Taxpayers face £6bn pensions bill

PUBLIC sector pension funds are facing a £6bn a year shortfall which will have to be met by the taxpayer. This is because vastly more is being paid out by generous schemes covering the NHS, Armed Forces, the Civil Service and teachers than is being paid in. More public money will also be needed to pay the mushrooming police pension bill.

Taxpayers have always funded public sector pensions to some extent, but the drain on funds has reached unprecedented levels. City forecasters fear that the equivalent of more than 1.5p on income tax is needed to make up for the black hole. It means that thousands of taxpayers in the private sector, whose own pension schemes have been cut back or ditched, will have to pay out to protect the retirement nesteggs of public sector workers.

Years of inaction have left the public sector pension funds in desperate financial straits. The pensions drain has reached unprecedented levels as Government workers have been allowed to retire early on generous benefits while fewer recruits have been taken on to cover the cost of payments.

Many staff pay paltry contributions - for civil servants it is only 1.5% of salary, while members of the Armed Forces pay nothing. The shortfall is likely to rise as people live longer.

Unlike private companies, public sector schemes do not have a fund of contributions which is used to invest on the stock market. Instead, contributions are used immediately to pay the pensions. If less money is paid in than is shared out, a deficit occurs.

Figures for 2001 reveal that the teachers' pension scheme took £2.3bn in contributions but paid out £3.9bn, a shortfall of £1.6bn. The Civil Service scheme paid out £2.6bn but received only £1.5bn. The NHS scheme has a £300m black hole and the Armed Forces scheme is believed to have a shortfall of more than £1bn.

The pensions crisis has also hit the police service. On Moday it emerged that the 43 forces of England and Wales expect to have to pay more than a fifth of their annual budget on pensions, equivalent to almost £2bn. Currently, around 15% of the police's annual funding is spent on pensions.

There are already nearly as many former officers receiving a pension as the 125,000 there are in service. The situation will worsen by the end of the decade as officers recruited during an expansion in the 1970s reach the 30-year point at which most normally retire.

Any attempt to bring the public sector schemes into line with private company pensions is likely to face stiff opposition from members and unions. It would mean workers either making much higher contributions or accepting greatly reduced benefits in old age.

Many employees in the private sector have watched as their retirement dreams have been hit by company schemes being ditched. Growing numbers of firms have scrapped final salary schemes, which pay a guaranteed level of pension, because costs have spiralled. This has been due to pensioners living longer, funds receiving poor returns on their investments, tough new accounting rules and Gordon Brown's withdrawal of the tax relief on share dividends for pension funds.