Interesting IoD report just published, especially so as the IoD is sometimes seen as a measure of Tory fiscal thinking (I wonder how much of it George Osborne will be drawing on next year..). Either way, pension reform for the future is looming ever larger on everyone's radar.
http://www.iod.com/intershoproot/eCS/Store/en/pdfs/policy_paper_save_50_billion.pdf
Item 26: One year pay freeze across the public sector, excluding members of the armed forces serving in conflict zones. The exemption in the pay freeze for members of the armed forces serving in or returning from conflict zones, such as Afghanistan, is morally the right thing to do, and will have a negligible effect on the overall saving.
Item 27: Increase employee contributions to all unfunded public sector pension schemes by a third.
The pensions divide between the public and private sectors has been much discussed. In brief, the main points are as follows:
In the context of a rapidly ageing population, pension reforms will be unavoidable. In the private sector, a combination of demographic pressures, tax increases and more onerous regulation has led to a 41 per cent fall in the active membership of defined benefit (DB) schemes. At the same time, the state pension age will increase to 68 by 2046. By contrast, existing scheme members in the unfunded public sector schemes will still retire at 60.
90% of public sector employees are members of DB pensions, compared with just 12 per cent in the private sector. According to a recent survey of 1,000 IoD members, only 12 per cent of company directors are enrolled in an occupational DB pension, the same proportion as for the private sector as whole, while 45 per cent have no occupational or employer sponsored pension at all.
Excluding member contributions, a public sector pension for a typical employee is worth over 40 per cent of salary, compared with just 7 per cent for a typical private sector defined contribution (DC) scheme. The Institute for Fiscal Studies has calculated that relatively generous pensions add 12% to the salary of public sector employees, over and above private sector employees.
Unfunded public sector pension liabilities are now as much as £1.1 trillion, while the IoD has estimated that the total bailout of public sector pensions (in addition to the already high employer contributions) could reach £335 billion, over £13,000 per household, over the next 50 years.
Given that public sector pay is now higher than in the private sector for all but those at the very top, there is no longer any justification for people to pay, through taxes, for pensions they can no longer afford for themselves. It is fair for public sector employees to contribute more towards the very high cost of their pensions.
The case study on page 23 of this report might strike a chord too.
http://www.policyexchange.org.uk/images/publications/pdfs/Public_Pensions_Final_Jun_09.pdf
Though he is quick to point out that the police contribute more as a percentage of their salary than anyone else, he worries about how the Government can continue to pay for these pensions when the population is ageing. “I am part of the baby-boom generation, yet there are fewer young people. I do wonder how they can keep paying these pensions without taxes having to rise.” When asked about his plans for permanent retirement, he says that in spite of his age he cannot afford to do this, and sees himself working indefinitely. When asked about his opinions, he says that he thought that contributing what he did, plus what the police contributed on top of that, if invested over the length of his service ought to give a substantial pension.
He adds that his pension is a fair reflection on what is an “unsociable and dangerous” job in which many men do not reach the end of their service. But if this obligation turned out to be too expensive, it is not for the Government to renege on it: “They have made a commitment at the beginning of your service, and it is up to them to honour it. In the first place, pensions should be formulated in a transparent and sustainable manner which is understood by both the employer and employee.”