Taxpayers in the United Kingdom were overcharged by £17 billion last year due to inflated public sector pension contributions, according to financial experts. Treasury data for the 2025-26 fiscal year revealed that £59.4 billion was collected in pension contributions, while only £42.4 billion was necessary to cover the accrual of additional pension entitlements for public sector workers.

Neil Record, a former Bank of England economist, criticized the government for using elevated employer contribution rates introduced in 2024 to obscure the actual cost of these "gold-plated" pensions. He argued that the government’s approach creates the misleading impression that pension schemes are self-financing, despite contributions not being invested but immediately spent to cover current payouts.

Public sector pensions in Britain serve over three million retirees, offering guaranteed, inflation-linked lifetime payments. Nearly all schemes, encompassing NHS staff, teachers, civil servants, and the Armed Forces, operate on an unfunded basis. Contributions from current workers are used to pay existing pensioners rather than being saved or invested to fund future retirements, contrasting with private pension schemes.

Although contributions exceeded entitlement accrual costs by £17 billion in 2025-26, Record contends this “surplus” is artificial. He explains that incoming contributions are not reserved but expended, while pension liabilities continue to accumulate, effectively shifting financial responsibility onto future taxpayers. The pension payouts themselves have nearly tripled over two decades, rising from £19 billion in 2006-07 to £55.6 billion in 2025-26.

The apparent £3.8 billion surplus recorded in 2025-26 followed a rise in employer contribution rates in April 2024. For example, the NHS pension scheme’s employer contributions increased from 20.6% to 23.7%, adding £3.5 billion in annual costs, while the Teachers’ Pension Scheme saw an increase from 23.6% to 28.6%, costing an additional nearly £2 billion.

Daniel Herring of the Centre for Policy Studies described the surplus as an “accounting illusion,” noting that unlike private sector pensions, public sector pensions are unfunded and contributions are spent immediately rather than invested. He emphasized that such practices defer the financial burden to future generations, undermining claims that public sector pensions are self-sustaining.

The government has confirmed plans to reduce employer contributions for the NHS, Civil Service, and Teachers’ Pension Scheme from 2027, with possible reductions for other schemes to follow. Nevertheless, concerns about their affordability persist.

Baroness Neville-Rolfe, a former Conservative minister who advocated for a comprehensive review of public sector pensions included in the Pensions Act passed in April, highlighted the need for greater transparency. She noted that while projections from the Office for Budget Responsibility (OBR) suggest pension costs will fall from 1.4% of GDP to 0.9% over two decades, these estimates partly reflect a significant expansion in the public sector workforce. She urged scrutiny of the opaque accounting methods used, emphasizing that current employee contributions fund retirees’ pensions, obscuring growing liabilities.

Since reforms were introduced by the coalition government starting in 2015, intended to raise retirement ages and alter pension calculation methods, there have been no major changes. Some measures were later found to be age discriminatory, prompting compensatory provisions for existing workers that may cost taxpayers up to £19 billion.

A Treasury spokesperson rejected claims of overcharging, stating that contribution rates are determined based on the costs of benefits being accrued by employees plus adjustments for past over- or underpayments.