Tuesday, November 5, 2024

A pensions trade-off could finally rid the state of its biggest financial burden

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I asked him recently whether he would give up his pension accrual (so keep what pension he has already earned, but not accrue any more rights) in return for a 30pc pay rise, and he jumped at it. 

His argument was that he needed the money now, and by retirement age he would have a house to downsize, and would have much lower expenses in 20 years’ time when the children had all left home.

Is 30pc the right trade-off for the pension rights that public sector workers accrue? The answer is difficult to define accurately, because the cost of pensions’ accrual depends enormously on financial and demographic factors. 

But at the moment, the combined annual employer and employee contributions into the NHS pension averages 30.4pc of payroll, so 30pc seems about right. With the exception of the Armed Forces Pension Scheme (which is much more generous – and expensive), the other main public sector pension schemes are at similar levels.

So how would this translate into practice? The Government could give all public sector employees the right to opt for a 30pc higher salary instead of joining or remaining in the existing public sector pension scheme. 

Some of that 30pc would be needed to go into an auto-enrolled workplace pension, but the rest could be saved or spent according to the needs of the worker. 

Today, the employees’ contribution to the workplace pension is 5pc of salary, so that would still leave public sector workers 25pc better-off in cash terms.

The effect of this change on long-term public sector expenditure would at worst be neutral, but more likely would bring down expenditure when measured over a multi-year period, as the average effective payout on public sector pensions has in the past been much higher than 30pc of salary.

In the short-term, the effect would be cash-negative for the Government, as the Treasury would no longer receive the pension contributions that it has been relying on to cover current expenditure. 

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