Report claims that "true value" of public sector pension schemes is over 40% of salary

The true value of the main unfunded public sector pension schemes is over 40% of salary, a report by an independent commission has claimed.

The Public Sector Pensions Commission – set up by the Institute of Economic Affairs, the Institute of Directors and other groups in the autumn of 2009 – also suggested that a lack of transparency over the true costs of public sector pensions had made it easier to delay reform in the past.

The commission outlined a number of options for reform:

• Reducing the accrual rate of 1/80 or switching to career average revalued earnings as the benefit structure would each save around £10bn per annum
• Increasing the pension age to 65 for all members would save around £5bn
• Increasing employee contribution rates by two percentage points could raise up to £2bn a year but is “not a substitute for longer-term reform”
• Giving serious consideration to ending the contracted-out status of public sector pensions, as they are generally paid from age 60, compared with 65 rising to 68 or even higher for the State Second Pension
• Moving to funded defined contribution arrangements, although there would be “considerable transitional issues” with such a switch
• Choosing hybrid schemes, combining a core of Defined Benefit and flexible defined contribution top-ups, which could be “an important compromise”.

The commission said the reform options would apply equally to a national or decentralised approach. “With a decentralised approach, different public sector employees could choose different options, provided that they and their employees faced the full actuarial costs,” it argued.

Peter Tompkins, fellow of the Institute of Actuaries and chairman of the commission, said: “It is a matter both of justice and good economics that public sector employees and employers should bear the full cost of their pension provision.

“Increasing longevity means that pension provision has to be looked at again, and the public sector cannot continue to remain immune.”

This commission is entirely separate from the Treasury-established official commission headed by former Labour minister John Hutton.