Public Sector Final Salary Scheme Warning

The current financial crisis has added fuel to the fire, for those concerned that the large Government backed final salary schemes are “expensive”. In reality the NHS, Teachers, Civil Service, Local and Central Government pension schemes are likely to alter considerably at some point over the next 20 years. The political will to end these final salary schemes has been muted due to the vested interests of politicians and the civil service but also due to the likely anger and protest that such a move would likely generate from the vocal unions and members of such schemes.

The Policy Exchange appears to have proposed replacing public sector pensions with investment based schemes (as is now the norm for the commercial sector). It is estimated that such a move would save around £12bn a year. At the moment, members of most public sector schemes contribute to their pensions – a doctor will pay 6% of salary. This money is not really paying for the pension of the individual, but for those already in retirement or perhaps their widow/er, much like everyone’s National Insurance is not really securing a pension for retirement, but helping to pay for those already retired.

Most of us are taxpayers, irrespective of age, so it is a myth to think that only those that are earning a living are paying tax - those with pensions (including the State pension) are also liable for personal income tax. The new proposals would tackle the issue of payments towards pensions being actually for the future but applied in value in the present. In other words, moving away from the promise of tomorrow based upon assumptions about there being sufficient future employees (and money) to pay towards the scheme.

This would seem to have won approval with the electorate (if well communicated) as there is the sense that once the money is set aside in a given year, for say the NHS pension, no more would be forthcoming. The price is fixed, the deal is done, end of discussion. There would then be no alarm bells asking if there is enough money in the pot at the end of 40 years, you get what is there. Perhaps more importantly, this is the sort of idea that post-modern politicians seem to like (by like, I mean find easy to sell as policy) – fixed sums that don’t become a gaping chasm that needs filling with public funds.

Of course any changes of such magnitude would require all of the political skill available to prevent a potentially huge amount of protest from public sector employees. However, despite the inevitable anger, there are relatively few alternatives and unfortunately the numbers won’t go away.