Today in England and Wales, tens of thousands of public sector workers, many of them teachers, are expected to strike. Currently public sector workers largely enjoy more generous pensions than their equivalents in the private sector and the Coalition Government has acknowledged the growing difference in approach between the private and public sectors. The private sector long ago realised the rising cost and substantial risk involved in offering final salary schemes, based on years of service and end of career earnings, made them unsustainable.
The Coalition Government has a responsibility to ensure that pensions in the civil service are both fair and sustainable in the long term. As it stands, by 2015-16, £10bn per year will be needed simply to meet the gap between pension contributions and payments to the unfunded pensions they support. In difficult economic circumstances, we simply cannot ignore public spending in an area that will more than double within five years.
The cost of public sector pensions has spiralled out of control in recent years, with benefits paid out of the five largest schemes rising by a third in real terms over the past decade. The problem is that most of these are not funded, so the burden falls on the taxpayer. To give some idea of the scale, the value of unfunded pension liabilities was put by the government’s actuary’s department at £770 billion in 2008.
As a public sector worker myself, I fully believe that I and my colleagues deserve a decent income when we retire. However, presently, most civil servants have a system that is far more generous than pension schemes elsewhere in the public and private sectors. We must create for the Civil Service an affordable and flexible pension package with a sustainable balance between pay and pensions that is appropriate to the times. I think it’s also important to bear in mind that the private sector employees have already seen final salary schemes close and returns from defined contribution schemes fall.
It is completely wrong for the PCS, NUT, ATL and UCU unions to continue with this strike action whilst negotiations are still ongoing with the Coalition Government. However, I agree with the Coalition Government’s steps to ensure the long term sustainability of public sector pensions, while reducing the existing inequality – something Liberal Democrats campaigned for before the election. John Hutton published his report into public sector pensions in early October in which he emphasised the need for fairness when it comes to pension reform so that the lowest paid workers are protected.
Steve Middleton is Data Officer/Treasurer of Salford Liberal Democrats.
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31 Comments
There seems to be a lot of people missing the point when it comes to pensions. I think the arguments about the boomers having it all can be overdone, but there is a very serious problem with pension provision and the stark reality is that there is a real generational issue here. The unions seem to be going out of their way to avoid saying it.
It is telling how people seem not to appreciate how expensive a pension actually is – and similarly people don’t seem to think an income stream which costs the government and/or private sector operators £500k is actually worth £500k. Similarly I am staggered by how often people seem to say, quite without irony that £350k of house price inflation is not actually a real asset that can help with retirement.
The point is that pensions of £20k a year would have required much a much higher saving rate than almost anybody actually managed whether in the public or private sector, and that the shortfalls are being met from current tax receipts and company profits made today. At the expense of the young who are more likely to see martians than a good pension. But for the boomers, house price hyperinflation has filled in the cracks.
It is of course quite true to assert that final salary schemes have become prohibitively expensive mostly because of two main reasons. Annuity rates dropped right down (compared to the late 80s) partly due to longer survival rates but equally due to low interest rates and investment returns have been a lot poorer. Therefore, not only do you need twice as much in the pot (compared to the boomer generation), you also need twice as long to save for it. hence shortfalls. Thanks actuarial profession.
In the private sector, companies either increased the employer contribution, reduced benefits/asked the employee to pay more or, more commonly, closed/froze the scheme and moved to an affordable (i.e. worse) alternative. Though of course people are quite entitled to ask why it is that the private sector banks and finance industry has been unable to offer anything close to adequate pension provision via the private sector. It is something of a surprise to me that this never comes up.
So there you have it – private and public, the young hose money at the old. For pensions, for housing, for a protected NHS, plus all the other lollipops (included, it should be noted, a gold-plated earnings link). And the young look like they will have all the protection of the Big Society. Instead of telling us that human life is ‘unaffordable’ I would like one politician, from any party, to set out a vision of how we can make labour rather than rent-seeking pay enough for a pension.
Here’s a start – how about an economy where currency, not property, appreciates?
Oh, and to save anyone asking, yes – I do think the unions are being short-sighted. But I would be careful about the tacit statement here that all schemes are unfunded. Certainly the USS is fully funded.
“It is completely wrong for the PCS, NUT, ATL and UCU unions to continue with this strike action whilst negotiations are still ongoing with the Coalition Government”
I would agree with this up to a point. The trouble is that the Government has gone out of its way to antagonise the Unions (some of whom were just waiting for the opportunity to respond). It’s been the political equivalent of both sides shouting “Come and ‘ave a go if you think you’re ‘ard enough!”…….
