A few weeks ago, I wrote about the deceit at the heart of national insurance – a tax dressed up as a savings product, in which the capital is simply spent rather than invested.
The Treasury may be unwise, but it is not stupid – and certainly not so much as to squander a clever wheeze by only using it once. This tactic is also deployed on public sector pensions, and if anything, the accounting is even more cynical.
Public sector pensions are more generous than those in the private sector. Once upon a time this practice was justified on the basis that public sector pay was lower, but it magically persists despite the fact that these workers now earn more, and enjoy better job security, as seen in the pandemic.
In recent decades most companies have phased out “defined benefit” pensions – where retirement funds are related to how much you earned, not how much you paid in – because they were unaffordable, but much of the public sector has clung onto the model regardless.
While public employees contribute a portion of their salaries, the expectation is that taxpayers will make up the balance. A pension model that guarantees higher payouts means bigger contributions for public employers – the Civil Service Pension Scheme, for example, collects between 26.6 per cent and 30.3 per cent of the total cost of salaries in employer pension contributions.
The cost of that policy is striking, but it’s only one of several concerning notes in this story. In a normal pension scheme, that money – and the employee’s contributions – goes into a fund, to be invested in order to grow during the saver’s working life, then provide for them in retirement. A company can’t touch the pension pots of its workforce for obvious reasons.
Not so for the public sector. Just like with national insurance, the Treasury grants itself the right to spend the money contributed by other public sector employers.
That’s red flag No. 2. But there’s worse to come. A new report published by the Institute of Economic Affairs reveals that behind the hollow façade of public sector pensions lies an additional deceit. Those generous employer contribution figures aren’t plucked out of thin air. Rather, they’re calculated to estimate how much the pension in question will eventually cost to fund. The money is still spent, but at least everyone gets a figure from the official accounts on how much it costs to hire and employ people. This feeds into the public finances, and the debates we hear at Budgets and elections.
Except, the report reveals, this calculation is skewed. If the Treasury used the same interest rates private companies are required by law to use in their reporting, then the numbers would look vastly worse. For example, the NHS Pension Fund is reported publicly to cost 30.4 per cent of salaries. The true figure seems to be double that. In sum, the report’s author estimates the total value of this under-reporting in the last financial year alone to be £57bn.
These costs aren’t negotiable, or theoretical – they’re real. Failing to tell voters and taxpayers about them is a betrayal of huge proportions.
Mark Wallace is the chief executive of Conservative Home, a political blog that is independent of the Conservative PartyInternet Explorer Channel Network