Public Sector pensions

A lot of the debate over the past few weeks has centred on Britain's levels of debt and specifically, whether the Government can afford to borrow more in its Keynesian approach to getting the country out of recession.

Many have pointed out that PFI deals are not included in the official figures as the debt is held off-balance sheet. However, the real elephant in the room is the massive liability for public sector pensions.

An excellent piece of research has been published by the Pensions Policy Institute. I should add that the PPI is a non-partisan body.

Here is a summary of some of the findings:

• On average public sector pensions are now worth 21% of salary compared to a typical private sector defined benefit scheme worth 20% of salary and a typical private sector defined contribution pension worth 7%.
• Employers contribute around £4,000 per year per employee in the public sector, compared to £1,600 per employee in the private sector. However, employees in the public sector also contribute more than their counterparts in the private sector.

Ah but, public sector workers don't get paid as much as their private sector counterparts, you say. Apparently not:

• Pay is higher in the public sector than the private sector at all but the highest pay levels based on observed annual gross pay for full-time employee jobs by sector and percentile, not controlling for occupation and individual characteristics.

Basically, if you are in the top 10% pay bracket in the public sector, then your average gross pay is £41,000 per year versus £53,000 in the private sector's top 10%. But at all other pay levels, the public sector pays more. And when you add into the mix issue of job security, probably especially relevant in current times, it would appear that public sector workers are on to a pretty good thing.

Aside from the issue of whether these generous feather-bedded pensions are affordable in the long-term, with average life expectancy increasing with a corresponding rise in the number of pensioners, the overriding question should be, 'is this fair?'

Why should low and middle-paid workers in the private sector be effectively subsidising their co-workers in the public sector?

When Gordon famously raided pension funds, by abolishing the tax credit on dividends, public sector workers were unaffected as they receive their pensions based on final salaries, rather than having to build up a fund to buy an annuity on retirement.

Pension reform in the public sector needs to go much further. This is a key issue for the next Conservative government to deal with when it comes to office. Clearly it is going to be unpalatable given the massive increase in the client state over the last ten years, but someone is going to have to grasp the nettle.