Leading pensions analyst Michael Johnson explains why the future cost to the taxpayer of public service pensions could be as much as £41 billion a year (the equivalent to £1,600 a year for every household in the UK).

This is comprised of: at least £17 billion in employer contributions; at least £15 billion to cover the cashflow shortfall between pensions in payment and pension contributions as currently identified by the Office for Budget Responsibility (OBR); and at least £9 billion in additional costs newly identified in A Toxic Tangle, published on Monday 4 February by the Centre for Policy Studies.

It was already widely accepted that public sector employees already enjoy pensions which are far more generous and secure than the great majority of private sector employees. These new findings show that the sustainability of the post-Hutton pension settlement is even more questionable than previously thought. The £9 billion of additional costs has primarily arisen because of the interaction – or “toxic tangle” – between two pension proposals currently before Parliament: the Public Service Pensions Bill and the DWP White Paper on the single-tier pension. Together these have created two additional costs: about £3.4 billion a year due to the loss of the public sector employers’ NICs rebate following the end of contracting-out; and about £4 billion a year as a result of public sector employees continuing to enjoy an enhanced occupational pension, as if still contracted-out, whilst being entitled to further accruals within the new single-tier state pension, once it appears. In contrast, private sector employers who are today contracted-out will be permitted to change their scheme rules (and reduce the pensions paid) without trustee consent (not least to enable them to recoup their lost NICs rebates).

A further £2 billion a year in additional cost may well arise because Lord Hutton’s modelling used life expectancy rates that are now six years out of date. Michael Johnson calls for the Public Service Pensions Bill to be stopped in its tracks until the White Paper’s cost implications for it are thoroughly examined. This should include the use of up-to-date projections for life expectancy. He comments: “The need for bolder reform of public sector pensions is far greater than that proposed in the Public Service Pensions Bill. And the Coalition must act now to untangle the expensive consequences of the interaction between its various pension reform proposals.” Tim Knox, Director of the Centre for Policy Studies, comments: “Lord Hutton claimed that his proposals for public sector pension reform would be fair, sustainable and balanced; and that taxpayers can have confidence that the costs are controlled.

Sadly, none of this is true. Taken together, the Coalition’s pension proposals are unfair and the costs – at £1,600 a year for every household – are clearly not controlled. This is clearly unsustainable.”