Sam Dunn: The old public sector pension deal must end

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The Independent Online

This is usually a final salary deal where their annual income after retirement is based on time worked and final wage earnt.

Historically, this has been part of a trade-off for serving the state. A lower salary that didn't rise at the same pace as those in the private sector was offset by benefits that also included shorter hours, more holidays and greater job security.

Today, however, the private pension savings crisis - being tackled by Adair Turner, who will conclude his Pensions Commission inquiry into the issue on 30 November - is forcing the pension part of this public sector package into an unwelcome spotlight.

It's all about the money: the cost of funding these public sector pensions is huge. Actuaries - who calculate the long-term costs of retirement - say more than £500bn is needed to pay for them. And the bill is growing thanks to, among other factors, our living longer and an expanding public sector payroll.

Crucially, unlike private schemes where contributions are invested in funds that then pay the pension, the public-sector plans are funded by the government - from the taxes we pay every year, or from borrowing.

This cost, which shows no sign of shrinking, is overshadowing the relatively meagre deal on offer to millions of private sector workers.

Here, companies have reacted to higher staff pension costs brought on by increased longevity and poorer stock market conditions by slashing final salary schemes and largely replacing them with money-purchase deals, where workers save to buy an annuity, or annual income, in retirement.

Worse, not enough workers who are offered these schemes bother to take them up, partly because, with plummeting annuity rates, they have no guarantee their efforts will be rewarded with a decent income in old age.

This difference, between the lot of a public sector employee and his neighbour working for a private company, could not be more striking. As average public sector earnings have now caught up with their private peers, their copper-bottomed pensions are starting to look like a luxury that can ill be afforded.

Yet as the Government and Mr Turner try to find a way to redress this balance, the public sector unions are balking at any solution that deprives their members of such a good deal.

At last week's TUC congress in Brighton, union leaders including Dave Prentis of Unison and Mark Serwotka of the Public and Commercial Services Union launched loud defences of their members' pension rights.

Threatening industrial action, they vowed to fight government proposals to raise the pension age from 60 to 65 and base retirement pay on a career average rather than final salary.

As Mr Turner points out, one or more of three things has to happen if workers are not to retire in poverty: taxes must rise, we must work longer or we must save more.

None of these is particularly palatable for an individual but the unions' stance is as unhelpful as it is unrealistic.

A healthy retirement for all in the future needs flexibility in today's chaos; the public sector has to realise this now.

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