By 2015-16, the taxpayer will have to contribute more than £10 billion a year to make up the difference between pension contributions and pensions in payment in the public sector says Michael Johnson in his latest Centre for Policy Studies paper.
His latest report, Self-sufficiency is the key: addressing the public sector pensions challenge compares the current system of public sector pensions to a Madoff-style pyramid, now collapsing under the weight of insufficient contributions, rising longevity and an ageing workforce.
Without reform, Johnson warns, we are embarked upon a slippery slope to fiscal calamity. He says the state’s capacity to absorb pensions-derived longevity risk is limited. His report says public sector pensions should be, ultimately, defined contribution-based.
Johnson argues an essential pre-requisite to reforming public sector pensions is to raise the basic State Pension above the guarantee credit threshold to around £140 per week. This would help allay pensioner poverty concerns, thereby weakening the unions’ position in the forthcoming negotiations, he says.
Johnson has challenged Lord Hutton, whose report is due in early March, not to merely recommend a form of watered-down DB provision, as this would require the Government to accept that the quality of pension provision in the wealth-creating private sector is to remain second class
Johnson says: “We need a two-step implementation process – an initial phase of watered-down DB provision before the long signalled introduction of a pure DC framework, possibly in 2020. In parallel with these proposals, we should start moving towards a funded framework, creating a savings culture amongst 20 per cent of the working population. And public sector employees should be compelled to participate in Nest.
Lord Blackwell, the Conservative peer says: “This is a highly perceptive and analytically rigorous investigation of the financial and social challenges posed by the current public sector pension schemes. No one can read this without being convinced of the urgent need for major reform and the paper sets out a valuable range of options for policy makers to consider.”