There seems to be a growing appetite to cut the cost of public sector pensions. A year ago, it was basically off the cards — no party would have dared take the political risk. But the coalition are now slowly making the case. There is a strong chance of a levy being imposed, if the government holds its nerve.
The payments shoot up at around 20 per cent a year, rising from £4bn in 2010/11 to £9.4bn in 2014/15. Even more worrying is the fact that this is only the early stages of the demographic trend pushing up costs. The jump will be more pronounced beyond 2015.
Here’s what Nick Clegg had to say about it:
“Public sector workers deserve a decent income when they hit retirement; no one doubts that. But the current situation is not fair. Private sector workers have already seen final salary schemes close, while returns from defined contribution schemes fall.
So can we really ask them to keep paying their taxes into unreformed gold-plated public sector pension pots? It’s not just unfair, it’s not affordable. As we face up to living within our means, we cannot ignore a spending area which will more than double within five years”
There aren’t many options available to the chancellor. To generate some long term savings, the final salary schemes could be closed and employees switched to a “notional” direct contribution scheme.
But that wouldn’t raise any serious money over the next 15 years. There are only two ways to do that: cut payments or increase contributions.
Cutting payments would withdraw accrued benefits, something that no sane politician would want to do.
So a hike in contributions is the obvious solution. Asking every public sector worker to pay an extra 2.5 per cent contribution would raise £3.2bn a year. It would effectively be a pay cut, dressed up as a means of making workers pay a fair amount for what remains a generous scheme. Ireland have done something similar already.
Personally, I’m looking forward to spending my wife’s gold-plated public sector pension. But I expect we’ll be paying a lot more for it, pretty soon.