Treasury proposals could add £20bn to public sector costs
Proposals to change the way public sector pension costs are calculated could raise employees' annual contribution rates by as much as £20bn, according to a Treasury discussion document
Even implementation of one of the more modest changes aired in the document could raise the required contribution rate by £9bn to £12bn each year if public sector benefits were not watered down significantly.
The move comes as public sector workers on higher pay face a two-year wage freeze and a rise in pension contribution rates that already will cut their pay by 3% by 2014-15.
Any government change in policy that results in much higher contributions by public sector workers is likely to prompt a furious reaction from Labour MPs. Ed Miliband, Labour leader, recently said public sector workers had been wrongly portrayed as “gold-plated fat cats” despite the average public sector pension being just £7,000 a year.
Brendan Barber (pictured), TUC general secretary, said state workers should be “very nervous” about the review of discount rates because it could lead to a “stealth increase” in their pension contributions when they were already facing a pay freeze and a third of a million job losses.
“The 3.5% rate currently used is similar to that followed in funded schemes with a strong employer covenant . . . any move to change it will be seen as just another way to make public sector workers pay an unfair contribution.”
The document is a consultation on which discount rate to use when calculating how much each additional year of pension provision costs. The Independent Public Service Pensions commission, chaired by Lord Hutton, said in October the current discount rate was at the high end of that used in the private sector or by funded schemes in the public sector.
The higher the discount rate, the lower the cost when expressed in contributions needed today to pay obligations well in the future. The Hutton report noted that cutting the current rate, which is 3.5 percentage points above the retail prices index, by just 0.5% would add £3bn to £4bn in annual cost.