We have a two-tier pension system in the UK whereby MPs and public sector employees have a defined benefit or final salary pension, whereas private sector employees have a defined contribution or money purchase pension. This raises the question: should the pension arrangements of MPs be aligned with those of employees in the private or public sector? We want our politicians to make decisions in the best interest of the country, and not in their own financial interest.It could be argued that if MPs' pensions are linked to those of public sector employees, they have a conflict of interest, given that they determine the pension arrangements for public sector employees?This is not a trivial matter, because our politicians have allowed the Government to accumulate an unfunded public sector pension deficit amounting to £2,306.2bn as at year ending 31st March 2021 (source; page 216, Whole Government Accounts for this fiscal year).Moreover, this figure represents an increase of £1,345bn over the previous 10 years.The reason this deficit is described as being unfunded is because the Government has made no provision for it to be paid - it will have to be paid either from the proceeds of future taxation or additional Government borrowing.This figure is in addition to the Government's debt of £2,636,9bn.
Prior to the mid-1990s every FTSE 100 company offered its employees the opportunity to join a final salary pension scheme.However, by 2018 not a single FTSE 100 company was willing to offer its employees the opportunity to join such a scheme.This change occurred because of the attacks on the World Trade Centre in New York in 2001 and the 2008 banking crisis.These developments heralded the beginning of a low interest rate environment, which made final salary pensions prohibitively expensive.Another factor making final salary pensions more expensive was the increase in life expectancy.FTSE 100 companies responded to these developments so as to maintain their pension costs at a reasonable level, whilst Treasury officials and Government Ministers decided to take no action.
Private sector employers now provide their employees with a defined contribution pension, otherwise known as money purchase pension, which is less costly than a final salary pension scheme.Under such a scheme the employer and the employee contribute money into a pension scheme for the benefit of the employee when they retire.The law requires that the employer contributes a minimum amount equal to 3% of the employee's salary and that the employee contributes a further 5%.It has been reported, however, that the average employer contributes between 7-14%.In order to provide MPs with their final salary pension the Government has to contribute 25-30% of an MP's salary and the MPs contribute a further 6-8%.
We often hear MPs talk about the size of the Government's debt and their desire to see it reduced from its current level, both as an absolute figure (£2,636.9bn) and as a percentage of the country's GDP (101.2%). By contrast, we rarely if ever hear them talk about the size of the Government's unfunded public sector pensions liability being £2,306.2bn, notwithstanding that both of these liabilities will both have to be paid from the proceeds of future taxation or additional Government borrowing. Why are politicians willing to discuss the size of the Government's debt and not the size of the unfunded public sector pension deficit.