Charles Cowling
PS Europe

Retirement at the age of 70 or even 75 – increasing by at least one year in every decade – is the minimum we can afford as life expectancy grows

Public Sector pensions are a topic of huge current interest in the UK and across Europe – and rightly so. They affect the lives and wellbeing of millions of public sector workers. But they are also hugely expensive and potentially a massive drain on the public purse and taxpayers’ limited funds.

We know that public Sector pensions also suffer two major curses, which make them hugely difficult for politicians in any democracy to tackle. First, the pay-as-you go system embraced by nearly all public sector pension schemes across Europe – and elsewhere – encourages financial ill-discipline. It is easy for politicians to make very expensive promises that do not need to be paid by the current generation of taxpayers.

Indeed, public sector pensions had been income-generating for the British government for many years, as employee contributions were more than sufficient to cover the small level of pension payments in the earlier years. But it does not take a financial genius to recognise that this situation is not sustainable.

The second major problem for politicians is a system that is inexorably getting more and more expensive and is increasingly untenable in the long term. Any changes to the system bring significant short term pain, in the form of unhappy public sector workers, while the benefits will only be felt over many years.

This is not soon enough to help the politician where it matters most – in the polling booth at the next election.

But pension debts are mounting across Europe and politicians of all colours recognise that this issue must be addressed. Private sector employers, driven by a much more disciplined accounting environment, have forced through significant changes to schemes.

So much so, that there is now a massive gap in the generosity of pension provision across the public and private sectors.

In the UK, the Treasury recently announced that public sector pensions represented additional debt calculated at more than £1.1trillion – as of March 2010. Ten years ago the equivalent figure was roughly £300bn.

This government debt, now equivalent to £45,000 per household, is escalating at a frightening rate shows no signs of slowing. This is not just a UK problem. Many European countries are facing similar problems. The details vary depending on the generosity of the first pillar of state benefits.

But for the large majority, the problems of spiralling pension liabilities, fuelled by increasing longevity, are the same. Although, not all countries have published as much information on the scale of the problem – as the UK has.

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