Are we paying for their pensions?

The media like to state that the private sector are the ones who pay for the public sector’s pensions.  This isn’t entirely true.

The issue is that, unlike the private sector, public sector pensions are funded from general taxation. The public sector pension pot doesn’t really exist – it just all goes into and comes out of the overall budget. 

Now, most of the public sector is on a pension scheme which says how much they will get paid when they retire. For example, say, a nurse could get a defined benefit of £20,000 per year, for every year they live after retirement. This used to be based on their final salary, but that was changed to be based on an average salary across their employment. This obviously reduces the amount you get quite significantly – but it does mean that you have incentive to work up the ranks quickly and improve your average.

The problem comes when that nurse hasn’t actually contributed enough into the pension pot to fund this £20,000. Say they’ve put in an amount that would only give them a return of £15,000 a year. That’s tough for the pension scheme, though, because the pension is defined for £20,000.  In the private sector, the extra £5,000 would normally just come out of the pension pot (and they’d have to change rules for other people to fund this shortfall), but in the public sector this just comes out of the tax budget. And who pays for that tax budget? “The taxpayers”.

Now obviously we don’t know how long someone’s going to live for, we don’t know how much they should be given from their pension each year, and so on – that’s why we have group schemes so that we can work on average life expectancies. We also don’t know what the interest rate or return on investments is going to be over time – that’s again why we have schemes with multiple earners over multiple years to even out the estimates. The issue is that when previous governments have done their sums on how much people needed to contribute in order to give the right amount of pension payment, they got their numbers wrong in some way – assuming people would die at 70, or that interest would be very high and so you could live off the interest of the pension pot. So we are having to fund this shortfall through public money, from tax.

So the media are trying to get people to think that due to this miscalculation, the government is going to fund the pensions shortfall with increased tax. To some extent they’re right, but that’s a pretty stupid way of looking at it; it was previous governments’ fault, and where something is the government’s fault it does get paid out from tax. The thing is to make sure that pensions are workable going forwards.  Existing pensions aren’t affected as far as I know; this is looking at what happens in the future.

But that doesn’t sell papers or get people riled up enough, so we’re left with the spiral of misinformation from the media and soundbites from union leaders which don’t set out a better policy for us all to believe in.

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