More questions raised over public sector pension changes

More claims today that the government’s claims for a need to reform public sector pensions may have a questionable basis, in line with independent pension analyst comments last month.

 

This time it’s the Institute for Fiscal Studies, whose study, part of its annual ‘Green Budget’ due tomorrow, claims the reforms are unlikely to save money over longer term.

 

Why? Because the savings from higher pension ages are, on average, offset by other elements of the pensions becoming more generous. The current pay freeze and additional two years of one per cent increases will leave public pay at roughly the same level relative to private pay as it was in 2008.

 

A factor the government doesn’t seem to have thought through in all its rhetoric is that of low earners – a group which tends to do better in terms of both pay and pensions in the public sector than in the private sector. In general, it says, lower earners in the public sector will actually get a more generous pension as a result of the recently announced reforms - that is, they will be able to retire at age 65 with a higher annual pension than they would receive under current arrangements. This results from the move from final salary to career average schemes and the particular changes to accrual and indexation rules.

 

“Overall the proposed reforms improve the structure of public service pensions,” the think tank says. “But we predict that they will make little difference to the long-term cost of public pensions. By contrast the move from RPI to CPI indexation of public service pensions, introduced by this government in the October 2010 Spending Review, substantially reduces expected costs and generosity.

 

Higher earners – public sector CIOs, for example - are likely to lose out. The move from final salary to career average relatively penalises those who see big increases in their earnings over time. So, by increasing its generosity to lower earners – a group less likely to have a good employer pension in the private sector – the reforms increase the difference between the public and the private sectors.

 

There are also big differences in estimated – that is after correcting for differences in age and education – between public-private pay differentials between regions. For example, men in the public sector

enjoy no pay premium in London or the South East of England, while in Wales the estimated premium is 18.0%. But there is also tentative evidence that the premium varies across different occupations within the same region. For example, while male police officers appear to have the highest relative pay in Wales, for female primary school teachers the North West appears to have the highest relative pay, and for male paramedics the North East appears to be relatively the most generous.

 

For Carl Emmerson, Deputy Director of the IFS and co-author of the paper, "The reforms to public service pensions implemented by the last Labour government, and this Government's decision to switch from RPI to CPI indexation of pension benefits, will in the long run reduce the generosity and therefore the cost of these schemes to the taxpayer.

 

“But the consequence of the long-drawn-out negotiations over the latest reform appears to be little or no long-term saving to the taxpayer or reduction in generosity, on average, of pensions for public service