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The approaching cashflow crunch

NEARLY £4 IN EVERY £5 PAID IN PENSIONS TO PUBLIC SECTOR WORKERS WILL COME FROM THE TAXPAYER

As the Public Bill Committee starts scrutiny of the Public Service Pensions Bill on Tuesday 6 November, leading pensions analyst Michael Johnson reveals that the cashflow shortfall between public sector contributions and pensions in payment are rising to unsustainable levels. As a result, he demonstrates that another round of public sector pension reforms will be required, probably before 2020.

The OBR forecasts that, even after the latest reforms, the cashflow shortfall will rise from an irrelevant £200 million in 2005-06 to £15.4 billion in 2016-17 – a 77-fold increase in 11 years. This shortfall will have to be paid for by taxpayers. With employers’ contributions of an extra £17.2 billion, the annual burden on taxpayers will then be over £32 billion – the equivalent of £1,230 for every household in the country. Nearly £4 out of every £5 paid in pensions to former public sector workers will come from the taxpayer.

The Coalition has justified its reforms on the grounds that they achieve a material reduction in the total public sector pensions liability. But this liability is a nebulous concept; and its modelling techniques unclear. The cashflow shortfall, as it emerges, will on the other hand be both clear and tangible.

The current reforms will only produce significant cashflow savings after 20 to 30 years, far too late to assuage pressure for further reform. That said, the public’s opprobrium could be fuelled as much by unfairness as unaffordability. During this time, public sector workers will enjoy certainty of income in retirement until the day they die, mostly paid for by the 80% of the workforce in the private sector, almost none of whom have that security.

Michael Johnson recommends that the Coalition should now:

-      put all its modelling assumptions for the reduction of the liability into the public domain;

-     start to prepare the public sector for a risk-sharing arrangement such as a cash balance scheme, en route, ultimately, to a wholly Defined Contribution framework.

This approach would, at long last, provide comparable pensions across the UK, irrespective of the employment sector. Not to express such a vision would be to accept that the quality of pension provision in the (wealth-creating) private sector will, from hereon, be second class.

Tim Knox, Director of the Centre for Policy Studies, commented:

“We must recognise that the Coalition reforms to public sector pensions do not go nearly far enough, are unaffordable – and cannot last. Why should future generations pick up the bill for the pensions of public sector workers, people who on average are likely to be far better off in their retirement than their wealth-creating private sector peers?”

 

MEDIA IMPACT

The Sun also ran a print story on the report. 

Michael Johnson - Monday 5th November 2012

Michael Johnson

Michael trained with JP Morgan in New York and, after 21 years in investment banking, joined Towers Watson, the actuarial consultants. Subsequently he was responsible for the running of David Cameron’s Economic Competitiveness Policy Group.