June 14, 2010 • 11:00 pm
Public sector pensions seem set for an overhaul as the Government looks for savings in spending.

Deputy Prime Minister Nick Clegg yesterday said that the current system was unaffordable, despite reforms already implemented.

Indeed the figures released by the Office of Budgetary Responsibility (OBR) suggested the cost to taxpayers was set to double from roughly £4 billion in 2010/11 to £9 billion by 2014/15.

Unions have hit back questioning some of the assumptions behind these figures.

So has the Government been over-estimating the potential costs of these pensions?

The argument made by Unison General Secretary Dave Prentice today was that because some parts of the public sector pensions scheme are connected to the stock market the figure was open to change.

He told the Today programme that the Local Government Pension Scheme (LGPS) was “by far the biggest pension scheme” and that the accounts of the scheme would improve as the stock market recovered.

At the other end of the scale the Institute of Directors has produced an estimate saying that the current cost of public sector pensions is closer to £18 billion.

So how much are these pensions costing us?

Taking Stock

It appears that Mr Prentice’s claim on how the stock market would affect the numbers given by the OBR is something of a red herring.

If it was only the LGPS which was being discussed the point would stand, as Full Fact explained in an article earlier this year. However this is not the scheme used by teachers, NHS workers, civil servants and so on. Such schemes are unfunded, that is, the money paid into these schemes is held by the Government, so unaffected by fluctuations in the markets.

Mr Prentice’s point that the LGPS is the biggest scheme is borne out by the numbers. Figures from the independent Pensions Policy Institute suggested that while the LGPS had 1.7 million active members, the NHS unfunded pensions scheme was not far behind with 1.3 million.

However the unfunded schemes appear to count for a larger proportion of public sector pensions. Figures produced by the Trade Union Congress last year suggest that there are 4.25 million active deferred or pensioner members of funded schemes, compared to 5.5 million in unfunded schemes.

So while the funded LGPS may be the largest, the unfunded schemes, to which stock market changes do not apply, make up a higher proportion of the total.

Even then, the numbers covered the OBR did not include the LGPS. Full Fact spoke to the Treasury, who confirmed that the numbers given yesterday only applied to the unfunded schemes.

This would mean that the arguments put forward by Unison would not apply to public sector pensions costs cited by the OBR.

We put this to Unison, and were told that the unfunded pensions schemes operated in ways that replicated their funded counter parts.
 

“They may be pay as you go schemes, but when they come to calculate the contribution that needs to be paid and costs going forward they do it on a basis as if it was funded so that contributions that are going in should effectively be enough based on current funding assumption to pay benefit in the future,” Unison representative Glyn Jenkins told us.

One way future economic conditions can potentially impact on the figures is through future GDP growth.

The OBR report also includes forecasts suggesting that the cost of public sector pensions as proportion of GDP will remain relatively stable at around 1.8 per cent of GDP.

So looking at the pension costs in this way at least, there appears to be less cause for alarm,

Underestimating costs?

But what of the argument put forward by the IOD that the costs of public sector pensions are actually far higher now than Sir Alan Budd and his OBR colleagues suggest?

This was an estimate which also featured prominently in the Daily Mail’s coverage of the pensions issue this morning.

We spoke to Corin Taylor, who explained the detail behind the calculation.

The figure is based on the Treasury’s 2009 Public Expenditure Statistical Analysis, in which total payments from the pension scheme were £25.3 billion. Contribution from employers and employees was £20.7 billion with the Treasury making up the additional £5.6 billion.

Mr Taylor argued that since the state is the employer in question, the contribution to the pension payments coming from public money therefore should be considered a cost.

Working on an estimate that the employers’ contribution accounts for two thirds of the £20.7 billion combined employee/employer contribution to the fund, this would add on something in the region of £13 billion to what the pensions are already deemed to cost the Treasury.

While defending this take on the numbers, Mr Taylor accepted that there were different ways of adding up the cost.

“It’s a matter of interpretation. It seems reasonable to include the employer contribution as well.

“That is a taxpayer cost as much as the extra Treasury payment,” he explained.

Unsurprisingly this is disputed by the Unions.  Even the extra Treasury money is seen as a repayment of money put into Government coffers by those in the pension scheme. Money which, it is claimed, the Government subsequently spent.

As Glyn Jenkins told us: “It’s a strange argument for a government to make that the liability is going up because basically they have spent all the money, instead of putting it into the fund to pay for those liabilities for the future.
“They are stuck with them, they can’t suddenly go away.”

Conclusion

It is virtually impossible to give an accurate figure of how much public sector pensions will cost taxpayers.

There differing interpretations on the figures depending on whether reforms to the schemes are being argued for and against.

In addition the issue of GDP growth will have significant effects on the ultimate cost, and cannot be forecast for years ahead with certainty.

Chris Curry of the Pensions Policy Institute explained: “The interesting thing in the latest figures is that they are largely in cash terms, which makes them quite hard to interpret – assuming the economy grows - in terms of what that really means as an overall proportion of GDP.”

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