Time to act on the pensions timebomb

by Ed Bowsher on 08 June 2009  |  20 comments
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The government should withdraw final salary pensions from younger public sector workers.

Pensions are back in the news. Three companies announced changes to their final salary pension schemes last week, and they won't be the last.

But there's one final salary scheme in existence that's way bigger than anything else out there. That's the public sector's scheme. In 2007, 5.2 million public sector workers were active members of a final salary scheme compared to 2.7 million in the private sector.

What's more, the Treasury says that the total public sector liability is £650 billion.

I don't think that is sustainable in the long-term and it's about time that the government introduced some meaningful changes.

The first step should be to close all public sector final salary schemes to new entrants. The second step should be to modify the scheme. Some current employees should lose their right to a final salary pension. In other words, the government should follow Barclays' lead.

I'd withdraw the right to a final salary pension for any public sector worker under the age of 45. These younger workers will have the time to boost their pension provision by other routes if they wish to do so whereas a 55 year-old will struggle and would rightly complain about unfair treatment.

So that's my solution. What do you think? Let me know in the comments feature at the bottom of this post.

Postcript: Following on from LastChip's comment at the bottom of this blog. I thought I'd expand a little on my proposal. Yes, if the employee has made contributions to a final salary pension, then he shouldn't lose those contributions. The money should be paid into a defined contribution fund or even the hybrid 'cash balance' scheme that Barclays is using.

The government should also start contributing to a defined contribution fund from now on, and should also make a contribution to the fund which should partly (but not wholly) make up for the loss of the final salary pension.

Of course, I understand that this would be a very controversial measure. Many public sector workers would understandably be very angry. But we face a looming pensions crisis. The private sector is now beginning to welch on its final salary commitments. In the end, the public sector will have to do the same thing. We might as well get on with it.

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