There are two fundamental problems with the analysis by the Institute for Fiscal Studies of the current negotiations on public sector pensions.
Firstly, the IFS compares public sector pension provision with that of the private sector and implies that the inevitable disparity has to be rebalanced by cutting the public sector rather than improving private sector provision.
Secondly, they choose to ignore the approximately £100 billion saved by moving from RPI to CPI and then says that if you exclude £100 billion and the fact that retired public sector workers’ pensions are going to have lower increases than before, they are better off.
But this is only true if one discounts the effects of the CPI switch and then assumes that their pay won’t keep pace with the annual indexation of each year’s contribution to their pension. But even so, the difference between the two is insignificant because the lowest paid workers’ pensions are going to be tiny on any analysis.
A straight comparison between public and private sector pension provision is always going to make public sector workers look better provided for. That is because regulatory changes to defined benefit pension schemes and tax grabs of pension assets by the Labour government coupled with over-enthusiastic intervention by The Pensions Regulator caused a run for the door by private sector employers, particularly when the recession hit.
Those closing their schemes have tended to replace them with cheaper, defined contribution schemes which dump all the risk onto the individual worker, and to which employers have contributed about half the amount they put in to the DB schemes.
And about 9-million private sector workers have no pension other than that provided by the state. Auto-enrolment is supposed to deal with this, but does not get round the fact that a growing number of private sector workers have so lost confidence in defined contribution pensions that they are making the decision not to save for a pension at all.
None of this justifies an attack on public sector pension provision. A decent pension is one of the foundation stones of a civilised society and the answer to the differential between public and private sector pensions is to improve the lot of the private sector.
As a taxpayer I am very happy that some of my taxes go towards paying for the pension provision of the people who have spent their working lives teaching our children, catching criminals, keeping us safe and treating us when we’re ill. The government should be setting an example to the private sector in its treatment of those it employs instead of chipping away at their pay and pensions – the average public sector pension, let’s not forget, is just £7,800 a year with women on half that.
The most urgent action this government should undertake is to defend private sector DB schemes and radically redesign and simplify DC schemes to give private sector workers confidence that their pension schemes can be relied on. There are several models being developed, some along the lines of the Dutch collective DC system which to my mind would be particularly attractive to those not in a DB scheme.
There should also be a serious investigation into the structure and levels of fees and charges levied by the pensions industry, in particular the investment banks: there is a case to answer that these charges are excessive. Action should be taken to rein this in.
It is because the private sector pension situation is in such crisis that I will be proposing a motion at the Liberal Democrat Spring conference in March, calling for all these actions and more.
It is worth recalling that 100 years ago, when the giants of Liberal history, Asquith and Lloyd George, proposed introducing the state Old Age Pension that the Tories howled that we couldn’t afford it. The Liberals introduced it anyway, and no-one would question its crucial role in helping to keep old people from dying in poverty. And how did the Liberals manage to pay for this vast new line of state expenditure? They taxed the rich.
The argument is not that we cannot afford to allow our working people decent pensions. We’ve got to afford it.
* Janice Turner is Vice Chair of the Liberal Democrat Campaign for Racial Equality
Follow @LibDemVoice on Twitter
Like us on Facebook
Subscribe to our feed
Sign-up for our daily email digest
Jago Hazzard on the complicated history of Turnham Green
Suitably inspired, I return to Suffolk
Investment, investment, investment.
Definitely a Lib Dem conference!
Ed Davey tries to name all the Lib Dem MPs while on a roller coaster
Fraser's West End ward surgeries later today #dundeewestend
What's next?
Simon R
Nigel Jones
Roland
Joe Bourke
Matt (Bristol)
14 Comments
While the sentiments expressed in this article are laudable, it makes no mention of the fundamental problem with pensions – that of changing demographics.
Put very simply, there are three variables in any pensions equation:
1) – the ratio of workers to pensioners (and how it changes if eg pensioners live longer and the retiring age doesn’t change)
2) – the transfer of value of contributions from present workers to present pensioners (either directly as in “unfunded” public schemes, or in the value of the companies who’s shares support funded schemes)
3) – the level of contributions taken by present pensioners
I keep waiting to hear those in the pensions debate addressing these issues properly – namely, that given the demographic shift caused by increased longevity we will have a ratio of 1 pensioner to every 2 workers in 2050 if the retirement age does not change.
