Public Sector Pensions - Warning Bell - One Giant Ponzi Scheme?

The Centre for Policy Studies has published a report today for the Government called "Self Sufficiency is the Key" by Michael Johnson, who has an investment banking background and has worked with Towers Watson. A free downloaded abridged version is found here.

Johnson argues that as a whole the public sector pension schemes are akin to the Bernard Madoff ponzi scheme - the promises simply are not going to be met. His solution is that all public sector pension schemes are switched to defined contribution arrangements rather than defined benefits.  Sorry for the jargon - but its actually as it appears - defined contribution is where the amount being paid in (contributed) is defined - say 10% of saalry for example. This is then invested and what it becomes is downs to how well the investments perform. At the moment the vast majority of public sector workers, which includes doctors, GPs, teachers and those working within local Government.

At the moment most Public sector pensions are defined benefit schemes - in essence, how much is paid in (contributed) is irrelevant, the amount you get out is based upon your service within the scheme and your final salary.

The attack on public sector pensions began some time ago, depending on your point of view, the privatisation of some institiutions like British Gas, British Telecom and British Airways was also effectively passing the liability and repsonsibility for the maintenance of the associated staff pensions to the new owners.

More recently employees have been asked to contribute more - including another 1% increase announced in the previous Chancellors last budget - which has been deferred by the Coalition Government. Some scheme have also begun offering less generous terms and some have only offered new staff an investment based arrangement.

It would take a very brave Government to introduce such measures - the costs of running the public sector schemes are enoromous - just think about the basic principle, that a pension is generally payable from age 60 and would continue until death, but then continue at a rate of 50% until the death of a spouse. This is potentially a very long time. The savings to central Government would be signficant.

However, these are such valuable benefits that one can imagine a fairly bitter battle surrounding their withdrawl, involving probable mass strikes of those working within the public sector. However, barring a miraculous change in the financial wellbeing of UK plc or a change in the manner in which UK plc spends money, this is ultimately inevitable. This is not the first time that suggestions have been made that "the end is nigh" but one gets a sense that a significant milestone may have been reached.