Think tanks press for reform of public-sector pensions as UK faces multi‑billion funding gap

A push to rethink the United Kingdom’s public-sector pension system is resurfacing as policymakers confront a long-running funding gap that has broad fiscal implications. Economists warn that the taxpayer carries a heavy burden from expansive retirement promises for public workers, with former Bank of England official Neil Record estimating the country currently owes around £6 trillion in pension income to public-sector workers and about £57 billion is payable in the current tax year.

Public-sector pensions are largely unfunded, operating on a pay‑as‑you‑go basis in which retirement incomes are paid out of current government revenues as workers retire. Projections cited by observers show an annual bill averaging just over £72 billion through 2105 to cover all retirement income due, even if public-sector schemes were closed today. By comparison, private-sector defined-benefit plans have dwindled, with roughly 661,000 workers remaining in such schemes. In most public-sector arrangements, retirement income is a function of years worked and average earnings, with inflation protection and no investment risk borne by the member, a combination critics say makes them far more generous than most private-sector equivalents.

Political and economic debate over these costs has been unusually quiet in think-tank circles. Many prominent groups have been reluctant to advocate sweeping changes that would challenge unions or disrupt political alliances tied to Labour’s leadership. In this environment, a handful of observers point to earlier proposals suggesting far-reaching reforms to place public-sector pensions on a funded footing, rather than a pay-as-you-go model.

In particular, commentary from New Financial, a publication focused on pensions and capital markets, has highlighted the potential benefits of funding public-sector pensions. A 2023 assessment argued that moving to funded schemes—where assets are ring-fenced and pensions paid from those assets—could save taxpayers hundreds of billions of pounds and enlarge the pool of capital available for infrastructure projects tied to growth objectives. The argument remains controversial in practice, given the political sensitivities around changing benefits earned by civil servants, teachers, and other public workers.

Some market observers describe the gap between public-sector defined-benefit pensions and private-sector equivalents as deeply unfair and financially unsustainable over the long term. John Ralfe, a pension expert, notes that civil servants often earn a pension close to 100% of their career-average earnings after roughly 42 years, plus a state pension, with inflation proofing. By contrast, a typical private-sector defined-benefit arrangement might deliver about two-thirds of final pay after around 40 years, without automatic inflation protection in many cases. Ralfe argues that the public sector’s pension framework remains too generous and too costly, posing a tax liability that future generations may have to bear unless policy action is taken.

Reforms attempted in 2015 were widely described as watered down after union pressure, leaving the public sector pension framework largely intact. This history helps explain why Reeves-era policymakers face a difficult balance: pursuing structural changes could provoke strong opposition from unions and voters, even as the fiscal case for reform becomes more pressing amid a looming multi‑decade funding challenge for retirement incomes.

Advocates of a funded approach contend it could reduce ongoing costs and channel pension capital toward long-term investments, including infrastructure projects that align with growth and productivity aims. Critics warn that shifting to funded schemes could transfer risk to taxpayers or expose retirees to market volatility if investment returns falter. The debate thus centers not only on fiscal arithmetic but also on the best way to protect public workers’ retirement security while ensuring the public purse remains financially sustainable.

With Labour’s policy space shaped by union influence and political constraints, there is no clear pathway to a rapid overhaul. Still, the dialogue around how to finance and deliver long-term retirement incomes is likely to persist as officials seek ways to close a roughly £50 billion gap in the nation’s finances. In the near term, the public purse will continue to bear the annual costs of existing pension commitments, a dynamic economists say will shape fiscal planning for years to come.