Public sector government pensions will more than double in cost in the next 5 years, according to the Office for Budget Responsibility (OBR).
Spending on public sector government pension schemes will increase from £4bn in 2010 to £9bn in 2015, the Office for Budget Responsibility (OBR) estimates.
LibDem leader Nick Clegg has called some government pensions ‘unreformed gold plated’ pension schemes which are both unfair and unaffordable. This underlines the government’s promise of a review of the whole government pension arena, possibly as soon as the Budget later this month on June 22nd.
The Office for Budget Responsibility has said that the increased cost of servicing government pensions equates to an annual increase of 20% in real terms, driven by anticipated rises in the number of public servants taking their government pensions in the next 4 years, and the fact that they can be expected to draw their government pension for longer due to increased longevity.
Nick Clegg pointed to the fact that many companies in the private sector have already been forced to close their final salary pension schemes, as they were staggering under the weight of their pension liabilities. It was unfair, he said, that those whose private sector final salary or defined benefit schemes had been closed should continue to pay their taxes to provide the best pensions to their colleagues in the public sector who were about to draw final salary government pensions.
Final salary pensions, also known as defined benefits pensions, have become a millstone around the neck of many private sector companies, and now for government as well, due in part to the recent stock market slump.
Final salary pensions are widely regarded as the best pension plans, as they provide a pension income calculated on salary at retirement, and also taking into account the number of years of service. However, this pre-agreed payout can be an expensive commitment, when the underlying investments fail to perform – as during the recent stock market slump. This left many private companies, and now the government as well, having to dig deep into their own funds to make up the shortfall, when the investments behind final salary pensions fail to provide sufficient returns.
There is now a strong drive to shut down final salary pensions and defined benefit pensions, instead enrolling new employees into defined contribution pension schemes, which carry no such promise or guarantee of the level of pension income.
