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Evidence busts myth pensions are unaffordable

30 July 2010

Evidence submitted by the civil service unions to the government's review of public sector pensions busts the myth that they are unreformed, overly-generous and unaffordable.

The government’s appointment of former Labour minister John Hutton to conduct the review is against the backdrop of increasingly hostile comments from coalition partners - both in the run-up to and following the general election - leading to suspicion about the aims of such an exercise.

But in their submissions to the public service pensions commission, PCS and the Council of Civil Service Unions point out that civil service pension arrangements have been reformed several times over the years, most recently in 2007.

The unions highlight that average civil service pensions remain modest, even compared to private sector schemes, and that they continue to be offered as a trade-off for comparably lower levels of pay in the sector.

The submissions also point to evidence from the Treasury and the National Audit Office that the civil service pension scheme is both affordable and sustainable in the short, medium and long term.

The key points include:

  • The unions and previous governments have agreed to reform pensions over the years, most recently to a career average scheme in 2007, and a system is already in place to jointly review arrangements and affordability.
  • Any discussion about pensions must be in the context of the current issues facing scheme members, including the current pay freeze, job cuts, planned cuts to redundancy terms, and traditionally low levels of pay and pensions for the majority of members.
  • The civil service pension has traditionally being offered as compensation for rates of pay that are comparably lower than other areas of the public and private sectors. These disparities remain, so increasing contributions would need an equivalent increase in pay so that future pensions are not eroded. Furthermore, because pensions are deferred pay, any arbitrary cuts in benefits, or increases in employee contributions, would be no different from a pay cut.
  • The pay freeze announced in the Budget in June will have a disproportionate impact on final pensionable pay for those nearing retirement.
  • The change in indexation from RPI to CPI immediately reduced the value of public service pensions by tens of billions of pounds, undermined the work of the Hutton commission by prejudging the issue of affordability, and went back on commitments senior government figures from both ruling parties gave prior to the election.
  • In its long term public finance report of 2008, the Treasury said the cost of unfunded public sector pensions as a share of GDP was 1% in 2007/08 and was projected to rise to only 1.2% in 2057.
  • More recently, the National Audit Office reported, in ‘The cost of public service pensions’, that when projections of liability are based on earnings, the total annual payments from the civil service pension scheme will be largely stable over the next 50 years.
  • The NAO’s report also shows that civil service pension scheme payments accounted for approximately 0.3% of GDP in 2009/10 and are projected to account for approximately 0.3% of GDP in 2059/60. The 2007 reform of the civil service pension scheme was designed to put the scheme on a sustainable footing for the long term and the NAO confirms this objective has been met. There is no credible case for further reform now on either affordability or sustainability grounds.
  • Low-paid workers faced with increasing contributions are more likely to leave the pension scheme, thus placing longer term pressure on the welfare system.

PCS general secretary Mark Serwotka said: "We totally reject the premise for this review, that our members’ pensions are unaffordable and unreformed, and we have made this case very clearly to the Hutton commission.

"There is an alternative to cutting public spending - an alternative that will help our economy to grow, and we believe this is the most effective and sustainable way to ensure we can continue to pay the pensions of hardworking and loyal public servants in future years."

 

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