Understanding Public-Sector Pension Schemes Funding

The Lead

Public-sector pension schemes in the UK have been a topic of discussion lately, particularly regarding their funding. A recent letter from Prof Stephen Caddick highlighted the £1tn in liabilities for public defined-benefit (DB) pension schemes, sparking debate about the fairness and affordability of these schemes.

The Event Details

There are five large 'unfunded' public-sector pension schemes in the UK: NHS, teachers, civil servants, police, and army. Employers, and ultimately taxpayers, contribute a significant amount to these schemes. However, without a decent pension scheme, these sectors would likely require higher levels of pay to recruit and retain staff, which would also fall on taxpayers.

The Data Analysis

The £1tn liability figure mentioned is misleading, as it estimates the money the government would have to pay out to cover pensions if there were no income coming from workers and employers. This figure is likely to be around £1.3tn. In contrast, other DB schemes, both public and private, are 'funded' through investment in the stock market.

The Impact Analysis

Public-sector workers choose their jobs based on the total package offered, including a good pension and strong benefits. These benefits allow the state to attract people who could earn considerably more in the private sector. The current system effectively defers the welfare bill, as generous public-sector pensions are a way of deferring costs to future administrations.

The Prediction

It would be more honest to raise pay so that staff could fund pensions and benefits themselves. However, no government is likely to do this, as it would create a problem today in exchange for solving one that lands on a future administration.