Reforming public sector pensions

15 March 2010

Reforms to public sector pension provision will need to balance the needs of public sector workers, the Government as an employer and the impact on taxpayers according to a new report by the Pensions Policy Institute (PPI).

The report, funded by the Nuffield Foundation, sets out policy objectives and policy options for any further reforms of public sector pensions.

Potential objectives for reform:

  • to ensure public sector pensions provide adequate pensions for public sector workers in their retirement;
  • to address concerns that public sector pension schemes are unaffordable and not financially sustainable;
  • to improve the transparency of the cost of the pensions being offered to public sector employees;
  • to address perceptions that public sector pension schemes offer higher levels of benefits than private pension schemes;
  • to address unfairness between members within the same public sector pension scheme; and
  • to enable the Government to recruit and retain high quality staff.

Options for the future of the public sector pension schemes

  • Continue current policy, and implement the already agreed reforms for new entrants with no further change. In particular it assumes that the already agreed cost sharing and cost capping agreements are implemented.
  • Make changes to existing final salary schemes such as increasing normal retirement ages in line with changes to the state pension age, placing a cap on the benefit accrued or increasing member contributions further.
  • Risk sharing measures such as moving schemes to career average arrangements such as the civil service scheme or implementing hybrid schemes with a defined benefit arrangement on a base salary with a defined contribution top up.
  • Move to defined contribution arrangements such as looking at the impact of moving to as funded defined contribution system or a national defined contribution system such as the one used in Sweden.

The PPI is not calling for further reforms of the public sector pension schemes. The objective of this research is to provide an independent evidence base to help policymakers to understand the implications of alternative policy options. The PPI will publish an assessment of these policy options against the policy objectives later this year.

Download the report from the Pensions Policy Institute website.