If the Government go into negotiations saying, in effect, that there is nothing of substance to negotiate over then there simply is not a basis for talks. The same is true of Unions who believe that no change is a viable option (or a remotely possible outcome). Add to this the not very tinly veiled threats to change industrial relations legislation if unions do strike, and both sides have created an almost perfect storm.
This is where I would have hoped Lib Dems ministers could make a difference. Tories love playing hard with the unions, it appeals to their core vote. The Lib Dems, without this baggage and without Labour’s (in my opinion too close) relationship with the unions, could be the honest brokers here. This would be common sense for the country and common sense for the party as it would play well with those of us who believe in neither the Tory or the Union default positions.
Vince badly misjudged his comments to the Unions but seems to have made more neutral comments at the weekend. So here’s hoping some progress can be made. I must say I’m not hopeful though.
Certainly the USS is fully funded.
As are teachers pensions, both are being cut. This is why the government are liars when they assert that pensions are unaffordable. Some are, some aren’t, and we need to discuss how to make them all affordable. Not attack the affordable ones so you can give a tax cut down the line.
While I appreciate some of the public sector pensions are fully-funded, there are many which are not (and have huge funding gaps, which are only going to get bigger over the next few years). David Cameron commented yesterday that negotiations were still ongoing and Francis Maude was on Sky TV this morning talking about how not all of the schemes will need ‘massive’ contribution hikes from it’s members.
The government clearly wants to sit down with the unions and come to a compromise (something I think will happen), but the NUT were adamant they wanted to strike before the summer holidays. They didn’t even wait for the backing of Unison, the biggest union, simply because it would take too long to ballot their members.
Personally I don’t think this is about funding a tax cut near the end of this parliament – the present system is simply unaffordable.
@Steve Middleton
Why does the government want to cut fully funded pensions?
g – No. The TPS has an annual deficit of about £1bn. See para 14 http://www.bath.ac.uk/news/2010/01/18/uss-qanda/
Steve Middledton Firstly, it is not OK for the coalition to run around talking as if EVERY scheme is unfunded. And whatever Maude said, that absolutely is the line the Coalition has spun. There is nuance here and the Coalition’s obliteration of it grates. A lot. Or is the dislike of final salary ideological?
Whilst I am quite open to an argument that contributions should increase and people should need to work beyond 65 (boomers included – male and female) that is simply not what the government line has been. It has been about spinning an idea that all public pensions are the size of bankers’. There are much better arguments to be had about inequality in final salary pensions by the way.
Now I do accept that the teacher unions are an unlovely bunch at the best of times. But the Coalition has been spoiling for this.
g – my impression has been that this action has been taken following a full and comprehensive review of all public sector pensions (including the Police, who will retire earlier than 66 due to the nature of their jobs). It’s my understanding that this is about making the system fairer and equal for all, no matter where you work or what sector you are employed in. As a core Lib Dem value, I find that motivation hard to argue with.
Remember, I am directly affected by this action. My pension contributions will increase and I will work longer. I don’t like it, but I agree it’s fairer.
This kind of hyperbole polarises the debate, to the point where there is no debate, just people shouting at each other. What we choose to sustain, or what we choose to afford (pay for via taxation) is a political decision. To say “pensions must be reformed because they are unaffordable” is a circular argument.
Based on the projected costs after the CPI indexation change, the Hutton report says that the cost as a proportion of national income will decline, as Evan Davis has been trying to bang into Ministers on Today this week. For sure, some of the unions reject the indexation change.
Hutton argues that public sector pensions need reform because they are overly generous and a bad deal for taxpayers. Let’s stay away from the hyperbole.
@Steve Middleton
g – my impression has been that this action has been taken following a full and comprehensive review of all public sector pensions (including the Police, who will retire earlier than 66 due to the nature of their jobs). It’s my understanding that this is about making the system fairer and equal for all, no matter where you work or what sector you are employed in. As a core Lib Dem value, I find that motivation hard to argue with.
Remember, I am directly affected by this action. My pension contributions will increase and I will work longer. I don’t like it, but I agree it’s fairer.
Umm so, you think a race to the bottom for employees pension rights is about making the system fairer? Why not argue for employers increasing their obligation to the long term welfare of all their employees, not just their top management?
