Taxpayer to fund extra £5bn for gold-plated public sector pensions

TAXPAYERS will pay billions of pounds more to fund gold-plated public sector pensions as higher inflation drives up retirement awards.

Double-digit price rises mean the cost of inflation-linked public sector pensions will rise by an extra £5bn a year by the next election in 2025. Public sector pensions increase in line with September’s rise in the consumer prices index (CPI), which is expected to be in double digits.

The Office for Budget Responsibility (OBR) last October forecast public sector pensions would cost £51.4bn in 2024-25. That assumed inflation peaked at 4.4pc in 2022 then fell quickly back to its 2pc target. But economists, including policymakers at the Bank of England, now believe price rises will be higher and more sustained.

Inflation is expected to remain in double digits until next autumn. This will push up the cost of public sector pensions to around £56bn by the end of the current parliament, according to the consultancy LCP.

This forecast may even prove to be an under-estimate, with a recent surge in gas prices suggesting inflation could rise faster and remain higher for even longer than expected just weeks ago.

Sir Steve Webb, a former pensions minister and partner at LCP, said: “Higher than expected inflation feeds through not just into the cost of state pensions and benefits but also the cost of pensions to retired public servants, which have comprehensive inflation protection built-in.

“With the total bill for public service pensions set to exceed £50bn next year, even a modest overshoot on inflation can soon turn into a multibillionpound bill.”

Public sector workers enjoy taxpayer-backed inflation protection in both their work and state pensions. The Government’s triple lock, which guarantees that payments rise every year by the highest of average earnings, inflation or 2.5pc, means state pension payments will also climb by around 10pc next April.

Public sector pensions are largely unfunded, which means payments are through taxes on current workers.