Public-sector pensions 'worth twice as much as was thought'

Public-sector pensions are worth twice as much as was previously thought and workers should expect to pay significantly more for them, an influential report will say today.

The Public Sector Pensions Commission (PSPC) will suggest that the true value of the main unfunded public-sector pension schemes – which guarantee a percentage of final salary on retirement – is over 40 per cent of salary. The current combined employer and employee contribution rates, it says, are "artificially set" too low at about 20 per cent of salary.

The report, which will be launched this morning and is likely to prove controversial, argues that a lack of transparency about the true costs of public-sector pensions has made it easy for successive governments to delay reform and to "unreasonably force costs" on to future taxpayers.

It sharply criticises the previous Labour administration for using "artificially" high discount rates to report unfunded liabilities of public-sector pensions and to calculate employer and employee contribution rates. These rates, it says, "appear to lower the cost of providing public-sector pensions". It further warns that reforms should affect all public-sector workers and not just new joiners. The PSPC, established in autumn 2009 by the Institute of Economic Affairs, the Institute of Directors and other bodies, is chaired by an independent actuary. Its terms of reference are to improve transparency and understanding of public-sector pension costs and to present options for reform to the new Government.

Its proposed changes so far include a reduction in the rate at which employees accrue pension benefits to one-eightieth of final salary per year, or a switch to paying pensions based on an employee's career average earnings. These would each save about £10bn a year.

An increase to a pension age of 65 for members would save about £5bn while the reduction in the degree of index-linking of benefits, from the Retail Price Index, which includes housing costs, to the Consumer Price Index, which does not, will save about 10 per cent of costs. This measure was set out in the emergency Budget.

Increasing the amount employees have to pay for pensions by 2 per cent a year would save £2bn, but the report warns that this "should not be a substitute for wider reform".

The report also says "serious consideration" should be given to ending the contracted-out status of public sector pensions, as they are generally paid from age 60, compared with 65, rising to 68 or even higher for the State Second Pension. The report says the reforms it proposes could either be imposed centrally or be decentralised by giving different public employers a "menu" of options. The Government has pledged its own commission to look at public sector pension reform.

The BBC recently became the first public body to embark on significant changes by closing its scheme to new members and cutting benefits to those who remain within it.

This is being seen by many as a "test bed" for other public schemes. Unions have pledged to fight it.

The commission's chairman, Peter Tompkins, a fellow of the Institute of Actuaries, said: "A true assessment of the value of pensions in the public sector today shows that they are worth twice what the Government suggests in its calculation of the contributions that public sector employers pay.

"It is a matter both of justice and good economics that public sector employees and employers should bear the full cost of their pension provision."