I totally agree with JustAnotherVoter. I am a teacher and am striking today; having previously worked for a Lib Dem MP for 5 years. I hope you have listened to this exchange on the Today Programme this morning Steve Middleton. http://news.bbc.co.uk/today/hi/today/newsid_9526000/9526631.stm
If not, please do and then explain to me why “the present system is unaffordable” when it is going to cost taxpayers LESS as a proportion of GDP in each of the next 50 years. You may want to actually read the Hutton Report (http://cdn.hm-treasury.gov.uk/hutton_final_100311.pdf). The relevant analysis is on page 23.
g, it’s not a “race to the bottom” as you term it. I can see we have differing views on the government proposals, let’s leave it at that.
I haven’t listened to the Today Programme this morning (but I will, when I return to a PC with audio access), but I read the accompanying article below the audio clip. Two paragraphs stick out:-
‘The Hutton report made it clear that the current public sector pension system was no longer “tenable” and the PCS union had “jumped the gun” and taken “premature action” he said.’
and
‘Under sustained questioning on the issue, Mr Maude said that the pension system “will be unaffordable” if changes were not made.’
So, whether it’s unaffordable right now or will be unaffordable in the near-future – surely that’s just semantics. Would you take out a mortgage now, knowing you could afford the payments, but also knowing that in 3-5 years your repayments would go up to an unaffordable level? The Labour party seem to think those types of economics are acceptable, clearly the coalition do not.
“So, whether it’s unaffordable right now or will be unaffordable in the near-future – surely that’s just semantics.”
Why don’t you have the courtesy to read what people have written?
Obviously what is “affordable” is a matter of political choice. This kind of choice is at the very heart of politics, for God’s sake!
We are not being offered a choice. We are not being offered a sensible debate. The government is just giving us tabloid slogans and a caricature of proper discussion – just as it has in so many other areas.
Steve Middleton “Why today’s strike action is wrong”
Todays strike action is right because the members of the unions voted for strike action. It’s called democracy,
Now you can question their arguments for the strike which you do in your post, but to question their right to strike, as you title suggests, is not very liberal.
I suppose you voted against this strike, in which case you should respect the fact that you lost the argument with the majority who voted and continue to argue your case about pensions to them not state that the action of striking is wrong.
Clearly this is all about policy choices – what the govt chooses to spend money on – and the government’s seemingly inexhaustible antipathy towards the public sector.
I’m a bit puzzled by the comment that this is not a race to the bottom.
Private companies took the opportunity a few years ago to move away from final salary schemes to less generous alternatives. Whether they had to do so because the schemes were unsustainable or whether they chose to do it to reduce employers’ contributions and increase profitability (and hence, no doubt, senior management remuneration) is no doubt something that could continue to be debated.
Whatever the reason, the change opened up a gap between private and public provision. The government has constructed this gap as indicating that public sector pensions are gold-plated and unnecessarily extravagant – just another example of the cushy life of those in the public sector. The proposal is a leveling down of provision. Yes, it could be constructed as greater equality. But greater equality in this case means a lower standard of provision overall and more poverty in old age for a larger proportion of the population (which means that the costs to the public purse are likely to reappear under other budget headings so it’s something of a false economy).
You could argue that such a leveling down isn’t a “race to the bottom” because private sector employers are yet to respond with further cuts in already meagre pension provision and a downward spiral hasn’t yet taken hold. But the race to the bottom metaphor appears apposite.
It seems to me that no one (with the possible exception of the more extravagant statements by the PCS) in this debate is arguing that nothing should change, if there is an underfunding problem that hasn’t already been dealt with. But at the moment there isn’t even agreement about whether there is a problem, let alone what size it is. A modest problem calls for a modest adjustment to funding the scheme. It doesn’t require leveling down for the sake of it. Shouldn’t we be seeking to level up, rather than drag down?
Much of the public discussion on this topic is a fog of misinformation and misleading information. The segment on Breakfast TV this morning was a great example of commentators seemingly making up ‘facts’ (like public sector workers each having a £500k pension pot) and big scary numbers to justify change. One commentator linked the need to reform public sector pensions to the situation in Greece, with the implication that unless this change was made the public sector unions would be responsible for bankrupting the country. This sort of stuff is just extraordinary. The guy from the IEA came out with the figure of £5tn as the cost of public sector pensions. You can only get to such numbers by making utterly implausible assumptions (eg it all has to be paid out tomorrow) or making stuff up. It makes rational debate impossible.
