A think tank has added to comments made by an independent pension analyst last month that the coalition government’s rationale for changing public sector pensions may have a questionable basis.
The Institute for Fiscal Studies is scheduled to release a study as part of its annual ‘Green Budget’ tomorrow, in which it claims that proposed pension ‘reforms’ are unlikely to save money over the longer term.
Why? Because the savings derived from introducing a higher pension age are, on average, offset by other elements of pension schemes becoming more generous. The current pay freeze and additional two years of 1% wage increases will leave public sector salaries at roughly the same level relative to private sector colleagues as they were in 2008.
A factor that the government does not seem to have thought through in all its rhetoric is that of low earners – a group that tends to do better in both pay and pension terms in the public rather than the private sector.
In general, the report says, lower earners in the public sector will actually get a more generous pension as a result of the recently announced reforms – that is, they will be able to retire at age 65 with a higher annual pension than they would receive under current arrangements.
This situation results from moving pensions from final salary to career average schemes as well as certain changes to accrual and indexation rules.
No long-term savings
“Overall the proposed reforms improve the structure of public service pensions,” the IFS report says. “But we predict that they will make little difference to the long-term cost of public pensions. By contrast, the move from RPI to CPI indexation of public service pensions, introduced by this government in the October 2010 Spending Review, substantially reduces expected costs and generosity."
But higher earners are likely to lose out. The move from final salary to career average schemes penalises in relative terms those who will see big increases in their earnings over time. So, by being more generous to lower earners – a group less likely to have good workplace pensions in the private sector – the proposed changes actually increase the pensions gap between the public and the private sectors.
There are also big differences in estimated – that is, after correcting for differences in age and education – public/private sector pay between various regions of the country. For example, men working in the public sector will enjoy no pay premium in London or the South East of England, while in Wales the figure amounts to 18%.
But there is also tentative evidence that the pay premium varies across different occupations. For example, while male police officers appear to have the highest relative pay in Wales, for female primary school teachers the North West of England appears to be the most lucrative place to work, while the North East seems to be the place to be for male paramedics.
Carl Emmerson, the IFS’ deputy director and co-author of the paper, said: "The reforms to public service pensions implemented by the last Labour government, and this Government’s decision to switch from RPI to CPI indexation of pension benefits, will in the long run reduce the generosity and therefore the cost of these schemes to the taxpayer."
But he added: "The consequence of the long-drawn-out negotiations over the latest reform appears to be little or no long-term saving to the taxpayer or reduction in generosity, on average, of pensions for public service workers."
