“Any reforms of the public sector pensions will require trade-offs between adequacy and affordability” says Pensions Policy Institute

23 November 2010

The future reform of the public sector pension schemes will require a trade-off to be made between competing policy objectives, according to a report published today by the Pensions Policy Institute, and funded by The Nuffield Foundation.

The report The future of the public sector pensions evaluates a range of possible reform options for public sector pensions against a set of policy objectives: including adequacy, fairness, recruitment & retention, affordability and sustainability, and transparency.

The PPI has assessed a range of reform options that the Government could consider in reforming the public sector pensions ranging from:

  • Continuing with current policy;
  • Amending the existing final salary schemes;
  • Introducing risk-sharing arrangements such as career average or hybrid
  • arrangements; or
  • Moving to a funded or notional defined contribution arrangement.

Commenting on the findings of the research, Niki Cleal, PPI Director said:

“Each of these reform options would perform differently against possible policy objectives for public sector pensions, and would leave public sector workers and taxpayers facing different risks.”

“Currently most public sector employees have generous defined benefit pensions – often linked to final salary - that are likely to enable them to have an adequate income in retirement.”

“The combined impact of the last Labour Government’s reforms and the Coalition Government’s recent announcement on CPI indexation has reduced the value of a public sector pension to a typical public sector worker by around 25%. As a result, the future cost of public sector pensions is now projected to fall from 1.2% of GDP today to 1% of GDP by 2050, even if the Government undertakes no further reforms to the public sector pensions.”

“If the Government were to amend the parameters of the existing public sector final salary schemes public sector workers are likely to continue to have adequate pensions. However, the overall affordability and sustainability of the schemes is unlikely to be substantially altered and the unfairness and crosssubsidies implicit in final salary schemes are unlikely to be addressed.”

 “The Government could reform the public sector pension schemes to share more risk between taxpayers and scheme members through a career average scheme, or a hybrid scheme. A career average scheme may remove the inequalities that exist in final salary schemes that benefit high fliers and penalise those who leave the scheme early.”

“Introducing a Career Average scheme offering similar levels of benefits to the one introduced to new entrants to the civil service but with higher levels of member contributions would reduce the adequacy of public sector pensions for some workers but could also reduce the costs to the Government of providing the public sector pensions, from 1.2% of GDP today to 0.9% of GDP by 2050.”

“If the Government were to move to a funded defined contribution scheme for the public sector pensions similar to the schemes that operate in the private sector, the short-term costs for the Government of providing public sector pensions would increase substantially, as the Government would need to continue to pay the pensions of today’s pensioners while investing the contributions of today’s workers.”

“The Government could consider a move to a notional defined contribution scheme similar to the model that operates in Sweden. PPI calculations suggest that even with a combined contribution rate of 15% of salary such a scheme would be unlikely to provide public sector workers with an adequate pension.

Under this option Government spending on public sector pensions is projected to fall from 1.2% of GDP today to 0.7% of GDP by 2050. However, beyond 2050 some of these savings would be offset by increased Government expenditure on the state second pension.”

“Ultimately the Government will need to make a trade-off between the competing policy objectives, and balance the cost and risks of public sector pensions between the scheme members and the taxpayer in any further reforms to the public sector pensions.”

ENDS

For further information please contact: Niki Cleal, Director of the PPI on 020 7848 3744 or 07834 275 083 email: niki@pensionspolicyinstitute.org.uk

Download a copy of the press release and executive summary (PDF)

Download a copy of the full report (PDF)

More details on the project page

More information on our work in economics of ageing

Notes for editors

1. The PPI is an independent research organisation, which aims to provide facts and evidence to inform public policy on pensions and retirement provision. Its aim is to improve information and understanding about pensions and retirement provision through research and analysis, discussion and publication. It does not lobby for any particular policy, but works to make the policy debate better informed.

2. The types of reforms that the Government could consider which would involve amending the parameters of the existing final salary schemes could include increasing member  contributions, reducing the accrual rate or increasing the Normal Pension Age or introducing salary or pension benefit caps.

3. The Nuffield Foundation is an endowed charitable trust that aims to improve social well-being in the widest sense. It funds research and innovation in education and social policy and also works to build capacity in education, science and social science research. The Nuffield Foundation has funded this project, but the views expressed are those of the authors and not necessarily those of the Foundation. More information is availableat www.nuffieldfoundation.org.

4. The Chancellor has invited John Hutton to chair the independent Public Service Pensions Commission. The Commission will undertake a fundamental structural review of public service pension provision and will produce its final report by Budget 2011. The Commission will make recommendations on how public service pensions can be made sustainable and affordable in the long-term, fair to both the public service workforce and the taxpayer, and ensure that they are consistent with the fiscal challenges ahead, whilst protecting existing accrued pension rights. The Commission published its interim report on 7th October, and launched a call for evidence for the final report on public service pensions on 1st November 2010. The deadline for submissions is Friday 17th December. Further details can be found at www.hmtreasury.gov.uk/indreview_johnhutton_pensions.htm.