Warning issued over public sector pensions

Pension payments to retired public servants could balloon by 200 per cent to £79billion a year in the next 50 years, according to a report by government spending watchdogs published today.

The National Audit Office has said that unfunded public sector pension schemes will cost £79 billion a year by 2060, compared with £25 billion this year.

The rise will be due to increased longevity and increases in the real earnings of public sector workers.

The study is likely to increase pressure on politicians to rein in the generous final salary schemes for public sector workers as they seek to cut the deficit in the public finances after the general election.

The Tories and Liberal Democrats have already hinted that they would review public sector pensions, with David Cameron expressing concern about “pensions apartheid” since many companies have closed their final salary schemes.

Labour says it has already acted to limit the rise in the pensions bill and that the current schemes are affordable.

The NAO’s report, the first of two, looks at the costs of the so-called “pay as you go” public sector pension schemes, in which pensioners are paid out of taxation rather than the proceeds of an underlying investment fund.

The report looked at the four largest public sector schemes currently paying pensions to more than two million retired teachers, civil servants, members of the armed forces and NHS staff. The current £25.4billion a year cost has risen by 38 per cent in the last 10 years. Some £14.9billion falls directly on taxpayers, with the rest coming from employees’ contributions.

It discovered that the government’s own projections for all public sector schemes showed total payments reaching £79billion by 2059-60. These figures exclude employee contributions and so would not all fall on taxpayers.

As a proportion of the economy’s total economic output, the Treasury estimates that these payments will rise from 1.7 per cent now to 1.9 per cent by 2018-19, before eventually falling back to 1.7per cent by 2059-60.

Unions argue that final salary pensions are justified because pay is lower in the public sector than in the private sector. Prospect, which represents 34,000 professional grades in the civil service, said the NAO report went a long way to debunk the “mistruths” often perpetuated about the affordability of public pensions.

Edward Leigh, chairman of the Committee of Public Accounts, said: “The projection that total annual payments to pensioners in these schemes will top £79 billion by 2059/60 is frightening, although, at least as a proportion of forecast GDP, this does not represent an increase.

“But it is striking that the Treasury’s projections all depend on the heroic-looking assumption that, as the UK’s workforce rises and the demand on public services increases, the size of the public sector workforce will stay the same. These figures must be used to inform an urgently needed national debate about public sector pension schemes for new entrants.”

The NAO will publish a second report later this year looking at the impact of recent changes made to the schemes, which have been designed to help reduce costs.