MYTH #1 The cost of public sector pensions is spiralling out of control.

REALITY Costs are set to increase somewhat (as are all pensions costs), but not by an unsustainable amount.

What are the Facts?

Many attacks on public sector pensions give a huge number for the cost of future liabilities. But they rarely explain what this means.

Public sector pension liabilities go a long way into the future. Young people at work today building up a public sector pension could well live for another eighty years. If you estimate the costs of all public sector pensions for decades into the future and then present it as a bill that has to be paid immediately, then it is hardly surprising that you end up with a frighteningly big number.

For example an organisation called the British North America Committee got headlines recently for saying that the cost of public sector pensions was 85% of GDP (the total wealth produced by the country each year). Their press release said:

“Public sector pension liabilities are £1,177 billion, about £20,000 for every person in the UK, equivalent to 85% of GDP”

But these figures do not mean very much. This is just another attempt to work out the total cost of public sector pensions going for decades into the future and expressing it as if it all had to be paid in one go, rather than over the decades the pensions are in payment.

This is what David Lipsey, the chairman of Straight Statistics – a pressure group that campaigns against the misuse of statistics – said about this report:

“The innocent might think that this means 85 per cent of our GDP in future is going to go to support those getting public sector pensions, leaving just 15 per cent for the rest of us. This is plain rubbish.

“The liability to pay public sector pensions is stretched over many, many years – from now until the last existing public sector employees dies. It is a statistical howler that would make an “O” level student blush to compare this with the figure for GDP for a single year. To make matters worse, we can safely expect GDP to increase over the years to come (if it does not, neither will pensions, reducing the actual liability). So the proportion of present GDP represented by the liabilities is even less relevant. What matters, if anything, is the proportion of future GDP that they represent.”

The Treasury does indeed produce estimates of the cost of paying public sector pensions as a proportion of GDP (not taking into account contributions). They show an increase from 1.5% of GDP to 2% by 2027-28. After this projections show a slight decline in the proportion of GDP taken up by public sector pensions. It is not surprising that there is some cost increase in the next few decades as we live in an ageing society. Either the cost of pensions will increase or many more pensioners will live in poverty. But public sector pensions take up a much smaller share of GDP than state pensions and long term care – also both set to increase in the face of longer lives.

The second claim made is that the cost of public service pensions is “out of control”. This is not the case. Not only is the share of public sector pensions in the country’s wealth less than 2% of GDP every year in the Treasury’s projections, the changes negotiated in many unfunded schemes caps employer costs with employees picking up the bill if people live longer than expected and pension costs rise more than expected.

Another way of looking at the cost of pensions is known as the “net public service pensions” net public service pension cost. It is the difference between benefits paid out to today’s pensioners from unfunded schemes and current contributions paid by current staff. In the current financial year this is estimated to be £4.1 billion or about 0.3% of GDP.

This is eminently affordable, but the figure can change a lot from year to year. This is not because of bad planning or anything being “out of control” – simply because it is the difference between two much bigger numbers that are not linked to each in the short term. These big numbers are:

  • the costs of pensions paid out each year – and pension levels are linked to the cost
    of living; and
  • the total contributions paid by staff and employers in the public sector, which is linked
    to the numbers of staff and the year’s pay settlement.

Over time earnings tend to go up more than prices so this will tend to reduce the net cost of pensions. But there can be sharp variations from year to year – particularly as pay in the public sector is often held back by politicians and then catches up once the damage done to recruitment and retention needs to be mended.

In 2009/10, for example, the increase in the cost of benefits will be determined largely by the 5% increase in the cost of living (RPI) in September 2008. But the increase in contribution income will be determined largely by the size of pay increases in the public sector during 2009/10. So when politicians freeze or hold public sector pay below inflation it has the odd effect of appearing to make pensions more expensive, even though those extra costs are more than met by reduced expenditure on the wider wage bill.

Of course other factors will also affect the cost of pensions. For example, how many people retire each year and how long pensioners live will affect the cost of pensions and the number of current staff and what grades they are on will determine the income figures. But these change relatively slowly over time and don’t produce the big changes between years that critics seize on.

Pension Reforms

The Government and trade unions have negotiated various reforms to public sector schemes in recent years. The reforms were made mostly in response to higher demands from increased life expectancy, with schemes now sharing the risk of members living longer.

Most public sector pension schemes have increased the normal pension age from 60 to 65 for new entrants, in line with most private sector schemes. Only the armed forces, police and fire schemes have kept theirs below 65, reflecting the physical demands of these jobs.

Nurses, teachers and local government employees are now paying more on average towards their pensions than before the reforms. This agreement resulted in an initial increase in member contributions of 0.5% on average with possible further rises when valuations take place every 3 or 4 years.

New cost-sharing arrangements were put in place that mean that if higher pension benefits are paid or if life expectancy continues to rise more quickly than expected, the resulting cost will fall mainly on public sector scheme members rather than on the taxpayer.

The Pension Policy Institute2 has estimated the reforms have reduced the immediate cost of
benefits by 12.5% and the Government expects the reforms to result in savings of around
£13bn on the NHS, teachers’ and civil service schemes, spread over a 50-year period.


2 Pension Policy Institute (2008) An assessment of the Government’s reforms to public sector pensions

Index – Media myths about civil and public services.

4 Comments CherryPie on Mar 2nd 2010

4 Responses to “Exploding Public Sector Pensions Myths – Part 2”

  1. jameshigham says:

    This is what David Lipsey, the chairman of Straight Statistics – a pressure group that campaigns against the misuse of statistics

    Now that’s a group which would be well worth exploring.

  2. Excellent post Cherie. Where on earth did that reidiculous statistic come from! Sadly people are prepared to think the worst of us and will believe such arrant nonsense

    • CherryPie says:

      People do believe such ridiculous stuff. Today I found myself having to explain (to a couple of people who should have known better) why it was wrong to accept the new terms and conditions of the CSCS.