I was chatting with Tom McPhail a few weeks back and he explained to me why the Conservatives were the only party he could support. His argument was that they were the only party who wanted fiscal fairness in society. I didn’t understand what he meant until I read an article in the Times by hm a few days later.
I hadn’t considered this article as having anything to do with Tom feeling he was a Conservative, but then I read this on Twitter from a respected commentator in the FT
I’m not sure if Hunt is following McPhail or the other way round or that this is pure coincidence but here it is.
Jeremy Hunt, former UK chancellor, has called for DB #pensions to end for new civil servants.
“there is no justification for new entrants to the civil service being enrolled into the DB schemes that add to our largely unfunded pension liabilities.”https://t.co/i1Bkp1dln2
— Josephine Cumbo (@JosephineCumbo) October 24, 2025
If you want to read my thoughts on this, they are on this blog, but you don’t – you want Tom in the Times, here it is on my blog, here is the link to the Times original.
I know what he is saying, council tax is high and that’s partially because of funded local government pension schemes. Income tax is high and maybe Labour’s budget is fixed in the public’s mind (mine included) as demanding more tax for unfunded public sector pensions.
For many people, whether they read the Times or not, Tom’s concern about public sector pensions is linked to their own wallets. Tom is straight to the point in his sub.
Here are my thoughts on the value of public pensions (on my blog)
Here is Tom’s expanded version of Jeremy Hunt’s sentiment (in the Times)
Public sector pensions should be reformed. Not just because of the unfunded off-balance sheet £1.4 trillion liability, but because they are fundamentally unfair.
It would be unjustifiable for public sector workers to be paid three or four times as much as private sector workers for performing comparable jobs. Morally, politically, economically, it would be intolerable. Yet in respect of deferred pay — the money set aside by our employers to pay for our retirement — that is exactly what happens.
Comparisons between public and private sector employment are always imperfect; it is not like for like. Organisations such as the Institute for Fiscal Studies and the Resolution Foundation (think tanks), and the Office for National Statistics tell us that, broadly, private sector employees are, on average, paid a few per cent more than their public counterparts. There is a difference, but it is not significant.
On pension funding, however, the difference is far bigger. On average, private sector workers get employer contributions of about 6 per cent of pay, compared with an average of about 24 per cent in the public sector. What’s more, not only are the contributions radically different, so are the benefits.
Public sector pensions are defined benefit (DB), paying a guaranteed income in retirement; very few private ones are. In the private sector, pensions are usually defined contribution (DC), where the amount you get in retirement depends on the amount paid in and how your investments have performed. A crucial development in this comparison is the impending imposition of inheritance tax on DC pension pots after death.
A compensating benefit of the non-guaranteed DC pensions has been the ability to leave a pension lump sum to any beneficiaries, such as adult children. From April 2027, this valuable advantage is undermined by the threat of 40 per cent inheritance tax. This issue doesn’t arise with DB pensions as there isn’t any pot of money to inherit.
All our public services — the NHS, the army, local government — depend on the tax revenue generated from people and businesses trading goods and services and, in the process, creating wealth and economic growth.
Without the taxation of the private sector, there is no public sector. There is therefore a moral issue in the imposition of taxes across the economy if that tax revenue is then used to make egregiously generous provision for public sector workers.
A counter-argument is to advocate for more generous pension provision across the board: private sector employers should just provide generous guaranteed pensions too. Except private sector employers, exposed to the competitive pressures of market forces, have elected to dispense with such provision. Public sector employees are shielded from these competitive pressures. This is manifestly unfair.
So what could reform look like? There are two important and under-reported consequences of the unfunded nature of public sector schemes. Firstly, it is a disincentive to reduce the workforce. A cut in employees means a reduction to the inflows of new money in the form of contributions, while the outflows are already baked in.
Secondly — and more importantly — any reform of public sector pensions involving a shift to a funded model, such as the DC schemes which dominate the private sector, means the government would have to pay twice over: once to fund the benefits for today’s retired members and a second time to meet the cost of employees’ new DC contributions.
