Public sector pensions "unsustainable", says CBI

Public sector pensions must be shifted from unsustainable final salary models to a more affordable model, the CBI said this week.

The business organisation claimed that its research showed there is a £10bn black hole for unfunded public sector pensions, a result of an unpredictable guarantee from employers and staff contributions that are “out of kilter” with payout levels.

The CBI said the picture is complicated because of significant variations in the size and structure of public sector pensions. It acknowledged that the local government scheme has more transparent arrangements and are ‘funded”]’, in contrast to the civil service.

The CBI nevertheless insisted that the current arrangements are unsustainable. It said: “Public sector pension benefits are on average worth 26% of salary every year, which is far higher than private sector norms – and the total cost will increase as people live longer. To compound the situation, the state workforce has grown by almost 1m in the past decade to hit 6.1m, or one in five workers.”

The business organisation called on the next government to set up an independent commission within weeks of taking office to fully investigate pensions costs.

In its report, the CBI proposes that:

• Public sector pensions should be fully linked to the contributions made by staff and their employer, “with no hidden taxpayer study”
• Pension rights and pots which have already been accrued must be protected
• All public sector staff should be moved off guaranteed ‘defined benefit’ schemes, which include final salary and career average pensions. “How this happens may differ between public sector employers, and schemes that are in a ‘funded’ position, such as local government, may wish to pursue a different route”
• For unfunded schemes, such as the NHS, teachers and the civil service, staff should migrate to pensions based on the Swedish model of ‘notional defined contribution’. This will provide guaranteed pensions without unpredictable taxpayer liability
• Retirement ages for existing and new public sector workers must be raised to match the state pension age.

John Cridland, CBI Deputy Director-General, said: “Public sector workers deserve a good retirement, but they and their employers should pay their own way. The pensions black hole is over one trillion pounds and rising, and taxpayers cannot be left to make up the difference.”