Public sector final salary pension schemes are unsustainable and must be overhauled as a matter of political urgency, the Confederation of British Industry warns today.
Such schemes represent a £1 trillion burden on the taxpayer, equivalent to £40,400 for every household, the CBI calculates. It puts the annual financial ‘black hole’ for public sector final salary pensions at around £10 billion.
The key problem is that benefits are ‘out of kilter’ with employer and employee contribution levels, the industry body says in a new report. The situation is further complicated by the fact that some schemes - such as the civil service pension scheme - are ‘unfunded’, it says.
According to the CBI’s research, public sector pension benefits are now worth an average of 26% of annual salary - far higher than the norm in the private sector. And this despite the fact that the average public sector salary is now £23,600, compared to £21,528 in private sector, and that the number of people employed by the state has swelled by 1 million to 6.1 million over the past decade.
The CBI is calling on the next government to set up an independent commission to fully investigate pension costs. It says the UK should consider ‘notional defined contribution schemes’, an alternative type of arrangement implemented in Sweden in the 1990s.
Under NDC schemes members and their employers pay contributions calculated on pensionable earnings, with these contributions kept in personal accounts. This money is then put in independently-managed, ring-fenced funds – kept separate from general public funds and budgets – which can then be drawn on to provide benefits for current pensioners.
In an NDC, the CBI says, the value of employees' personal accounts increases over time in line with selected economic benchmarks – such as average earnings or inflation – using an independently determined rate of return. On retirement the accumulated value of the personal account is then used to buy an annuity.
John Cridland, deputy director-general of the CBI, admitted that this was ‘a difficult and emotive area’.
‘Public sector workers deserve a good retirement, but they and their employers should pay their own way,’ Cridland said. ‘The pension black hole is over one trillion pounds and rising, and taxpayers cannot be left to make up the difference.’
‘Guaranteed final salary pensions have entered the history books in the private sector, but the state has not squared up to the issue for its own workers. Countries like Sweden and Holland reformed their systems some 15 years ago.’
The next government must acknowledge the problem, starting by establishing the true costs and letting the taxpaying public decide what they are prepared to pay for, he said.
‘Public sector workers cannot lose the pensions pot they have accrued so far, but they will have to adapt in the future. We think that, for many public sector employers, shifting to a notional defined contribution pension could be the best way forward. It would ease the burden on taxpayers and offer public sector workers a secure and sustainable pension.’