Public sector workers are facing changes to their pensions which, for most, will mean paying more in contributions and working longer. The annual cost of servicing the state sector schemes, as a share of GDP on reasonable assumptions about rising life expectancy and future growth in earnings and contributions, that is projected to rise from 1.7% of GDP today to 1.9% in 2018-19, before falling back to 1.7% by 2059-60. Local government pension scheme presently costs every household around 5p in every £1 paid in council tax.
Some experts say best advice might be to expand the public-sector workforce and massively increase their pay. In five years' time, public-sector pensions probably wouldn't "cost" the government anything at all. In fact, the Treasury might even be making a profit. This is what happened in the NHS over the past decade - pay and employment shot up. The result was that the "cost" of their pension scheme disappeared. In 2008-9 the NHS pension scheme ran a big surplus: it paid in £2.1bn more to the Treasury than it paid out. Over the next five years, the NHS pension scheme will actually provide a surplus to the Treasury of over £10 billion
Already changes have been made. First, the age at which a scheme member could draw a full pension was increased from 60 to 65 years for new members. Second, employee contributions were increased by 0.4% of pay for teachers and by up to 2.5% of pay for NHS staff. Third, a new cost-sharing and capping mechanism was introduced to transfer, from employers to employees, extra costs that arise if pensioners live longer than previously expected. The Commons Public Accounts Committee on the basis of evidence from HM Treasury and the Department of Health is concerned the Treasury did not test the potential impact of changes in some of the key assumptions underpinning the long-term cost projections. Indexing pensions to the Consumer Prices Index rather than the Retail Prices Index is expected to reduce costs further. The committee also heard concerns that the discount rate used to set pension contribution levels was too high. A lower discount rate leads to higher contributions from employees and employers, reducing the long-term cost of pension schemes.
In the 1990s, Britons had more saved in private pensions than the rest of Europe combined, mostly in company schemes. There was so much cash around that firms were taking pension “holidays” because their schemes were in surplus. But Gordon Brown couldn’t keep his hands off this money pot, and from 1997 he syphoned off £5bn a year by abolishing dividend tax reliefs. Then, in the noughties, a collision of factors trashed private sector pensions: interest rates fell, the stock market collapses ( the FTSE is still 25% down on ten years ago.) and inflation returned. The current policy of near zero interest rates has been devastating to all savers. Inflation erodes the value of any savings, whether in a private pension or a building society account by around 5% a year. There used to be many more final salary pensions in the private sector - indeed, public sector pensions were originally modelled on the best practice of great British companies of old, like BP, ICI, GEC. These firms used final salary pensions to attract and hold on to experienced staff. But with globalisation, the collapse of stock markets, and the neurotic search for ‘shareholder value’, corporate Britain came under increasing pressure through the 80’s and 90’s. The old career structures were broken up and pensions scrapped in favour of “money purchase schemes” in which employees are left to the vagaries of the stock market.