Public sector discounts rates come under scrutiny
The Treasury will shortly launch a consultation into the methods used to calculate public sector workers’ contributions to their pensions, the results of which are likely to require that employees contribute at least £3bn more per year than they pay now.
That is more than the £2.8bn or so that the Treasury expects to receive by requiring that public sector workers pay about 50% more into their pension schemes from next year.
The consultation was requested by Lord Hutton, the former Labour minister who is heading an inquiry into public sector pensions, and who has already urged the government to look at significantly scaling back benefits for the better paid.
Specifically, the consultation will look at the discount rate used to calculate the cost of each additional year of benefits.
The discount rate in “pay as you go” schemes takes account of the rate at which time will devalue each promised pound of pension in retirement.
Higher discount rates have the effect of lowering contribution rates because tomorrow’s pension is worth less.
If the discount rate is cut, it will help the government underscore its argument for cutting the future benefits accruals of civil servants. But it could set up a confrontation between unions and government.
“It is the piece of the puzzle that has the greatest impact,” said a Treasury spokesman, explaining why the discount rate deserves a special inquiry all its own. On average workers contribute 6% of pay.
Pensions experts have long argued that the method used to calculate the cost of each additional year of benefits wildly understates the actual cost. Ros Altmann, a pensions expert who is now director-general of Saga Group, said that current contribution rates from workers “are divorced from financial reality”.
“They only shift the cost to future taxpayers,” she said.
In October, Lord Hutton unveiled the interim report of the Independent Public Service Pensions Commission, set up by the government to review retirement schemes for teachers, civil servants and others. It urged consideration of an overhaul of benefits, linking these to average salaries over a lifetime, not the highest one at retirement.
That report concluded the current rate used to calculate how much workers and employers contribute is much higher than that assumed by any other public or private sector scheme.