Sean O'Grady: Suddenly, the old certainties have gone

A few years ago, you knew where you were. If you took a job in the private sector the chances were you'd enjoy a higher salary, but have a little less job security and a rather less generous pension than if you became a public servant. The traditional image of Sir Humphrey's "gold plated" index-linked pension was justified on the grounds that he would have earned far less over his lifetime at, say the Department of Trade and Industry, than if he'd decided to become a bureaucrat with Shell or BP. He would also, towards the end of his career, collect a "K", and his wife would become a Lady. Early retirement, a world cruise and the golf club beckoned. By the same token, nurses earned less than factory workers and teachers less than journalists – but were better provided for in old age.

Times have changed. The decline of final salary pension schemes – where your retirement income is guaranteed no matter what happens to the stock market – has been startling. Startling, that is, in the private sector. Today, only about 17 per cent of staff in private firms are entitled to a "proper" pension, against 76 per cent in the public sector.

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Most workers in private industry have "money purchase", or "defined contribution", where the employer may add cash to the subs paid by the employee, and the money is invested in the stock market, where it takes its chances. On the whole it ought to provide a respectable return, but the experience of many has been unhappy, and these arrangements are regarded as inferior to final salary schemes. It is these that still prevail in the public sector; but they are becoming much less justified, and more resented.

The problem has become one of equity, and cost. Whether a good or bad thing, public sector pay no longer lags behind the private sector. Since 1997 there has been a considerable "catch up". And, looking over the brink of this recession, public sector employment is even more secure. So the old, implicit, deal between public and private is being undermined. In the words of the Institute for Fiscal Studies (IFS), there is "no strong argument to favour pensions over pay" in the public sector. The established public sector pension is also coming unstuck because of sheer cost. The current liability is put by the IFS at £725bn, and by the Treasury at £650bn. Either way a substantial sum: about half the national GDP. The liability was some £300bn in 1998. The reasons for its huge growth are threefold.

First, there has been a rise in public sector pay, especially at the top, part of the catch up. When pensions are linked to salaries, and salaries rocket, then pensions rocket. The explosion of administration in the NHS, for example, and GPs' new pay packages have seen the number of ex-NHS employees with retirement benefits of more than £1m each, rise to 8,500 individuals. The second reason is the sheer growth in numbers employed by the state. Over the decade 1997 to 2006, the public workforce grew 13 per cent; with a 28 per cent rise in NHS staff, a 24 per cent rise in teaching staff, and a 20 per cent boost to police numbers. The third factor is people now live longer, so will draw their pensions longer.

Such is the scale of the potential burden on future generations that reforms have already begun, but are limited. No major public sector scheme has moved to a money purchase basis. That's the revolution clearly in the mind of the Conservative leader.