My ex-wife, a school teacher, had expected to take retirement in 2013 and now has to wait another six years. She is just the wrong side of the cut-off line and will have to work another 20% of her working life to get an inferior pension at the end of it. The French closed down the country for a one year increase from 60 to 61.
I think Alex makes some good point about the misinformation that has been banded about – certainly I have found the statements coming out of PCS to be bordering on the outlandish today (accusing the government of not being serious about negotiations and just talking). But I don’t think it’s justifiable for tens of thousands of people to walk out on strike because some of the negotiating team have political differences and cannot reach agreement straight away. The Liberal Democrats and Conservative parties managed to negotiate an agreement to govern a whole country together, but it took a little time – all the unions and the government need to return to the table and not just talk, but listen!
I do feel sorry for Keith’s ex-wife, that’s not a great situation to be in – but are you proposing we act like the French and bring this country to a standstill? Can you contemplate the economic damage to the UK should that happen?
It’s worth pointing out that any pension rights already accrued won’t be lost, Keith, your ex-wife will still be able to retire in 2013 and take the pension benefits she already has at that point. Looking at many of the examples I have seen, I fail to understand how those extra 2 years in the “new rules” will materially affect her (what I assume is) already healthy pension pot. She should seek professional advice from a pensions expert.
Sorry but where the teachers are concerned I think they have a perfect right to strike and I don’t buy any of the arguments that they shouldn’t. I’ve blogged on it here http://aviewfromhamcommon.blogspot.com/2011/06/have-i-mentioned-that-i-used-to-write.html
Steve, if you’re going to post an article it’s a good idea to know something about the subject.
Public sector pensions are affordable becuse of changes made over the last few years. See http://blogs.telegraph.co.uk/finance/jeremywarner/100009757/theres-nothing-unaffordable-about-public-sector-pensions/ The cost of public sector pensions is set to decline back towards 1% of GDP, well in line with the historic cost of such provision.
The Warner article argues for changes in public sector pensions on entirely different grounds, which to me boil down to free-market spite against the public sector coupled with the belief that public sector pensions must be reduced to disguise the awful mess private pensions companies and firms have made of private pensions provision.. Leave public pensions alone and take steps to improve private provision, otherwise the taxpayer will be paying billions in means-tested benefits to support private sector workers whose companies have abandoned them.
Steve, you still haven’t explained why they will become “unaffordable” given that they will cost less as a proportion of GDP in future years. You appear to believe that if a Tory politician says something is going to happen, it will – even if the facts suggest the complete opposite.
“I have found the statements coming out of PCS to be bordering on the outlandish today (accusing the government of not being serious about negotiations and just talking). ”
When Ministers state openly that the deal is the best that will be available and therefore that it will not be improved they leave themselves open to that charge.
More coalition line towing from shameless vote burglars.
let’s be honest if David Cameron stood up and said his pension policy was to cull 50% people approaching retirement in the next five years Nick Clegg would be on the Andrew Marr show giving his default setting excuse “being against a cull was easy in opposition, but the coalition needs to take tough action” And by the way Labour were planing to cull virtually the same number of old people”.
scrreeeeeechhhh …… the sound of a once great party scraping the very bottom of the political barrel. I despair at what people like the author here have done to our tradition.
I guess that the NUT wil not be providing free fish and chips for representatives at this year’s LibDem Conference?
Public Sector Pensions will get more affordable. Fact. See Hutton.
Or listen to Francis Maude getting turned over on Today by Evan Davis.
http://liberalconspiracy.org/2011/06/30/audio-the-moment-francis-maude-got-rumbled-on-pensions/
Steve, you may also want to take a look at this http://blogs.channel4.com/factcheck/factcheck-are-public-sector-pensions-unaffordable/7138
If the Institute of Fiscal Studies, Public Accounts Committee, Office of Budget Responsibility, National Audit Office and Lord Hutton all said that the cost of your mortgage was going to fall as a proportion of your income, would you still accept claims that it was “unaffordable” or “spiralling out of control”?
Exactly Peter.
The way it is being portrayed is scandalous and the argument has been totally nailed, as you rightly refer too.
Steve Middleton needs to look at the facts (as clearly exposed in the Maude – Davis mauling), and his post of 1:09pm and then it would be big of him to come back to the thread and admit he is totally factually incorrect on the question of affordability.
