The ‘final salary’ scheme is unsustainable and is causing a trillion pound black hole burden on the taxpayer, the CBI claims.
Their research claims the financial ‘black hole’ for unfunded public sector pensions is £10bn every year. The total overall liability for these schemes has mushroomed to £1 trillion, or £40,400 for every UK household.
The picture is complicated because public sector pensions vary greatly in size and structure depending on the employer. Some, such as the local government scheme, have more transparent arrangements and are ‘funded’, unlike for example the civil service, which is ‘unfunded’. However, the CBI believes that, taken as a whole, the current approach to public sector retirement is simply not sustainable.
Public sector pension benefits are on average worth 26% of salary every year, which is far higher than private sector norms – and the total cost will increase as people live longer. To compound the situation, the state workforce has grown by almost 1m in the past decade to hit 6.1m, or one in five workers.
The CBI has released a report: "Getting a grip: the route to reform of public sector pensions" to back up their claims and set out the issues they believe should be investigated.
One of their key issues says the public sector needs to ‘pay its way’ for their pensions, and that pensions should be fully linked to the contributions made by staff and their employer, with no ‘hidden taxpayer subsidy’. Importantly, pension rights and pots which have already been accrued must be protected, so staff will not lose whatever they have accumulated.
The CBI says that going forward, all public sector staff should be moved off guaranteed ‘defined benefit’ schemes, which include final salary and career average pensions. How this happens may differ between public sector employers, and schemes that are in a ‘funded’ position, such as local government, may wish to pursue a different route.
John Cridland, CBI Deputy Director-General, said: "This is a difficult and emotive area, and not one that should be rushed. Public sector workers deserve a good retirement, but they and their employers should pay their own way. The pensions black hole is over one trillion pounds and rising, and taxpayers cannot be left to make up the difference.”
For the ‘unfunded’ sectors including the NHS, teacher and civil service, the CBI recommends the Swedish model of ‘notional defined contribution’. They claim this scheme would offer a risk-free pension that is ‘more sustainable and secures transparency for employers, staff and taxpayers’.
