“We desperately need a new police pension scheme fit for the modern world. Without reducing costs, police officer pensions will become unaffordable for taxpayers and for officers themselves.”
Edward Boyd, Policy Exchange, 01 March 2012
The right-of-centre think-tank Policy Exchange weighed in to the ongoing row over public sector pensions this week.
This time it was the police pension scheme that came under scrutiny.
Officers are waiting anxiously to see what kind of offer ministers are going to put on the table following the imminent publication of the second Winsor report into police pay and conditions.
As Crown servants, the boys and girls in blue can’t go on strike, but that doesn’t mean they won’t be as angry as other state workers if the government tries to cut back their pension entitlements, particularly as reforms in 2006 already diminished the generosity of the payouts officers can expect to get when they retire.
Policy Exchange made the case for reform, however, saying that the annual cost of taxpayer contributions to police pensions has doubled, rising from £951m in 1995/96 to £1.9bn in 2009/10.
Does that mean the country will soon be unable to afford police pensions?
There’s little dispute that the taxpayer is footing a hefty bill for retired officers at the moment, but does that mean the cost will inevitably continue to spiral?
Pensions expert John Ralfe, who helped us FactCheck NHS pension reform last month, says we may be in danger of underestimating the effect of the 2006 changes to the police scheme.
Policy Exchange believe that members who joined before 2006 receive benefits worth about 35 per cent of their annual salary, paid for by the taxpayer.
That fell to about 29 per cent of salary after the reforms in 2006, according to their research.
Mr Ralfe, an independent pensions consultant and the former head of corporate finance at Boots, disputes the figures that those numbers are based on (they emanate from the Pensions Policy Institute).
He thinks the real pre-2006 cost to the taxpayer was much higher – about 51 per cent of a police officer’s annual salary.
That’s because the earlier pension scheme offered an outstandingly generous maximum pension of two-thirds of final salary. Officers could also retire as early as 48-and-a-half.
The cost fell dramatically after 2006 from 51 per cent to 32 per cent of salary, reflecting big cuts in generosity. The maximum pension is now half of final salary, plus a lump sum of four times final salary. The new minimum retirement age is 55.
According to Mr Ralfe, that means that police pensions used to cost the taxpayer about twice as much as schemes for teachers, local government workers and some NHS staff.
Now that margin has been already been cut and police pensions only cost the state about 25 per cent more than those of other public sector workers.
Of course the government could argue that’s still too much, but they would have to persuade the public that police officers – with all the physical demands, risk and responsibility their job entails – don’t deserve to have slightly more money spent on them.
Policy Exchange say 91 per cent of today’s officers are still enrolled in the pre-2006 scheme, and it will obviously take years for the cost to the taxpayer begins to fall significantly as the new scheme becomes the norm.
That means some officers will still be claiming two-thirds of salary and retiring before 50 until 2036. If the government wants to cut costs in the short term, it may follow the think-tank’s advice and announce an immediate redesign of police pensions.
But if Mr Ralfe is right that the current cost to the taxpayer of police pensions is only 25 per cent more than other public sector schemes, it may be difficult for ministers to argue that the thin blue line doesn’t deserve a slightly more expensive deal.
By Patrick Worrall
[Update: After we published this blog, Policy Exchange gave us this statement: “Mr. Ralfe’s comments relate to ‘relative generosity’ not how ‘affordable’ pensions are. We looked at how ‘affordable’ pensions were for both taxpayers and officers. Taxpayers are spending £1 in every £7 we spend on policing in England & Wales, just on police officer pensions. Last year taxpayers spent £1.9 billion on police officer pensions, a 79 per cent increase above inflation over 15 years. This is set to increase up to 2036 as officer numbers (and therefore employee contributions) are due to decrease and life expectancy is due to increase. Under current proposals officers are going to be asked to contribute up to 15 per cent of their pay. We are not convinced that this is affordable for them. This is why we argue for fundamental reform that will reduce the amount officers put in and the amount they take out. This can still be done whilst maintaining a ‘relatively generous’ final pension and will make it more affordable for both officers and taxpayers.]