By 2015-16, the taxpayer will have to contribute more than £10 billion per year to make up the difference between pension contributions and pensions in payment in the public sector.
In a report for the Centre for Policy Studies, Self-sufficiency is the key: addressing the public sector pensions challenge, Michael Johnson writes that this is unaffordable, and hence unsustainable.
Johnson compares the current system of public sector pensions to a Madoff-style pyramid, now collapsing under the weight of insufficient contributions, rising longevity and an ageing workforce.
Johnson also shows that the state’s capacity to absorb pensions-derived longevity risk is limited; it should be utilised solely within the state pension, rather than allocated in favour of any particular employment sector. His vision is for comparable pensions, irrespective of employment sector, and he states that public sector pensions should be, ultimately, defined contribution (DC)-based.
An essential pre-requisite to reforming public sector pensions, according to the report, is to raise the basic state pension above the guarantee credit threshold to £140 per week. This would help allay pensioner poverty concerns, thereby weakening the unions’ position in the forthcoming negotiations.
Johnson suggests a two-step implementation: an initial phase of watered-down defined benefit (DB) provision before the introduction of a pure DC framework, perhaps in 2020.
In parallel, Johnson says the UK should start moving towards a funded framework, thereby seizing an opportunity to catalyse a savings culture amongst 20% of the working population, and that public sector employees should be compelled to participate in the National employment savings trust (Nest).
Reforming public sector pensions is foremost an exercise in effective communication and negotiation, rather than a technical challenge, says Johnson.
He warns Lord Hutton, whose report is due in early March, that should he merely recommend a form of watered-down DB provision, this would require the government to accept that the quality of pension provision in the private sector is to remain second class. Consequently, public opinion may demand a second round of reform a few years later.
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