Public Sector Pension Scandal

Economist Michael Johnson has warned that public sector pensions have become a ‘Madoff-style pyramid’.

In a report for the Centre for Policy Studies Johnson said public sector pensions were ‘collapsing under the weight of insufficient contributions, rising longevity and an ageing workforce’.

He said ‘self-sufficiency is the key’ and unless the issue was addressed Britain faces a ‘societal division’ between private pensions and the ‘disproportionately high pensions paid to high earners’ in the public sector.

Over three quarters of civil servants are in a final salary scheme compared with less than 20% of private sector workers. Currently taxpayers provide around 80% of all public sector final salary contributions and in 2009 the state paid £14.9 billion towards the £19.3 billion costs of the UK’s four largest civil service schemes.

Johnson predicted that in 2016 the taxpayer will have to contribute even more to make up the £10.3 billion shortfall in contributions.

He said the government should start closing final salary schemes in favour of defined contribution schemes. In order to phase this transition in Johnson recommended one of two paths; a ‘brave’ path or ‘cautious’ path.

The brave path would be a ‘watered-down [salary-based scheme] before the introduction of a pure defined contribution framework perhaps in 2020’ or a more cautious path of a career average scheme up to a salary cap of £38,000 with defined contributions above that.