Taxpayers’ £6bn pension bombshell over public sector retirement bill

Gold-plated pensions handed out to public sector workers will cost taxpayer extra £6bn this year alone due to rampant inflation

  • This will add to annual bill for retired state employees – already at £60bn 
  • It will also fuel row over ‘pensions apartheid’ between public and private sector
  • Taxpayers on hook for £2.6trillion for existing pensions for public sector workers 

Gold-plated pensions handed out to MPs, civil servants and other public sector workers will cost the taxpayer an extra £6billion this year alone due to rampant inflation, experts warned last night. 

This will add to the huge annual bill for retired state employees, which already stands at £60billion – one-third more than the entire defence budget. 

It will also fuel a simmering row over ‘pensions apartheid’ between generous public sector provision and the inferior, risky plans for employees in the wealth-creating private sector. 

On a cliff edge: A row over ‘pensions apartheid’ between generous public sector provision and the inferior plans for employees in the private sector is simmering

Taxpayers are on the hook for a colossal £2.6trillion to pay for existing inflation-proofed pensions for public sector workers now and over decades to come. The vast pension liability is not included in official Treasury borrowing forecasts, but it is greater than the entire output of the economy and, if included, would more than double the national debt of £2.4trillion. 

Pensions expert John Ralfe said: ‘This is off-balance sheet financing that makes Enron, the collapsed US energy group, look like amateurism.’ 

Public sector schemes protect against inflation, no matter how high prices rise or how great the cost to UK taxpayers. With inflation running at more than 10 per cent, this is an extremely valuable benefit for recipients. Ralfe added: ‘The annual cost to the taxpayer is increasing and the gulf between the public and private sector pensions is widening. 

‘The problem is policymakers have no skin in the game. It doesn’t matter to MPs or civil servants if inflation is 2 per cent or 10 per cent. Their pensions are automatically increased by the full rate.’ The security enjoyed by retired public employees is in stark contrast with those forced to rely on a private sector pension for their old age. At best, company plans give only limited protection against inflation, leaving pensioners vulnerable to increases in the cost of living. 

Critics argue that the four-fifths of the workforce in the private sector are at risk of being consigned to a pensions underclass, while civil servants and other state personnel enjoy a comparatively cosseted retirement. 

‘Workers in the private sector are paying for the public sector to enjoy a retirement they can only dream of,’ said John O’Connell, chief executive of the TaxPayers’ Alliance. ‘It’s long past time that politicians delivered a better deal for hard-pressed taxpayers and got a handle on these public sector pension perks.’ 

Around one in five of the UK workforce is employed by the state. They include doctors, nurses, teachers, police officers, firefighters and soldiers.

The majority are members of so-called defined benefit ‘final-salary’ schemes, where pensions are based on their salary when they retire. 

These are guaranteed to rise each year in line with living costs. Therefore, around six million public sector workers past and present will be totally protected from runaway inflation, while those in the private sector remain vulnerable. 

‘This pension apartheid will rankle former private sector workers who see their spending power diminished,’ said Tom Selby, head of retirement at investment platform AJ Bell. 

While experts agree that former state employees deserve a decent retirement, they point out that their pension schemes were designed more than 50 years ago and have subsequently become unaffordable. 

These final-salary schemes are rapidly becoming obsolete in the private sphere.

Most private companies have axed them for new staff and are winding down existing schemes due to the punitive expense. 

Unlike their taxpayer-financed counterparts, final-salary pensions in the private sector give only partial protection against inflation, with annual increases capped at a maximum of 5 per cent. With the Consumer Prices Index soaring at more than 10 per cent, that creates a big shortfall. 

Millions of employees lack even that basic safeguard as their firm only offers them pension plans that are linked to the stock market and there is no automatic protection against inflation. 

Critics are calling on the next Prime Minister – whether Liz Truss or Rishi Sunak – to take urgent action to tackle the mushrooming public pensions bill. Politicians have previously been reluctant to do so as it brings them into conflict with trade unions and with Whitehall mandarins who are themselves in line for well-cushioned retirements.