Public sector pensions: John Hutton’s views so far

I’ve not yet had time to fully digest all 176 pages of John Hutton’s interim report on the future of public sector pensions, but here are some parts which have stood out so far and look to be the key issues for the future:

I have been struck both by the enormous complexity of the subject matter, as well as by the degree of misunderstandings and confusions that surround any debate about it. My report tries to dispel some of these myths. It is mistaken to talk about ‘gold-plated’ pensions as being the norm across the public sector. In the most part, the pensions that are paid out to public service employees when they retire are fairly modest by any standard, although in part these reflect part-career or part-time working. For some people these modest pensions now look over generous because of the changes that have taken place in the private sector over the last 30 years or so, where pensions have become generally much less valuable than they used to be. Fewer people in the private sector are also contributing to a pension. I hope these negative trends can be reversed and I fully support efforts to do so.

This downward drift in pension provision in the private sector does not however provide sufficient support or justification in my view for the argument that pensions in the public sector must therefore automatically follow the same course … I have therefore rejected a race to the bottom as the only answer…

Final salary schemes, which are the norm across much of the public sector, primarily reward high earners who progress rapidly through the salary scales…

All these past reforms [to public sector pensions], the current pay freeze and planned workforce reductions will reduce the future cost of pensions. The gross cost of paying unfunded public service pensions is expected to fall from 1.9 per cent of GDP in 2010-11 to 1.4 per cent of GDP by 2060 …

However, these measures will take many decades to fully affect the costs of pensions in payment, which are heavily influenced by existing pensioners, the vast majority of whom are still in pre-reform schemes. The Commission estimates that gross expenditure on unfunded public service pensions will remain close to current levels as a proportion of GDP over the next decade…

The increase in longevity also means that these pensions are now likely to be paid out for longer, increasing the overall costs. These extra costs, despite recent reforms, have not been equally split between employer and employees…

The most effective way to make short-term savings is to increase member contributions and there is also a clear rationale for doing so…

Evidence to the Commission has also made it clear that current pension structures, combined with the requirement to provide comparable pensions (‘Fair Deal’), are a barrier to non-public service providers, potentially reducing the efficiencies and innovation in public service delivery that could be achieved.

The lack of long term cost increases (as a proportion of GDP), the way the schemes particularly benefit those who end up in the best paid jobs and the view that decreasing private sector pension schemes is no reason for the public sector to follow suit all look towards a final report that may recommend many changes of detail but will not propose radical reductions in overall public sector pension provision.

Here is the report in full – and do post up a comment if you spot something significant somewhere in the details:

Independent Public Service Pensions Commission: Interim Report

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36 Comments

  • Just as the Orange Tories are being used by the Blue Tories as a fig leaf for their viscious cuts so Lord Hutton, an ex Labour minister, will be used as the convenient justification for attacking the risible pensions of most public sector workers who are already having to have their wages frozen so that the bankers can go on enjoying their massive bonuses . Every day it becomes clearer that women, children, the poor and low paid public sector workers are the ones this craven coalition has decided must pay for the excesses of the ruling class.

    @Mark Pack
    A question for you Mark. Within hours of Ed Miliband delivering his conference speech LDV was asking for comments on it. What did you think of it? etc. I anticipated a similar thread after Cameron’s speech yesterday, but none was forthcoming. Why the deathly silence on Cameron’s speech Mark? Could it be to do with the fact that in his speech Cameron committed himself to renewing Trident? I warned the Orange Tories not to put the champagne on ice prematurely!

  • I think it’s a very sensible and balanced report. I can’t see Gideon and Dave appreciating Hutton specifically rejecting the “gold-plated” tag, and it’s also positive that he has rejected a “race to the bottom”.

    Interesting that he also comments that (some) of the reason that private sector pensions tend to be lower than public sector is that private sector workers make less provision (ie payments) for their own pensions.

    Some public sector pensions are already doing what Hutton proposes – eg the NHS 2008 pension, for NHS employees entering the scheme post April 2008, has switched to 65 and gone to average-earnings.

  • MacK
    for attacking the risible pensions of most public sector workers

    I’m not sure if you appreciate how offensive that “risible” comment is to most people in this country. It does display a singular ignorance on the subject of pensions.

    Perhaps you should read the Interim Hutton Report.

  • @ Simon Shaw

    Public sector pensions are risible, I don’t think you realise how offensive it is to local government workers who get an average pension of less than five grand a year being told they have this awesome gold plated pension.

  • @MacK- can you explain how bankers bonuses are the cause of public sector wage freeze. The tax and NI on these bonuses is what is paying part of the wages in the first place!

  • I would imagine that I’m the same as many others, in that I haven’t got time to sit and read the report in one go and I’m having to read it in bite size chunks. From what I’ve seen so far, it does try to strike a balance but (again, from what I’ve read so far) it does appear to perpetuate one myth – i.e. that the Armed Forces Personnel don’t contribute to their pension. I can’t see any Gov. moving to a contribution model for this group as the real cost borne by individual service personnel would fall onto the state.

  • Anthony
    Public sector pensions are risible

    And you wonder why the Daily Mail et al constantly have a go at public sector workers.

    Mark Pack is spot on. If you are going to talk about an average LGPS pension of under £5000, you really need to tell us the average length of service which earns that.

