In The Times a few days ago the costs of public sector pension liabilities were discussed. “Of all the ways to measure the precarious state of the government’s balance sheet, the one that gets the least attention is the whole of government accounts (WGA). Which is odd, because it subjects the government to the same standards as a private company” was suggested.
“The WGA is by no means a perfect measure. Future public sector pension liabilities are capitalised because they are a contractual obligation but spiralling NHS costs are not, because the promise of healthcare is only implicit, for example. But it is more complete than the monthly public finances, with their restricted definition of borrowing and debt. The gaping hole in the monthly data is the cost of those public sector pensions. Every WGA release is a reminder of how expensive they are, how the young are having to mortgage their futures to pay for benefits most will never enjoy, and how reform is vital.
The latest update, for 2018-19, contains some startling revelations. For the first time, the payroll cost of the 5.3 million public sector workers is the largest single government expense. At £256 billion it is bigger than the £230 billion social security bill for state pensions and welfare. Two fifths of that, £96 billion, is the cost of servicing those 5.3 million pensions.
The accounts also include an estimate of the net public sector pension liability for 2019-20. An increase of £350 billion to £2.25 trillion is expected, taking it far above the national debt that year and even above forecasts for this year after the coronavirus bailout.
There is no pot of money to cover the cost; taxpayers will simply have to pick up the bill. What makes the schemes so expensive is that they tie pensions to salaries. Such generous defined-benefit guarantees have vanished from the private sector, where staff have to save up to buy an annuity or property for their retirement income. In a world of tiny returns, this is storing up pension inequality. An employer may pay 10 per cent of an employee’s salary towards their pension but, the WGA reveals, the promises to public sector workers are equivalent to 40 per cent of their wage. For a worker on £30,000, that’s an extra £9,000 a year. An unrecognised wage top-up for the public sector worker. All covered by future taxpayers.
John Ralfe, an independent pensions expert, has proposed a hybrid system, with an initial wage earning defined-benefit perks and, above that threshold, contributions made into a savings pot like private schemes. Universities already do this. Only the first £60,000 accrues defined-benefit entitlements. The public sector would still have better pensions than the private sector but costs would be lowered for future taxpayers. Is the government brave enough to take on the public sector?
West Lancashire Borough Council has pension commitments. In the latest Borough accounts we learn that “The Council employs around 500 people and uses assets of around £258 million to deliver its services. The Council had a total net worth of £92.192m at 31st March 2019, taking into account all of its assets and liabilities, which was a reduction of £1.814m on the previous year. This change was the result of a wide range of different factors.
“The value of the net pension liability in the accounts has increased by £1.078m to £56.573m. The net pension liability represents the excess of long term accrued liabilities, assessed on a prescribed basis, compared with the market value of pension assets. Statutory arrangements for the funding of the pension scheme mean that the financial position of the Council remains healthy”.
Readers know WLBC advertises its vacancies on its website. Perhaps it ought to show a running total of actual employees other than state “around 500” and let us know if the council, with the pensions liabilities, is being prudent in the costs we all carry?