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Is the Chancellor brave enough to tackle Public Sector pensions?

Is the Chancellor brave enough to tackle Public Sector pensions?

[dropcap letter="T"]here can be little doubt that last year’s big announcement of the flat rate state pension was a major transforming moment for UK pensions. This is only the start of the changes that need to happen to truly bring the UK pensions system into a sustainable position, changes which I’ve touched on in previous blogs.

However, maybe it’s time to let the dust settle on the private sector pension arena. Over the last decade there have been endless changes in the private sector pension systems with the introduction of personal allowances, the introduction of auto-enrolment, the curtailment of personal allowances and the compulsory switch to fee-based advice selling from commission-based product selling. This constant shifting ground has made it difficult for advisers to give solid advice or for people to understand the complex rules involved in pensions. So a period of calm would probably be a good idea.

Instead, the Chancellor should consider the public sector pensions issue. There are enormous liabilities building up in the public sector without anyone being seen to object. These liabilities are so massive that they will ultimately cause a huge increase in the national debt as future governments are forced to borrow to top up pension funds, where they exist, or to pay directly the unfunded pensions for schemes where no fund was ever established.

Indeed it is not an understatement to say that without the burden of the public sector pension liabilities, the government could provide a more generous base pension to all citizens while simultaneously reducing the tax burden on the population and the need to mortgage our children’s future by borrowing ever-greater amounts for non-productive pension payments.

Obviously, commitments that have been entered into have to be fulfilled – this isn’t Cyprus after all. However, the Chancellor could make a dramatic move by switching all future public sector employees, including politicians, to a defined contribution system with the same generous employer contribution that is currently made. This would move the risk from the taxpayer to the employee in the same way that almost all companies in the private sector are moving the risk from the firm to the employee.

A move like this would not only bring justice to all taxpayers but would play a huge role in eliminating the deficit over time.

However, it would require a very brave and selfless politician to do what is so obviously right against the huge vested interests in the public sector itself. This is why the Chancellor will probably settle for more messing around with the details of private sector pensions and ignore the radical changes necessary to make public sector pensions sustainable.

It is a pity, for each missed opportunity to tackle the public sector pensions’ liabilities issues loads ever-more debt onto future generations, who will have to pay for our weakness in refusing to face up to this problem. Maybe the Chancellor will surprise us with a bold initiative on public sector pensions – but I, for one, won’t be risking any money on it.

Tom Murray

Twitter: @TomMurrayDublin or @Exaxe

What do you think? Let us know in the comments below!

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