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Taxpayers hit with £2.5bn public sector pensions bill

Whitehall
Whitehall

Taxpayers will have to pay an extra £2.5bn to cover the cost of honouring “gold-plated” public sector pensions after retired civil servants were handed one of their biggest pay rises in a generation.

Critics have accused the Government of creating a “pensions aristocracy” through its generous inflation-linked schemes for public sector workers such as NHS doctors, teachers and civil servants.

Ex-public servants’ yearly retirement income is linked by law to the previous September’s inflation figure, which stood at 6.7pc in 2023. Their pay rise this year is the second-largest increase for decades after last year’s 10.1pc boost.

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The uplift could cost the taxpayer at least £2.5bn, according to estimates from investment firm Canada Life, a figure it described as “conservative”.

Most private sector workers and employers pay pension contributions each month into “defined contribution” schemes, with the size of retirement pots determined by investment performance.

“Defined benefit” public sector pensions, by contrast, promise an inflation-proof income guaranteed by the taxpayer – paid as a percentage of either their final or career average salary.

The state pension triple lock – which ensures the state pension rises in line with the highest of either inflation, wage growth or 2.5pc – means retired civil servants are afforded a double layer of protection against rising prices.

Baroness Altmann, a former pensions minister, said many public sector workers are unaware of how lucky they are.

She said: “It’s long been the case that a public sector job will result in you being the aristocracy of pensioners. You will have inflation-linked income for life, and it won’t fall if inflation is negative.

“Of course public sector workers deserve good pensions, but they often don’t appreciate how good they already have it, and that their pensions have become far more generous than anything available in the private sector.”

The number of civil servants pocketing annual pensions of over £100,000 has tripled to 141 since 2015. The number getting more than £50,000 a year jumped by 53pc from 3,092 in 2022 to 4,741 last year.

Between September 2022 and September 2023, the public sector grew by 133,000 workers. Over the same period, the number of private sector staff edged down by 3,000.

Public sector pensions are “unfunded”, meaning the Government has not put aside a pot of money to meet the obligations. Instead, current taxpayers foot the bill.

While defined benefit schemes are the norm in government, they are close to extinction in the private sector as they have become too expensive for employers to maintain.

Neil Record, former chairman of the Institute for Economic Affairs think tank, likened the public sector pension system to a “Ponzi scheme”, with taxpayers set to lose out.

He said: “The government is choosing to give 20pc of your workforce much more money than the other 80pc. It is politically indefensible.

“Now schemes are maturing the amounts the Government is having to pay is going up dramatically. They have to keep raising contributions to keep paying the current generation.

“It’s like a Ponzi scheme. These pension schemes are too expensive, but the Government hasn’t felt this yet.

“There’s a huge intergenerational unfairness too. The current generation is paying for these lucrative pension schemes but aren’t going to have them themselves.

“Major reform is needed. It can’t go on like this. It’s a big strategic mistake.”