Phase out the DB schemes and replace them with collective defined contribution schemes. These are a hybrid model, involving shared investment and longevity risk but without the guarantees of DB schemes.
The Department for Work and Pensions is overwhelmingly in favour of such schemes for the private sector, so let’s see it put its money where its mouth is. We should start with the MPs’ scheme, even though it is not short of money, they should lead by example.
The trickier part is paying for it. Some cost savings can be achieved simply through the switch: for example, if you have a budget of, say, 24 per cent of pay to play with, move to a 15 per cent employer contribution to a collective DC scheme, give your employees a 5 per cent pay rise and bank the remaining 4 per cent.
Over time, I would also look to save money for the government across the entire pension system by phasing out pension contribution tax relief (older homeowners will remember getting mortgage interest relief at source; it went, we survived) and compensating with a gradual increase to the mandatory employer contribution.
Tom McPhail was the head of retirement policy at the investment firm Hargreaves Lansdown
investment returns from fund managers are generally are low, rarely constantly in double digits.
Low productivity means limited savings capacity. Inadequate resources means poor retirement incomes.
Pensions are not the only source of income beyond work SEIS and EIS are platforms to consider. Cash ISA is not investing either.
To raise the U.K. from the lethargic habit of throwing more cash at a disappointing models EIS and real future infrastructure excellence can combine tax incentive and high value jobs, double digit returns and investable cash.
An example ( I declare an interest as an early stage shareholder)
https://finchetto.com/
Restore the pride by being innovative.The Universities have the opportunities now.
I need to declare an interest – I am in receipt of an unfunded public sector pension. One which I did not make any decision to accrue but which now in retirement provides me with the considerable reassurance of an inflation protected income to partially offset the now considerably eroded income from an annuity (bulk purchased some years ago) and the uncertain outcome from my personal pensions. (I do have over 50 years of pensionable employment).
What Tom and Jeremy Hunt appear to be saying is that we should reduce the retirement income security of future public sector employees to match the inefficiencies of the DC pension universe.
On the funded versus unfunded issue, I do know that employer sponsored DB pension schemes have added very considerable unnecessary costs onto employers in the last two decades. We are now seeing that position reversed, where employers with open DB schemes have the opportunity to reduce their future employment costs using past service surpluses and improved investment performance targeting long term rather than short term returns. I suspect the same issues have driven the employer’s cost estimation in both funded and unfunded pension arrangements.
Should we not now be targeting the best pension outcome for all workers and attempt to bring up the non public sector pension up to standard of the “gold plated” public sector benefit? In this way the burden on the future taxpayer will be reduced with lower demands for pension credits, housing benefits, etc. and increased requirement to maintaining a State Pension that compensates for the lack of inflation protection on other pensions. It would also increase the tax receipts from better off pensioners, like myself. To do otherwise are we not targeting lower current taxes at the expense of future generations?
This is surely a matter for the Pensions Commission!
Should have read:
I suspect the same issues have driven the employer’s cost estimation in both funded and unfunded public sector pension arrangements.
There is no value in diminishing the good. Keep the good we have and bring the schemes that need pensions – pensions. I would like to see schemes that have surplus, open to new accrual and for conversion of pots to pensions. This is already available for public sector schemes and one or two private schemes (I hope UKAS). CDC can help millions, those who want to build up cash and opt-out to manage it themselves – should be able to do so. But the “norm” should be a pension paid from pots either by Retirement CDC or by flex and fix or by annuity.
When we have recruitment and retention problems in many areas of the public sector, proposals to cut pay which this is don’t seem very credible way to improve things.
Let’s have a Pensions Commission for public service pensions! Just a minute. We had one in 2011 under a Tory led government and we ended up with the current benefit structure. A structure that that Government said was guaranteed for 25 years.
What does the author realize about the Conservatives’ idea of fiscal fairness after reading the article in the Times mentioned by Tom McPhail?
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