That will necessitate either an unaffordable transfer of wealth to pensioners from workers, or a massive reduction in the value of what pensioners receive.
Society has to address this fundamental issue, namely that EVERYONE will have to contribute more, receive less, and retire later – and decisions have to be taken on how this is managed.
I agree with tabman that the article ignores some of the fundamental demographic drivers for pensions reform.
I am also again frustrated by the idea that the average public sector pension is ‘just’ £7,800pa. Public sector pensioners, like all pensioners, get the state pension on top of this, and the combined amount is a perfectly reasonable retirement income (and will be mor so if the Government’s longer term plans for the state pension are implemented). Of course anyone who has worked for their whole career, full time, on an average public sector salary, would get far more than that anyway.
Tabman is right. You have to take account of demographics. Remember too that the average pension, as I understand it, is for all retired pensioners, including those who did not work for very long in the public sector.
And of course, final salary schemes greatly help those who are well paid. Care average schemes are much more favourable to the low paid (and particularly to women), for any given total cost.
@Janice Turner
“As a taxpayer I am very happy that some of my taxes go towards paying for the pension provision of the people who have spent their working lives teaching our children, catching criminals, keeping us safe and treating us when we’re ill. The government should be setting an example to the private sector in its treatment of those it employs instead of chipping away at their pay and pensions – the average public sector pension, let’s not forget, is just £7,800 a year with women on half that.”
If you really believe that teachers, police officers etc really retire with a pension of around £4000 to £8000 per year then I can understand why you might be “very happy”, Janice. Sadly you are unbelievably adrift.
In fact if someone retires with 40 years’ service in the Local Government Pension Scheme on a salary of £36,000 they would receive an index-linked pension of £29,000 (including the basic state pension) for life. Slightly more than your £4,000 to £8,000, I think you’ll agree. The Teachers and Police Pension schemes are likely to be broadly comparable, but I happen to know more about the LGPS.
Are you really saying £29,000 pa pension is ungenerous?
While Tabman’s points are valid he does ignore the increasing surplus that is being held within the UK corporate sector – in no small helped by the reduction of their share of pension cost and the reduced corporation tax rates. Who is getting the benefits of that surplus?
Another point to bear in mind on pensions is the share taken by the fund management industry – which is hardly perfomance related at all. And the same people also fail to exercise proper corporate governance over the companies in which they invest our pension funds. Perhaps some of us would be more willing to bear the demographic pain with pensions if we were really all in this together and the government was seen as being tough with those who clearly have not managed our pensions very well at all.
“None of this justifies an attack on public sector pension provision. A decent pension is one of the foundation stones of a civilised society and the answer to the differential between public and private sector pensions is to improve the lot of the private sector.”
Totally agree with this balanced and thoughtful piece. This is an issue that needs careful consideration, not knee-jerk public-sector-bashing.
We keep getting told that the case for high contributions/lower payments/later retirement is a given, yet we are provided with few hard numbers to back any of this stuff up, just vague mutterings about “demographics”. Meanwhile across the channel the French have an older population and a much earlier retirement age, yet somehow manage to have a higher GDP per capita. Those who are clamouring for emaciated pensions really ought to explain just why countries like France seem perfectly able to sustain what we are told is unsustainable.
Tabman hits on one truth, that this is an issue for *society* to consider. Matters such as default retirement age are of fundamental importance to society as a whole – it isn’t something that a here-today-gone-tomorrow government should be messing around with on a whim, which is the big problem with the way the current government is going about imposing such sweeping changes with hardly any debate.
Liberal Neil: Even more frustrating is the fact that the *median* average public sector pension is just £5,600. So even with a full basic state pension, over half of all public sector workers will be getting by on about £11,500 per year. And of course, if they are from a low social class then they can expect to be drawing this huge sum for very few years beyond their 67th birthday. The recent pension changes are terrible from an equality point of view.
@Stuart Mitchell
“The recent pension changes are terrible from an equality point of view.”
