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Call for pensions shake-up

Public sector pensions cost twice as much to provide as previously thought and must be reformed if they are to be sustainable, a report indicated today.

Workers in the public sector would need to save more than 40% of their salary each year, including their employer's contribution, to fund the final salary pension benefits they are building up.

But the actual amount they contribute is half this level at just 6% for workers and 14% for their employer, according to the independent Public Sector Pensions Commission.

A lack of transparency about the schemes is also masking their true cost due to the accounting methods used by the Government, it claimed.

The commission estimates that the schemes will cost the Government £18bn during the coming financial year, using the Government's own accounting methods, but it warned that this figure nearly doubled to £35bn if the liabilities were “properly measured”.

Unlike private sector final salary pensions, the public sector schemes are also unfunded, meaning that no pot of money has been set aside to pay future pensions, and as a result the liabilities of the schemes are estimated to be between £770bn and £1.18bn.

Peter Tompkins, of the Institute of Actuaries and chairman of the Commission, 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. “The question of why the majority of the workforce should be expected to pay through their taxes to support pensions that they cannot afford for themselves must be raised.”

The commission pointed out that there was considerable disparity between the public sector schemes and those offered to workers in the private sector.

It said that while 94% of public sector workers were members of defined benefit schemes, this was the case for just 11% of private sector employees.

In all of the public sector schemes, apart from the Local Government Pension Scheme, the normal pension age for existing members is 60 or lower, compared with 65 for most members of private sector schemes.

It added that while it had previously been argued that the generous pensions in the public sector made up for lower pay, this was no longer the case as pay in the public sector was now higher than in the private sector at nearly all levels.