Steve
“As it stands, by 2015-16, £10bn per year will be needed simply to meet the gap between pension contributions and payments to the unfunded pensions they support. In difficult economic circumstances, we simply cannot ignore public spending in an area that will more than double within five years.”
“cost of public sector pensions has spiralled out of control in recent years”
cost of public sector pension will decrease for the tax payer every year from now on becoming more and more affordable. public sector workers a high skilled graduates (mostly) like teachers who take a life of low pay compared to their equally qualified private sector counterparts. nowhere in the hutton report did it say these pensions are unaffordable – this coalition merely refuses to afford them. i work in the private sector and hope public sector workers keep their pension schemes – we all deserve fair pensions
There are two types of public sectors pension scheme, those that are funded and those that are unfunded. Most local government schemes (but not the teachers’) are funded and the overwhelming majority of these schemes have large deficits. However, in general, these schemes are allowed to eliminate their deficits over much longer periods of time that is permitted for comparable private sector schemes. This is on the basis that a public sector body cannot go broke and will exist in perpetuity (or else a successor body will take over the liabilities), whereas a private company could become bankrupt and therefore its pension scheme needs to be fully funded as soon as possible. Of course this has the perverse result that financially weak companies have to eliminate their deficits faster than financially strong companies (unless of course you’re RBS in which case the Government stepped in to prevent it going bust, thereby ensuring that Sir Fred Godwin received a pension running into hundreds of thousands of pounds compared to the £25,000 maximum paidto pensioners of companies that do go bust). However, even if the deficits in local government schemes are being eliminated over long periods of time (typically now 25 years), this does mean that local councils have a a choice – continue to provide pensions at the current level at the expense of other services, and in particular the increasing needs of an ageing population, raise council rates and other charges to unacceptable levels, or reduce pension benefits. This is therefore ultimately a political decision, and I have little doubt that faced with this choice, most voters working in the private sector would argue that reducing public sector pension benefits is fairer than the alternatives.
Civil servant pensions and those of teachers, are unfunded schemes. It is in reality therefore a nonsense to suggest that such schemes are “fully funded”. There are no assets to back the pensions in payment, though it has often suited governments and public sector unions to talk about a notional fund. (The same argument has been used in the past to justify increases to national insurance contributions, implying that state pensions were somehow dependent upon a periodic valuation of the national insurance fund). The payment of public sector pension relies entirely on future generations being willing to finance these from their taxes. The key argument therefore is whether it is fair for future generations to finance from taxes public sector pensions which young voters themselves will not receive in their old age, or alternatively whether it is fair, for instance, for care for the elderly to be restricted so that public sector pensions can continue to be paid at their current benefit level for far longer than was ever envisaged when these schemes were first devised.
It is therefore almost irrelevant whether or not public sector pensions will rise or fall as a proportion of GDP. The key political issue is whether voters regard public sector pensions as being more important than all other public services, even if demand for these services is increasing faster than the growth of GDP.
Graham, you state that “The payment of public sector pension relies on… taxes” but then conclude that their cost to the taxpayer (measured as a % of GDP) is “irrelevant”. Surely the cost to taxpayers is of some relevance to people who pay tax? Could it be that you wish to dismiss this fact as it does not fit with your view?
I am appalled that any officer of any LibDem local Party should be taking at face value what a devious right-wing Tory like Francis Maude would say about anything, and especially over ‘public service versus private profit’ issues.
As Graham rightly says, the Teachers Pension Scheme is unfunded, just as the State OAP is – payments to today’s pensioners are paid by today’s contributors, both employers (schools and local authorities -15% of salary) and employees (currently 9%). For teachers, the Government wants a) increase contributions to 12% b)increase the qualifying age to 68 and c) replace final-salary with career average salary as the basis. The Government’s position ignores the fact that following the 2008 changes, an audit by the Government actuary and reported (I think) to the Public Accounts Committee found the scheme to be broadly in balance and sustainable.
For the average teacher, the Government’s demanded increase in contributions is equivalent to a pay cut of over £1000pa. This cash will go straight to the Treasury, (as the TPS fund is only notional) giving around £1bn of additional savings or a ‘war chest’ of £4bn to spend on tax bribes to buy votes in 2015. Interestingly, the Government side has persistently refused requests by the teachers’ unions for a repeat of the 2008 audit to justify their demands.