The Government published two consultations last week on reforming the funding of public sector pensions. The problem is that unfunded public sector pension costs exceed £2.1 trillion but growth in GDP (and therefore tax revenues) has not kept pace. At some point the Government is either going to need to raise tax rates or cut public sector pension benefits.

The unfunded public sector pension schemes include the NHS Pension Scheme, the Teachers' Pension Scheme, the Civil Service Pension Scheme and the Firefighter's Pension Scheme. The Government's difficulty with cutting benefits in these schemes is both that the public is particularly appreciate of healthcare professionals and teachers in the light of the Covid-19 pandemic and that these workforces are heavily unionised. In short, any move to cut pension benefits will be unpopular and heavily opposed.

However, raising taxes will also be unpopular in the current season with many businesses and individuals having had to significantly tighten their belts over the last year.  

For the moment, it seems likely that the Government will wait and see how the economy recovers before making any hard choices - but this isn't a problem that is likely to go away any time soon. The consultations propose some technical reforms but this is really tinkering round the edges.  

In the meantime rising contribution rates are likely to be very difficult for employers participating in the unfunded public sector schemes but without government funding to cover the rising costs. For them keeping a wary eye on the development of this situation is recommended. Further background is available here.