Page last updated at 00:03 GMT, Friday, 12 March 2010

Warning on public sector pensions

Two pensioners
More retirees means more money paid as pensions

The amount of money paid as pensions to many workers in the public sector could more than triple in the next 50 years, the National Audit Office suggests.

Its report on unfunded public sector schemes says they will pay out £79bn by 2060, compared with £25bn this year.

The rise will be due to increased longevity and increases in the real earnings of public sector workers.

But the NAO warns that annual pension payments will be much higher if the public sector workforce increases.

"The Treasury has not assessed the impact of different assumptions about the size of the public service workforce, despite it being a critical driver of pension costs," it said.

More pensioners

The NAO's report, the first of two, looks at the costs of the so-called "pay as you go" public sector pension schemes, in which pensioners are paid out of taxation rather than the proceeds of an underlying investment fund.

These figures must be used to inform an urgently needed national debate about public sector pension schemes for new entrants
Edward Leigh MP, chairman, Parliamentary committee of public accounts,

The biggest four schemes of this type are those of the civil service, the armed forces, and the NHS and teachers schemes for England and Wales.

They account for 75% of all payments from unfunded public sector schemes.

Last March the schemes covered 6.5 million people - 2.75 million staff, 1.59 million former employees who had not yet retired, and 2.13 million pensioners.

The report found that total payments to pensioners made by those schemes rose by 38%, from £14bn in 1999-2000 to £19.3bn in 2008-09.

The main reason for the increase was the 23% rise in the number of pensioners during that time as more people retired.

Employee contributions also rose strongly over the same period, by 56% to £4.4bn, thanks to higher contribution rates and more staff making contributions.

'Heroic' assumption

The NAO, on the basis of figures supplied by the Government Actuary's department, estimates that cash payments to pensioners will rise further, from an estimated £25.4bn in 2009-10 to £79.1bn in 2059-60.

As a proportion of the economy's total economic output, the Treasury estimates that these payments will rise from 1.7% now to 1.9% by 2018-19, before eventually falling back to 1.7% by 2059-60.

As well as assuming that women will live on average to 94.7 and men to 92.3, and that average public sector earnings will grow by 2% a year above inflation, the government is also assuming in its calculations that the public sector workforce will not grow.

That is despite a predicted 20% growth in the population over that time.

Edward Leigh MP, chairman of the Parliamentary committee of public accounts, said that particular assumption was "heroic".

"The projection that total annual payments to pensioners in these schemes will top £79bn by 2059-60 is frightening, although, at least as a proportion of forecast GDP, this does not represent an increase," he said.

"These figures must be used to inform an urgently needed national debate about public sector pension schemes for new entrants."

The NAO will publish a second report later this year which will look at the impact of recent changes to the pension schemes and put forward recommendations.

These involve the assumption that the cost of higher contributions in the future will fall on employees, with two-thirds of the higher costs being absorbed by lower payments to pensioners and one-third being paid for by higher contributions.



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