Think tank warns of public sector pension reform risks
Published 24/11/2010 | 08:00
Replacing public sector workers' final salary pension schemes with defined contribution ones would "substantially" increase costs for the Government in the short term, a think tank has warned.
Such a move would also be unlikely to provide public sector staff with adequate pensions, even if 15% of workers' pay was contributed to the schemes each year, according to the Pensions Policy Institute (PPI).
In a recent review of public sector pensions, former Labour cabinet minister Lord Hutton said long-term structural reform was needed, including an end to the current final salary schemes.
But the PPI warned that moving from the current unfunded final salary schemes - under which pensions for retired workers are paid out of contributions made by those still working - to funded defined contribution schemes would lead to a substantial jump in costs.
The increase would be caused by the fact that the Government would have to continue paying pensions to those who had retired, while also investing the contributions of people who were still in work.
To avoid the problem, the Government could move to a notional defined contribution scheme, similar to what operates in Sweden, where workers' pension contributions are still used to pay the benefits of the retired, it noted.