Here’s a pension tweak for nudging civil servants to work past 60

A month or two ago I bumped into a former civil service colleague of mine. It didn’t take long for him to cheerfully announce that he had just retired from his post-civil service career.

Given that, lucky chap, he doesn’t look a day over 45 I was a tad surprised. Turns out he had in fact just turned 60. Still a bit early to be retiring. But after 30 years in the civil service he had accumulated a very nice pension, thank you very much.

I too will hit 60 terrifyingly soon. Along with many of my friends I’ve been watching in horror and fascination as the value of my main source of retirement income, my private pension, has spiralled downwards since President Trump started wreaking havoc on the world’s stock markets. But I do have a bit of a civil service pension as well. I only spent about eight years in Whitehall but it will pay out an annual sum not far off the state pension I’ll have earned after more than 45 years in work. Unlike my friend I have no intention, nor indeed the financial wherewithal, to retire at 60. 

But here’s the thing. Like him I will start drawing that civil service pension at 60. I effectively have no choice. The longer I defer taking my private pension the more it will, hopefully, accumulate, and the better annuity rate I would get if I were to decide to purchase an annuity. I can even delay taking my state pension after state pension age and get an actuarial enhancement so that I draw it for less long but get a higher annual payment. Not so my civil service pension. There is no actuarial enhancement for delay. I will get the same annual amount, inflation adjusted, if I take it at age 60 or 67. It’s a no-brainer.

This is absurd. It’s not going to affect my retirement decision — I didn’t accumulate enough pension — but it is a clear signal to thousands of others that 60 is the time to go, or at least to reduce their working hours.

If the government wants to encourage more older people into work, here is a virtually costless way of doing so. Allow those who accumulated public service pensions, under the age 60 retirement schemes, to defer claiming those pensions in return for an actuarial enhancement. If the enhancement is set correctly then the cost to the government in payments will be nil.

There might be a small cost in reduced tax receipts — those who currently take their pension while earning might be paying a higher rate of tax on the pension in payment — but even a small positive labour supply effect would be likely to offset that. And in the short run it would be all good news for the exchequer — lower pension payments, more work. It’s not often that there are costless win-wins in public policy, but this is one of them.

Amazingly this isn’t the most absurd impact of absurd public service pension rules on the Johnson household. My partner, same age as me, is a teacher, and has been all her working life. She accumulated the vast majority of her teacher’s pension under the old, pension at age 60, rules. As with the civil service pension, there is no actuarial enhancement from delaying taking it. If you defer taking it and claim later you get the arrears paid as a lump sum, with the obvious painful implication for tax.

The effect of the — staggeringly complex and confusing — rules is that you also can’t work full time as a teacher and claim the pension, and you risk losing pension if you retire and subsequently decide you’d like to return to teaching. The obvious conclusion, again, is that 60 is the time to cut and run.

These examples just scratch the surface of the problems created by our complex, expensive and unwieldy system of public service pensions. The unfunded schemes for, among others, the civil service, teachers, NHS, armed forces and police come at a gross cost of nearly £60 billion a year. That’s getting on for half of what we spend on the entire state pension for all pensioners. These schemes are not good value for money.

We know that many public sector workers would prefer more pay up front. Some don’t even join the schemes at all, despite their considerable value, because they don’t feel they can afford the employee contributions. All in all, generous pensions at the expense of lower pay is not an efficient route to recruitment and retention.

Reforms introduced more than a decade ago, following the report for the coalition government by the former Labour minister Lord Hutton of Furness, were supposed to fix the system. They may have improved it somewhat. They certainly didn’t fix it.

In an era of low to negative real earnings growth the method of calculating pension entitlements under the new rules has turned out much more generous than intended.

For some lower earners, despite a higher pension age, the new scheme is actually even more generous than the one it replaced. It is literally possible for someone who spends a career as a low earner in the NHS to end up with a pension — state pension plus NHS pension — higher than their average earnings.

That is not sensible. And the move to most pensions actually paying out at state pension age rather than age 60 is glacially slow.

There is a lot of unfinished business here. Grasping this particular nettle could help, just a little, with many of the government’s stated priorities: stabilising the public finances, improving public services, enhancing growth, and increasing labour force participation. There aren’t many things over which it has such direct control and where there are such obvious wins.

This article was first published in The Times, and is reproduced with kind permission.