was impossible so the triple lock was born which protected pensioners from excess inflation and kept their pay in line with the highest average pay awards. This would then, over a period of years, slowly bring pensions values higher than average pay and abreast of inflationary costs. The idea was sound.
Pensioners pay, since it has been governed by the triple lock, has indeed done what it was supposed to have done and increased pensions more than most suspect they would have done had the old system of discretionary hand-outs still existed.
Sadly however even with a few years of the triple lock applying British pensioners remain some of the lowest paid in Europe.
I understand that for someone with maximum contributions of National Insurance payment they receive the princely sum of £169.50 per week or £8814.00 per annum. This is the maximum payment for the new year of April 6th 2024 !
So taken in context with your exposure of the difference between discretionary and official pension payments to public sector workers it beggars belief that certain political figures complain about the cost of old age pensions where it appears their vitriol should be directed in a completely opposite direction.