Prof John H Arnold and Douglas Russell have responded to a letter from Prof Stephen Caddick (26 May) regarding public sector defined-benefit (DB) pension schemes, offering a nuanced perspective on how these schemes are funded and their impact on public finances.
Understanding Unfunded Schemes
There are five large unfunded public sector pension schemes in the UK: those for the NHS, teachers, civil servants, police, and the army. While it is true that employers, and ultimately taxpayers, contribute a relatively high amount to these schemes, the alternative would likely require higher pay to recruit and retain staff in these sectors. Without a decent pension scheme, these sectors would struggle to attract talent, and the cost of higher wages would also fall on taxpayers.
Liabilities in Perspective
Prof Caddick mentioned that public DB schemes have liabilities of around £1tn, but this figure is misleading, as is often the case with pension liability assessments outside the private sector. The actual figure is probably closer to £1.3tn, but this estimate represents the money the government would have to pay if there were no income from current workers and employers to support pensions. This would only happen in the unlikely scenario that we suddenly had no NHS workers, teachers, soldiers, etc., but only pensioners in those sectors.
Funded Schemes and the Total Package
Various other DB schemes, both public and private, are funded through investments in the stock market. Public-sector workers choose their jobs based on the total package on offer. A good pension and strong benefits are what allow the state to attract people who could earn considerably more in the private sector.
An Honest Approach?
Douglas Russell argues that it would be more honest to raise pay so that staff could fund their own pensions and benefits. However, no government is likely to do this, as it would create a problem today in exchange for solving one that lands on a future administration. Generous public-sector pensions are, in effect, a way of deferring the welfare bill.
This debate highlights the complexities of public sector pension funding and the trade-offs involved in ensuring that essential public services can recruit and retain the staff they need.
