"Unfair and unaffordable" public sector pensions are in the Government's sights

Both the Telegraph and the Mail today splash on the alarming rise in the cost to the taxpayer of public sector pensions.

Yesterday's report from the newly-created Office for Budget Responsibility concluded that the public sector pensions currently enjoyed by 2.2 million former civil servants will cost £4 billion in the current financial year, with the contributions for existing civil servants costing taxpayers another £14 billion. The £4 billion figure will rise to £9.4 billion by 2014-15 - equivalent, as the Telegraph headline states, to nearly £4,000 in tax for every household in Britain.

In a further sign that the Lib Dems will be sharing the burden of making the difficulty economic decisions, it fell to Deputy Prime MInister Nick Clegg yesterday to lay the ground for addressing this issue. In a speech which was far removed from his official responsibility for political reform, he told the Institute for Government:

"Private sector workers have already seen final salary schemes close, while returns from defined contribution schemes fall. So can we really ask them to keep paying their taxes into unreformed gold-plated public sector pension pots? It's not just unfair, it's not affordable. As we face up to living within our means, we cannot ignore a spending area which will more than double within five years." 

So what's to be done?

Alex Barker from the FT summarises the limited options and likely outcome ahead of George Osborne delivering the Budget a week today:

"To generate some long term savings, the final salary schemes could be closed and employees switched to a “notional” direct contribution scheme. But that wouldn’t raise any serious money over the next 15 years. There are only two ways to do that: cut payments or increase contributions.

"Cutting payments would withdraw accrued benefits, something that no sane politician would want to do.

"So a hike in contributions is the obvious solution. Asking every public sector worker to pay an extra 2.5 per cent contribution would raise £3.2bn a year. It would effectively be a pay cut, dressed up as a means of making workers pay a fair amount for what remains a generous scheme. Ireland have done something similar already."

Curiously, the news that the Liberal Democrats are in coalition with the Conservatives does not appear to have reached Glasgow, a city with a notoriously large public sector and where Conservative supporters are few and far between. The sub-editors at the Herald newspaper headlined their story on this issue this morning "Osborne puts public-sector pensions into the firing line", despite the fact that it was Mr Clegg who made the speech.

Jonathan Isaby