The government’s June 2010 budget has launched a review of public sector pensions, the cost of which is set to double in the next five years from £4bn in 2010 to £9bn by 2015*.
Today the Chancellor George Osborne has announced that ex-Labour cabinet minister John Hutton has agreed to head up the commission which will look at budget changes to public sector pensions, and to formulate a series of budget changes to be implemented in next year’s budget, in June 2011.
Public sector pensions are final salary pensions which have a guaranteed minimum pension income, as they are linked to the final salary of employees when they retire, and to their number of years of service.
The largest government pension schemes are not invested, but depend on this year’s contributions from existing members to fund the pensions of retired members. The four largest such schemes are the NHS pension scheme, the defence forces pension scheme, and the teachers’ pension scheme. Together these had payment obligations in 2008/09 of £19.3bn, while contributions totalled just £4.4bn, according to the National Audit Office.
The generosity of public sector pensions becomes clear from the figures. Private sector savers in defined contribution pensions save on average less than £50,000 during their working life. However, they would need pension savings of £189,000 to equal the average civil service pensions income of £5,928 per year. They would need a pension pot of over £221,000 to achieve the average NHS pension income of £6,931 per year. Most generous of all: to have the average teachers’ pension income of £9,358 per year, you would need a pension pot of over £298,000.
*Data from Office for Budget Responsibility, June 2o1o
