Article in the Yorkshire Post by IEA Editorial and Programme Director Philip Booth
In this week’s Pensions White Paper the Government ignored the real scandal in the pensions sector – the hidden burden of public sector pension liabilities. Public sector workers are being promised gold plated pensions whilst workers in the private sector, who will ultimately face whopping tax increases to finance public sector pensions, struggle to make sufficient provision for themselves. Of course, the most expensive public sector scheme of all is the one which Members of Parliament join.
The best private sector pension schemes – those that pay pensions related to employees’ salary at retirement – have fallen like nine pins in recent years. Over two thirds are now closed to new entrants. The rest will probably close in the next five years. Yet public sector final salary pension schemes remain open and unreformed and have ludicrously low retirement ages. Furthermore, the government refuses to reveal their full cost. In the national accounts, only the £18 billion cost of actually paying pensions is revealed. When pushed, the Government is willing to admit that the value of all the pensions it has promised so far to public sector workers is about £500 billion. However, even this massively understates the real cost. In calculations undertaken by Neil Record for the Institute of Economic Affairs, the true cost is estimated at over £1 trillion in current value terms. In other words, if the government had put aside investment funds to meet the cost of the pensions for public sector workers, as and when it made its promises, it would need a fund of £1 trillion.
Put in context, this hidden debt is well over twice the official national debt. It is a genuine liability for future generations of taxpayers who will have to foot the bill. Such a burden may seem too big to ignore, yet unlike private sector employers the Government can ignore their own pension deficit because the payment of pensions will not hit a peak until 2045. By then today’s politicians will be “respected elder statesman” in the House of Lords – or possibly in a higher place – and they will not be called to account for their inaction today.
This debt is only the debt accumulated in relation to pension promises made to date. Every year, the government promises new pension rights to public sector workers. The value of those pension rights is about £76 billion each year.
Perhaps the biggest scandal in these schemes is the level of ill-health retirement. Members who retire due to ill health receive an enhanced pension paid from the age at which the ill health retirement takes place. Nearly a quarter of all teachers, civil servants and NHS workers retire due to ill health. This rises to 40% of all local government workers, 50% of police and over two-thirds of firemen. Again, the taxpayer picks up the bill. It is simply not credible that our policemen and local government officers are this unhealthy. The problem is with the governance of these schemes. Easing an employee out, using the pretext of health problem such as stress, is an easy way of dealing with difficult situations for management, because public sector employers, such as individual hospitals and schools, do not bear the cost of their decisions. Alternatively, it could be argued that public sector employers do not put sufficient effort into managing and nurturing the health of their employees because they know that generous severance terms are available for them and employers themselves do not pick up the cost of these generous severance terms.
So much for the problem, is there a solution? The government has climbed down on meaningful reform. The reforms that it proposes – raising the retirement age for new members of public sector schemes – will have a minimal impact on costs. There is also little the government can do about the pensions it has promised so far. Future taxpayers will just have to suffer the consequences.
However, paradoxically, the cost of public sector pensions helps lead us to potential solutions. The cost of providing a female NHS worker or teacher with their pension benefits is 40% of salary: it is a little less for males. The cost of a policewoman’s pension is a staggering 72% of salary. The government hides this cost but it will not be able to do so for long. When the costs are made more transparent, it will give the government huge leverage in negotiations. Public sector workers could have pay increases in return for closing their pension schemes. Future taxpayers would be better off and public sector workers would be too. This could all be combined with local responsibility for setting pay and conditions. Such reforms would leave a legacy worthy of a Prime Minister in search of a handsome early retirement pension.
Philip Booth is author of The Way Out of the Pensions Quagmire.