Public sector pensions should be cut, says former head of civil service

Public Sector Pensions

Public sector pensions should be cut to help fund pay rises, the former head of the civil service has said.

Lord O’Donnell, who led the civil service between 2005 and 2011, said the sector needs to shift away from pension-based remuneration and towards higher pay, saying there should be “more pay less pension”.

He was responding to a post on X which argued there was limited evidence that retirement benefits improve staff retention, suggesting the pay offered in the public sector was not a big enough incentive to attract top talent.

Lord O’Donnell appeared to suggest that generous “final salary” pensions, which come at large cost to taxpayers, could be cut to fund pay increases.

He wrote on the platform, formerly known as Twitter: “I will continue to argue that we desperately need a switch towards more pay less pension in the public sector. You can’t get a mortgage based on your future pension.”

It recently emerged that the cost of public sector pensions had soared past £2.6 trillion for the first time, larger than the size of Britain’s economy.

Millions of public sector workers receive generous “defined benefit” pensions, guaranteeing them an inflation-linked income in retirement.

Meanwhile, most private sector workers have “defined contribution” pensions which link payouts to the performance of financial markets and are therefore less valuable.

Tom McPhail, of the Lang Cat, a consultancy, said “There is a disparity between public and private sector pensions that is hard to justify. In general, private sector workers have substantially smaller pots by the time they retire.

“At the same time, lower-paid public sector workers such as nurses are struggling to meet day-to-day living costs.

“People generally put more value on getting money in their bank account now rather than later. There is an attractive logic to rebalancing the system so public sector workers get better pay today but slightly smaller pensions. This could be achieved by shifting to defined contribution plans.”

Despite lucrative public sector pensions, there are growing concerns that Whitehall departments are struggling with retention and recruitment, as well as low productivity.

Staff turnover is at its highest level since 2010 apart from the post-pandemic peak, according to analysis by the Institute for Government – with 12pc of civil servants changing departments or leaving in the year to March.

The Public Accounts Committee warned in a report published last month that chronic pay issues are behind the drop in civil service morale, which has led to difficulties recruiting and retaining staff.

But the group of MPs also said the Cabinet Office was not doing enough to improve performance across the sector.

Some departments do not routinely collect data on underperformance – “and most do not monitor what happens to staff who are identified as underperforming”, the report said.

The Cabinet Office has ordered civil servants to spend at least 60pc of their time in the office, following concerns that hybrid working has dented productivity.

Some staff are planning to strike over the working-from-home crackdown, with union members at the Office for National Statistics recently voting in favour of industrial action. This was in response to plans requiring them to be in the office at least 40pc of the working week.

Mr O’Donnell, referred to as “G.O.D” in the media because of his initials and high-ranking position, served under three prime ministers and oversaw Britain’s first coalition government since the Second World War. He joined the consultancy Frontier Economics as a senior adviser in 2012 and became chairman the following year.

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