No! Exactly the opposite in fact. As Tim Leunig has pointed, the switch to CARE from Final Salary represents the greatest single possible boost for fairness on pensions.
Also, what makes you think French pension arrangements are sustainable?
Stuart Mitchell – “We keep getting told that the case for high contributions/lower payments/later retirement is a given, yet we are provided with few hard numbers to back any of this stuff up, just vague mutterings about “demographics”.”
This is utter rubbish. 5 seconds googling will provide links to serious academic studies showing what the problem is. You don’t even need that; a basic grasp of maths will give you the same answer.
When Lloyd George introduced pensions in 1909 life expectancy was 70. People retired at 65 having started work as early as 12. Pensions only needed to be paid for 5 years on average and most of the population were working. Peoplevnow live into their 80s or 90s and start work later; a working life of 40-45 years has to support 25-30 years of retirement.
Can you spot the difference?
Indeed here’s a good link: http://www.google.co.uk/url?sa=t&source=web&cd=1&ved=0CCsQFjAA&url=http%3A%2F%2Fwww.ifs.org.uk%2Feconomic_review%2Ffp241.pdf&ei=EmAsT4WIBafU0QXJlaWCDQ&usg=AFQjCNE7IGuaIa9MZSDQWT8iTO8_NqWmaA
The low median figures for public sector pensions are distorted by the fact that most workers do not spend their whole career in the public sector. Hence the figures do not represent their entire pension.
I support the changes to public sector pensions. We need to save money in these difficult times and public sector pensions are ripe for reform, and even after these changes more generous than those on offer in the public sector.
I also agree that the government should also be trying to take measures to boost private pensions as well as making public pensions more affordable. Revoking Brown’s pension tax raid, and cracking down on the high fees and poor performance of private pension funds would all be welcome steps, as well as auto-enrolment, in giving us a sustainable pension system that provides all pensioners with decent incomes.
That said there are difficulties. I’m sure the government would have dearly liked to revoke the pensions tax raid but that with the deficit they desperately need the tax income.
“As a taxpayer I am very happy that some of my taxes go towards paying for the pension provision of the people who have spent their working lives teaching our children, catching criminals, keeping us safe and treating us when we’re ill.”
If this means subsidising, then why should only public sector be subsidised. What about the man who made your daily bread and the women who made your car ?
We cannot afford subsidies (except as a safety net) people must fund their own pensions, hence the need for change.
Simon: “No! Exactly the opposite in fact. As Tim Leunig has pointed, the switch to CARE from Final Salary represents the greatest single possible boost for fairness on pensions.”
I actually support such a switch, which is why I didn’t actually mention it in my list of concerns. It is the other aspects of the changes which are terrible news from an equality point of view. In some parts of Britain, a person retiring at 67 will have barely a couple of years retirement to look forward to after up to 50+ years of work. Such a person will likely be in poor health, and will certainly not be in a position to afford to retire early. This ought to provoke a howling sense of injustice in anyone who cares about equality.
“what makes you think French pension arrangements are sustainable?”
Well France have long had a retirement age of 60 (proposed to rise to 62). They also live significantly longer than us (by more than a year). Despite this, France has equivalent GDP and national debt to the UK, and a much smaller deficit.
Five seconds looking at the government’s own figures will show you that public sector pensions are already projected to become MORE affordable as a result of the reforms we saw in the last decade. The current frenzy to attack public sector pensions yet further is simply inventing a problem that does not exist. The sustainability of public sector pensions may have been a problem ten years ago – but it’s already been fixed. Now, as the OP said, we need to start looking at how we can improve the pension situation in the private sector, and you certainly don’t do that by impoverishing public sector pensioners.
The current approach of reforming public sector pensions every couple of years, on the dubious grounds that they have become too generous compared with the private sector, is never going to get us anywhere. We need to look at the pension arrangements for society as a whole and come up with a system that is affordable and fair to all.
The article fails to mention the flaw in final salary pension schemes. From a pension perspective, every promotion is backdated to the start of employment. This means that final salary schemes represent a transfer of pension assets from the lower paid to the higher paid.
The recent teachers strike was in support of head teachers’pensions!