£1trillion pensions timebomb

A damning report by the Confederation of British Industry calls on ministers to tackle the huge bill to look after millions of state employees in old age, which works out at a staggering £40,400 for every household in the UK.

It also claims that civil servants, teachers and NHS staff are being allowed to retire on unaffordable gold-plated schemes based on their final salaries, far more generous than those in the private sector.

Campaigners say private workers pay more towards public sector pensions than their own, through taxes. They also pay higher rates of National Insurance and retire later.

Industry bosses want the timebomb of taxpayer-funded pensions to be a key issue in the General Election. CBI deputy-general John Cridland said: “The pensions black hole is over £1trillion and rising, and taxpayers cannot be left to make up the difference.”

Matthew Elliott, chief executive of the TaxPayers’ Alliance, called for urgent action. He said: “The generous terms of most of these schemes are unsustainable and are placing a stranglehold on public finances. They must be reformed, as ordinary taxpayers face the prospect of picking up the bill.

“Most private pension funds have moved away from final salary schemes but those in the public sector seem to think there is an endless pot of money.”

Researchers for the CBI found there was an annual unfunded public sector shortfall of £10billion, partly because staff contributions were “out of kilter” with unpredictable payout levels. Public sector pension benefits are on average worth 26 per cent of salary every year, far higher than private sector levels, and the costs are spiralling as people live longer.

To compound the problem, the state workforce has grown by almost a million over the past decade to hit 6.1 million, or one in five workers. The depth of the funding crisis was underlined by a separate study revealing that local authority deficits have soared to almost £60billion.

The CBI wants an independent body set up to calculate the true cost of unfunded public sector pensions and work out how the rising bill can be met. Mr Cridland said: “Public sector workers deserve a good retirement but they and their employers should pay their own way.

“Guaranteed final salary pensions have entered the history books in the private sector but the state has not squared up to the issue for its own workers. A new government needs to acknowledge the problem, establish the true costs and let the taxpaying public decide what they are prepared to pay for.”

The CBI report, which is published today, suggests all public sector staff be moved off defined benefit schemes, which include final salary and career average pensions. Just 15 per cent of private sector workers now have final salary pensions, while 78 per cent of public sector staff are signed up to a defined benefit scheme.

Public sector pensions currently cost the taxpayer £14.93billion a year, a rise of 38 per cent in a decade. But more than five million people, including civil servants, teachers, NHS staff and members of the Armed Forces, are in schemes for which no money has been set aside.

Philip Hammond, Shadow chief secretary to the Treasury, said: “An incoming Conservative government will ensure that public sector employers properly recognise the costs of the pension promises they are making. It is already widely accepted that reform is needed and we will work to achieve consensus to move forward.”

A Treasury spokesman insisted there was no looming funding crisis. He said: “The most important measure of public sector pension affordability is the Government’s ability to pay pensions as they fall due – the cost of pensions is projected to remain at under two per cent of GDP for the foreseeable future.”

And a spokesman for the Local Government Association said: “The supposed ‘black hole’ in the local government pension scheme would only occur if every single worker retired tomorrow, which is not going to happen.”