The sheer cost of gold-plated public sector pensions is today laid bare. Analysis for The Sunday Times reveals that unfunded inflation-proof retirement deals have saddled future taxpayers with a bill of \u00a31.3 trillion \u2014 nearly half the national debt.<\/p>\n
It shows a stark divide between the retirements of public and private sector workers, with one able to rely on the taxpayer while the other contends with investment risk and relentless tax threats.<\/p>\n
Most workers in the public sector have generous defined benefit (DB) pensions, also known as final salary schemes, where your income in retirement is guaranteed and inflation-linked. They have all but disappeared in the private sector because they are too expensive to run.<\/p>\n
As fears mount over the possibility of further tax hikes in the autumn budget to fill a multibillion black hole in the country\u2019s finances, we reveal that:<\/p>\n
\u2022 Public sector workers are annually gaining pension benefits worth as much as 82 per cent of their salary.
\u2022 Taxpayers will pay \u00a357 billion this year to fund retired public sector worker pensions.
\u2022 Even if public sector pensions closed today, the yearly bill for funding existing pension promises would surpass \u00a3100 billion by 2050.<\/p>\n
Neil Record, a former economist at the Bank of England who did the analysis, said: \u201cPublic sector pensions are one of the most damaging, and least understood, of the government\u2019s long-term policies. <\/p>\n
\u2022 How will my pension be affected by inheritance tax?<\/b><\/a><\/p>\n \u201cThey are incredibly generous \u2014 way more generous than equivalent jobs in the private sector \u2014 and are set up like a Ponzi scheme, where today\u2019s contributions are paying for today\u2019s retirements and leaving the kitty empty.<\/p>\n \u201cThis is all taxpayers\u2019 money. No wonder the fiscal position is so dire if successive governments have been content to allow this damaging policy to continue.\u201d<\/p>\n The divide<\/p>\n Each scheme works slightly differently, but DB pensions typically pay an income until you die. It is normally inflation-linked and based on your salary and length of employment. The onus is on the employer to ensure that these pensions can be paid.<\/p>\n In 2006 3 million private sector workers and 5.1 million public sector workers were paying into DB pensions.<\/p>\n By 2019 the number in the private sector had dropped to 900,000 (and some of these are \u201cquasi-public sector\u201d, such as university and rail staff). Large companies such as BT, Marks and Spencer, Tesco, John Lewis, Rolls-Royce and BP have all closed their DB pension schemes. Hundreds of private schools have left the teachers\u2019 pension scheme because of affordability fears.<\/p>\n In the public sector, however, the number of workers with a DB pension has grown to 6.6 million \u2014 even though the workforce has shrunk 11 per cent since 2006.<\/p>\n Private sector employees now typically save into defined contribution (DC) pots instead. These are \u201cpot of money\u201d pensions, where how much you get in retirement depends on how much you pay in and how your investments fare. They have the generous benefit of being held outside your estate for inheritance tax purposes, so can be passed on free from the tax, but from April 2027 this will no longer be the case, unless left to a spouse or civil partner.<\/p>\n \u2022 Why Gen Z is facing a pensions crisis<\/b><\/a><\/p>\n Importantly, in a DC scheme the onus is on you to ensure that you have enough in your pot to fund your retirement.<\/p>\n The cost<\/p>\n With DC schemes, the cost is easy to calculate. Under auto-enrolment rules, employees pay a minimum of 5 per cent of their salary and employers contribute a minimum of 3 per cent. Most private sector companies follow these minimums, but about a fifth of workers have an employer who contributed between 4 and 8 per cent, according to the Office for National Statistics. <\/p>\n With public sector DB schemes, the cost is more complicated. The government publishes the overall cost of matching the pension promises for unfunded public sector schemes, which stands at \u00a31.3 trillion, but there is more to it.<\/p>\n Workers pay in more of their salary than private sector workers \u2014 NHS employees pay between 5.2 and 12.5 per cent, civil servants between 4.6 and 8.05 per cent and teachers between 7.4 and 12 per cent, for example \u2014 and employer contributions are certainly higher. The employer rate for the NHS pension scheme is 23.7 per cent of a worker\u2019s salary, for the teachers\u2019 pension scheme it\u2019s 28.7 per cent and the civil service contributes 28.97 per cent.<\/p>\n But these contribution rates do not necessarily match up with the true cost of funding the pension benefits that are being offered. The true cost is what is known as the \u201ccurrent service cost\u201d, a complicated sum calculated by the government. It is sensitive to wider economic circumstances, such as interest rates.<\/p>\n When interest rates were low, the cost of matching the pension benefits that were being promised was staggeringly high. For example, official documents for the teachers\u2019 pension show that in 2021, teachers built up pension benefits worth 65.8 per cent of their salaries. In 2022 it was 77 per cent and in 2023 it was 82.3 per cent. This year, because interest rates are higher, it\u2019s 22 per cent.<\/p>\n \u2022 Why boomers face the biggest tax grab in history<\/b><\/a><\/p>\n John Ralfe, a pensions consultant, said: \u201cOver the course of the last few years, the cost of new pension promises has gone down a lot because interest rates have gone up a lot.<\/p>\n \u201cBut the cost of servicing these pensions could go back up again. While at the moment the contributions match how much the pension is actually costing, it may not always be the case. The cost has been as high as 80 per cent of someone\u2019s salary.\u201d<\/p>\n Then there is the cost of paying today\u2019s retired public sector workers. The forecast for the 2025 bill is \u00a356.8 billion \u2014 the highest yearly cost yet.<\/p>\n And according to Record the annual cost to the taxpayer is only going to grow. He estimated the cost of meeting the public sector pension promises that have already been built up (so if the schemes were closed to new members and any new pension promises today) and found that the yearly bill would surpass \u00a3100 billion in 2049.<\/p>\n In fact the cost would peak in 2061 at \u00a3132 billion and the taxpayer would only stop paying pension promises by the year 2106. <\/p>\n The future<\/p>\n