Pensions crisis 'may put 4p on tax'

TAXES may have to rise by 4p in the pound to fill a massive black hole in providing the pensions of public sector workers, it was revealed yesterday.

Experts say there is a shortfall of £690bn needed for the retirement nest eggs promised to five million state employees over the next 50 years.

The deficit is higher than the national debt and equivalent to £11,500 for every person in Britain, according to leading actuary firm Watson Wyatt.

The shortfall is growing extremely fast. The last official Government estimate, published in October 2004, put the public sector pension deficit at £425bn.

The debt is accelerating mainly because New Labour has presided over a rapid increase in the number of public employees.

Labour inherited a public sector workforce of 4.7m in 1997 but it is expected to reach 5.37m next year. The Government also pays its employees more - an average of £ 11.32 an hour compared with £9.79 for private sector workers.

This has a direct effect on the cost of their pensions because they are still based on final salaries - and index-linked to inflation.

Many private employers have abandoned such schemes and replaced them with stock market-based policies. Workers are also living longer and changes in the way the Government calculates its liabilities and interest rates have further boosted the figure.

Another major problem is that state pensions are 'unfunded'. This means that, unlike pension schemes in the private sector, no body of stocks and shares has been invested to pay them. Instead, the money is paid straight out of taxes. Experts said this means state pensions are a timebomb ticking away under the nation's economy.

Gordon Brown would either have to raise taxes or cut public spending to plug the hole. The experts calculated there would have to be an increase of 4p on income tax just to stop the £ 690billion deficit getting larger relative to the size of the economy. The national debt stands at around £400bn.

If the Chancellor wanted to pay the deficit off altogether, taxes would have to rise even further. The Government is battling to ease the burden by raising the retirement age from 60 to 65 for recruits to the public sector.

Tory pensions spokesman David Willetts blamed the situation firmly on Mr Brown. 'He has been living in a fool's paradise,' he said. 'He has not properly accounted for the cost of the pension promises he has made and they are now coming back to haunt him.'

LibDem pensions spokesman Steve Webb agreed. He said: 'Mr Brown has made promises to public sector workers always hoping that the tomorrow's taxpayers will keep paying.'

He said a hefty tax rise and a later retirement age would be needed to close the gap. LibDem pensions spokesman in the Lords, Lord Oakeshott, said there was a widening chasm between the 'two nations' of pension provision.

He said research showed that the public sector employed 18% of the population but had 36% of the nation's pension rights.

Bill Midgley, president of the British Chambers of Commerce, said it was essential that public sector retirement ages were increased in line with the private sector. 'This is a massive weight on the shoulders of existing and future taxpayers,' he added.

However, a Treasury source dismissed the Watson Wyatt study as a 'theoretical accounting sheet exercise' and said it would not have any impact on taxpayers or workers.

State employees fight pension shake-up

PUBLIC sector workers will today launch protests against plans to overhaul their pensions, despite official confirmation that they are paid more than members of the wealth-creating private sector, reports Daily Mail City staff.

The TUC said 20 unions would join forces to demonstrate against proposed changes to their generous pension schemes. Protesters claim it would be unfair to cut their pensions on the grounds that their earnings are generally lower than private sector equivalents.

Figures from the Office for National Statistics show that the average public sector worker is paid £1.50 more an hour than their private sector counterparts - £11.32 an hour compared to £9.79. The Government proposes to raise the pension age from 60 to 65 for the 4.5m public sector workers.