Why the public sector pensions racket must stop

The taxpayer is paying the price for gold-plated guarantees, writes Lauren Almeida

Britain’s retirement wealth divide is about to widen further as millions of retired public servants collect their biggest pay rise in decades. Retired public sector workers will receive a 10.1pc bump next week, thanks to a rule that dictates that the Government must uprate their pensions each April in line with the previous September’s inflation figure, which hit a four-decade high last year.

These defined-benefit pensions guarantee an income in retirement for life – but the enormous burden they place on employers has meant that they have mostly vanished from the private sector.

Yet they remain the norm for more than 5m public servants, including former teachers and doctors.

And while the Government will hand a double- digit pay rise to its retired employees this spring, most taxpayers’ private savings will crumble under the pressure of weak stock markets and their wages will fail to match inflation, experts have warned.

Most private sector workers have a “defined contribution” pension, which invest savings in stocks and bonds over the course of their careers. While public sector pension payments are about to increase by 10.1pc, invested pension pots have suffered from a turbulent year in the stock and bond markets.

Major private pension funds, including the state-backed Nest, have dropped in value. Nest, which has more than 10m savers, has lost 2.5pc on average, well below the rate of inflation. The People’s Pension has lost 5.7pc, while Now Pensions has dropped by 12pc.

Public servants’ pensions have emerged unscathed – but it is the taxpayer that takes on much of the burden of funding these schemes. The inflation link this month means that the Treasury will have to pay as much as £4.5bn to cover the cost of honouring gold-plated pensions, according to estimates from Canada Life.

While retired public servants prepare for their bumper rise, those still working in the private sector have been forced to grapple with falling real wages.

Conor Holohan, of campaign group the Taxpayers’ Alliance, said that the growing costs showed that public sector pensions were becoming increasingly unsustainable and unfair.

“Private sector workers are paying for their public sector counterparts to enjoy a retirement they could only dream of,” he said. “These pensions are becoming even more unsustainable.”

And while retired public servants will receive the biggest pay rise in decades, hundreds of thousands of those still in work are preparing to strike this month over pay. Junior NHS doctors will walk out of hospitals for four days next week, as their union lobbies for a 35pc pay rise.

Meanwhile, the largest teaching union in England, which has also demanded an inflation-beating pay rise, has threatened to strike until the end of the year.

Angus Hanton, of the Intergenerational Foundation, a charity, said: “A reduction in these unaffordable pensions could allow the pay of nurses, teachers and police to be raised to keep pace with inflation.” Overall, the cost of public sector pensions weighs heavily on Britain’s balance sheet. Their liabilities were worth more than £2 trillion in 2020, according to the Government’s latest accounts, almost twice as much as the value of all of its bonds.

This could balloon quickly as the “discount rate” on public

service pensions changes. This is an accounting exercise that the Government uses to calculate the future value of their pension promises. For example, if they promised to pay £1,000 in 20 years’ time and used a 1pc discount rate, this would be valued at £820 in today’s terms. Lower rates are more expensive: if they used a 5pc discount, it would be marked as £377.

Last week the Government confirmed a new, reduced discount rate – it means that overall the cost of pension contributions will rise from April 2024, according to estimates from the Institute for Fiscal Studies (IFS), a think tank.

Ben Zaranko, of the IFS, wrote in a recent report: “In some sense, public sector pensions are becoming more ‘generous’, not because the Government is improving the terms of the pension promise, but because we think it will be costlier for taxpayers to pay the existing promise.

“Some rebalancing of public sector remuneration away from pensions towards take-home pay could help ease issues with recruitment, retention and morale.”

The Government’s own analysis has found that it is easier to fund a comfortable retirement with a public sector pension. Just 8pc of workers in a defined- contribution scheme are saving enough for a comfortable lifestyle in retirement, it found. That compares with 14pc of workers in a defined-benefit (DB) scheme, most of whom are government employees.

While the data show that you need a gold-plated pension to enjoy a comfortable retirement, these schemes have become increasingly scarce in the whole of the labour market. In 2012, there were about 2m people who were still building income in a defined-benefit pension. This has since dropped to around 786,000, according to the pensions regulator.

There are still companies that offer defined-benefit pensions to their staff, such as BT, but they remain scarce.

Carl Emmerson, also of the IFS, said: “While private sector DB pensions are linked to inflation this is usually up to a cap, sometimes 5pc.”

Public sector pensions have also historically been more tax efficient. The lifetime allowance ( LTA), which caps how much you can save into your pension over your lifetime, was set at £1.073m. This cap is in the process of being removed, and charges arising from the LTA have been scrapped this week.

For savers in defined contribution pensions, the limit applied to the value of their invested pots. However, for members of public sector schemes, the value was typically calculated by multiplying their expected annual pension by 20.

This means that a retired public sector worker could secure a retirement income of £53,655 without hitting the cap, while a private sector worker with a pension at the cap would have received an income of around £ 50,000 if they bought an annuity last year.

A Treasury spokesman said: “Rising prices are challenging for everyone, which is why halving inflation this year is a top priority for this Government.

“Raising the public sector pension in line with CPI inflation is how we routinely revalue these types of pensions and reflects our compassionate approach to supporting pensioners in the current economic climate.”