Dramatic reform of public sector pensions is needed to reduce the £1 trillion liability facing taxpayers, according to the Confederation of British Industry.
The CBI says that the value of all the future pensions obligations to public sector workers such as civil servants, teachers and NHS staff amounts to just over £40,000 for every household, although this is higher than the official estimate of the liabilities.
The employers' organisation claims a rapidly increasing life expectancy has left the public sector with an unknowable future burden, and one that will compound the current crisis in the public finances. They are calling for a new inquiry, along the lines of last year's Turner Review into financial regulation, on the viability of public sector pensions.
However, the CBI draws back from recommending a wholesale move to the kind of money purchase schemes now prevalent in the private sector. These depend on funds being invested in financial markets to yield an income on retirement, though with few guarantees as to its amount.
By contrast, the traditional type of defined benefit or final salary scheme – still the norm in the public sector – guarantees future payouts related to length of service and final salary. The CBI suggests that all the accrued benefits earned by workers in existing schemes must be honoured, but that future employees should be gradually moved into "nominal defined contribution" schemes, a sort of hybrid.
Under this system the public sector workforce pays into a non-invested fund that disburses pensions to retirees, with the benefits underwritten by the government. Contributions made by the employee and employer would be paid into a pot that would grow at a fixed rate each year and which would not be related to investment performance. The CBI says this would offer "reassurance and greater predictability of employees to plan ahead". Instead the pot will grow in line with an agreed benchmark, such as prices or average earnings. On retirement the employee has access to a fixed fund to purchase an annuity or take an income in another way.
There is as yet no calculation from the CBI on what sort of benefits the scheme could deliver to the average public sector worker, but it seems unlikely that they would not be as generous as the current arrangements. For the CBI, the advantage for taxpayers is not the potential cash saving, though that may be substantial, but the element of certainty.
John Cridland, the CBI's deputy director-general, said: "Guaranteed final salary pension schemes have entered the history books in the private sector, but the state has not yet squared up to the issue for its own workers. A new government needs to acknowledge the problem, establish the true costs and let the taxpaying public decide what they are prepared to pay for."
The CBI argues that better pensions in the public sector do not "make up" for lower pay, as may have been the case in the past. It quotes Office for National Statistics figures showing that the average public sector salary is £23,660, compared to £21,528 in the private sector, the biggest gap on record. The Institute for Fiscal Studies say that factoring in pensions would add 12 per cent to public sector pay packages, and only 5 per cent to private sector pay.
Only 15 per cent of private sector staff are now covered by traditional final salary schemes, where as public sector coverage is 78 per cent, comprising 5 million people.
Some reforms to public sector pension schemes have already been agreed with unions, with lower accrual rates and higher retirement ages usually being brought in to make the scheme cheaper to run. Despite these deals and the political consensus around reform, any serious assault on public sector pension will meet fierce opposition from the trades unions.
The Turner Review has already suggested raising the state retirement age by the middle of this century to meet the broader challenge of an ageing population.