Taxpayer could save billions from public sector pension reform, finds report

Moving public sector employees onto defined contribution (DC) pension schemes could have significant benefits for taxpayers, according to a new report by Policy Exchange. The report suggests that this move could save taxpayers a staggering £37 billion per year in the long run. Not only would this be a huge cost-saving measure, but it would also send a positive signal to the bond market about the government’s commitment to fiscal responsibility.

The current pension system for public sector employees is based on defined benefit (DB) schemes, where the employer guarantees a certain level of pension income for the employee upon retirement. However, these schemes have become increasingly unsustainable and costly for the government, with the cost of public sector pensions rising by 45% in the last decade alone. This has put a significant strain on taxpayers’ money and has led to calls for reform.

The Policy Exchange report argues that moving public sector workers onto DC schemes, where the employee and employer both contribute to a pension pot, would not only save money but also provide employees with more control over their retirement savings. Under the current DB system, employees have little say in how their pension funds are invested, whereas DC schemes allow for more flexibility and choice.

The report also highlights the fact that DC schemes are becoming increasingly popular in the private sector, with many companies already making the switch. This move has been driven by the need for more sustainable and cost-effective pension options, and the public sector should not be left behind in this trend.

One of the main advantages of DC schemes is that they shift the risk from the employer to the employee. In a DB scheme, the employer bears the risk of any investment losses, whereas in a DC scheme, the employee takes on this risk. This not only reduces the burden on taxpayers but also encourages employees to make more informed decisions about their retirement savings.

Moreover, the report suggests that the move to DC schemes would also have a positive impact on the bond market. Currently, the government’s large pension liabilities are a cause for concern for investors, as they add to the already high levels of government debt. By shifting to DC schemes, the government would be sending a strong signal to the bond market that it is taking steps to address its long-term financial obligations.

Some may argue that this move could lead to a reduction in pension benefits for public sector employees. However, the report suggests that this could be mitigated by offering higher contributions from the employer, as well as providing employees with the option to top up their pension pot through additional voluntary contributions.

In addition to the financial benefits, the move to DC schemes would also promote fairness and equality among public sector employees. Currently, there is a significant disparity between the pension benefits of different public sector workers, with some receiving much more generous pensions than others. By moving to a DC scheme, all employees would be treated equally, regardless of their job or salary.

It is also worth noting that this move would not affect current pensioners or those close to retirement. The report suggests that only new public sector employees should be enrolled in DC schemes, allowing for a smooth transition and avoiding any disruption to those who have already made retirement plans based on the current system.

In conclusion, the Policy Exchange report makes a compelling case for moving new public sector employees onto defined contribution pension schemes. Not only would this save taxpayers a significant amount of money, but it would also provide employees with more control over their retirement savings and send a positive signal to the bond market. It is a win-win situation for all parties involved and a step towards a more sustainable and fair pension system for the public sector.