It now looks like a dead-cert that next month Rachel Reeves will become our new chancellor.
It may be tempting for her to ignore everything but the urgent and immediate, but if she wants to make her mark as a real reformer, she should sort out public sector pensions, which governments have now dodged for decades.
Making public sector pensions sustainable is crucial for public sector workers, as well as taxpayers.
Without controlled changes today, public sector defined benefit (DB) pensions may end up being scrapped altogether, or taxed away in retirement.
Ms Reeves should cut the cost to taxpayers by reducing the generosity of future public sector defined benefit pensions – without touching pensions already earned.
The new lower public sector pension could be as an example 1/80th of salary for every year worked – half the current value – with annual inflation increases capped at 3pc, just like in the private sector.
The value of this less generous pension – half average salary over a 40-year career – would still be much more generous than private sector defined contribution (DC) pensions – but would start closing the gap.
There have been feeble changes attempted in the past.
Sir Tony Blair’s Labour government tinkered with public sector pensions, but did nothing to reduce the overall cost for taxpayers.
The coalition had a major review under Labour peer Lord Hutton, but when it came down to it, caved-in to public sector unions.
The 2015 “reforms” increased the retirement age from 60 or 65 to the state pension age, but also increased the annual pension earned, so again no saving for taxpayers.
And since 2015, the gap between private and public sector pensions has become a chasm, with DB – a guaranteed inflation-linked pension for life – all but dead in the private sector.
As the cost of new pension promises spiralled in the last 25 years, companies replaced DB with less generous DC pensions – with no guarantees.
Even big companies that had held out – BT, BP, BA, Marks and Spencer, Tesco, John Lewis and Rolls-Royce – are now closed.
Meanwhile, all public sector DB schemes are still open, with six million staff, including local government, still earning new pensions.
The civil service DB pension is 1/42nd of average salary, increased in line with inflation, before and after the pension is paid.
NHS and teacher pensions – the other big public sector schemes – amount to the same.
Although the annual fraction of average salary earned is slightly lower, it is automatically increased at more than inflation before retirement to compensate.
Member contributions average around 10pc of salary.
Someone in the civil service, the NHS or a teacher on an average salary of £42,000 working for 42 years to their state pension age of 67 or 68, would get a guaranteed inflation-linked pension of £42,000, in today’s values, equal to their average salary.
The cost to taxpayers of NHS, teachers and civil service pensions for the year to April 2024 is around 20pc of salary, after member contributions.
This annual cost, shown in individual scheme accounts, is calculated in the same way as private sector DB pensions, based on the market long-term bond rate – the higher the rate the lower the annual cost.
The average cost for the nine years since the 2015 coalition “reforms” is 40pc of salary, and in 2023 – before Liz Truss’s mini-Budget pushed up interest rates – the cost for taxpayers was a whopping 70pc.
The taxpayer cash contribution for 2024 to 2027 is 28.7pc of salary for the civil service, 28.6pc for teachers and 23.7pc for the NHS.
Talk of guaranteed, inflation-linked DB pensions and high employer contributions will stick in the throats of millions in the private sector with DC pensions where the legal minimum employer contribution is just 3pc, with an average 10pc for the largest companies.
And Ms Reeves should use what looks like being a large Labour majority, to start by making MPs’ pensions less generous.
This would certainly underline the idea that the new Labour government really is about “change” and about “service” as Sir Keir Starmer has said.