    Would you be good enough to confirm that for someone on (say) £18,000 pa, the current Local Government scheme would give a pension of £12,000 pa after 40 years – and that’s before the state retirement pension of around £5,000 pa.

    So, in work, their earnings were £18,000 pa.

    In retirement, above state retirement age, their pension would be £17,000 pa.

    And that’s risible?

  • With pensions, public or private, I think there is an “implied contract” to consider which is in place from the time someone joins a pension scheme. This contract says what the pensioner can expect (final salary or money purchase for example) and I believe the pensioner is morally entitled to base his sums on that throughout life. He’s not entitled to stop paying the contributions agreed, and the pension provider is NOT morally entitled to move the goalposts.
    I haven’t read every word of Hutton or anything else in detail, and I don’t recall seeing that mentioned, even though to me it is a basic truth……

  • @Mark Pack that’s the average figure, of course those who pay in for less time get a smaller pension, the same argument you’re making in terms of lowering the average figure can be used in reverse for those who are in the scheme for 40 years, they inflate the figure.

    @Simon Shaw, First of all, when The Daily Mail reviewed public sector pension schemes a while back they were rather kind to the LGPS and pointed out it was a funded pension scheme.

    Secondly, no, they don’t get £12,000 a year, they would in 38 years time on the current scheme because it changed in 2008, those who paid in for 40 years prior to 2008 would get £9,000 a year (before tax of course) and a tax free lump sum of around £27,000. The tax free lump sum has been replaced by a higher accural rate, which would mean that since 2008 the rate is 1/60 instead of 1/80 but there’s no tax free lump sum, if they want a lump sum they exchange it for a lower annual pension.

    Are you seriously arguing that people who have been paying into a pension scheme for 40 years shouldn’t be getting a half decent return? If you’re not getting a half decent return after 40 years of paying into a pension of your choice then you should go see a financial advisor. I know people who are in better private pension or former company pension schemes and I know people with worse private pension schemes.

    On average the LGPS isn’t great, for some it’s a very good deal, but that’s why people pay into it.

  • @Anthony

    Pensions are always an emotive issue – however Simon did ask his question of someone on the current LG scheme – which would be the post 2008 scheme, I assume that those on the old scheme would have some sort or preserved rights to that system, but it is still the old scheme. By your own figures, the new scheme would indeed give 12k.

    I would guess that the reason Mark asked the question was probably due to the emotive nature of your original comment, which was worded in such a way that people could think that you were claiming that 4k is the norm and not the average for everyone from 1 to 40 years service.

  • @ Chris_sh, yes you’re right, they are an emotive issue and I think it should be pretty clear now that I’m not trying to mislead anyone on some of the realities of public sector pensions, the example I gave figures for is above average but is a decent pension, plenty of people would be happy with a company pension in that range.

    However there have been changes to public sector pension schemes, this is often not reported and we have already seen changes in contribution arrangements in the LGPS, which changed from a flat 6% to 5.5% – 7.5% depending upon how much you earn.

    Public Sector workers are rightly wary of pension changes, but they are not averse to change, they’d rather work with government than battle the government over pensions, they aren’t blind to the realities of pension schemes needing to be affordable.

  • @Anthony
    I think you are agreeing that my figures are correct. As Chris_sh pointed out, I did refer to the current LGPS.

    What I, and, I would guess,most people in this country find so objectionable is that you describe the amount which public sector pensions pay out as “risible”.

    For example, are you actually aware how much council taxpayers pay into the “risible” LGPS? In my own council currently around 75% of the total cost comes from the council taxpayer.

    My main complaint about what you said is that arrogant, misleading and selfish comments merely play into the hands of people like the Daily Mail.

  • @Simon Shaw, where are you getting this 75% figure from? Are you basing this on salaries and employer contributions? LGPS is a funded pension scheme, the pensions are paid out of the fund, not general taxation, so unless you’re basing this on employee costs, it makes no sense to throw around figrues of the scheme being 75% funded by council tax payers.

    When you look at the sums people receive, they often are risible, how many people do you think work in the public sector for forty years as opposed to people like Mark Pack and myself who have spent time working in both sectors and so won’t be drawing two thirds of our salaries when we claim our pensions?

  • @Anthony
    Simon Shaw, where are you getting this 75% figure from? Are you basing this on salaries and employer contributions?
    Yes – where else would it come from?

    Employer contributions are currently around 3 times the level of employee contributions.

    So for every £4 paid into the pension fund £1 comes from the employees and £3 from the employers – that’s 75%.

  • Anthony
    When you look at the sums people receive, they often are risible

    That’s actually offensive garbage.

    Are you seriously suggesting that those working in the public sector for only 5 or 10 years (as you, Mark Pack, very many other people, and I, have done) should expect to get a pension from that employment of the order of half or more of our/their final (or, indeed, career average) salary?

    To do so would require employer contributions to rise to in excess of 50% of salary.

    Completely bonkers!

  • Simon Shaw: “Are you seriously suggesting that those working in the public sector for only 5 or 10 years (as you, Mark Pack, very many other people, and I, have done) should expect to get a pension from that employment of the order of half or more of our/their final (or, indeed, career average) salary?

    To do so would require employer contributions to rise to in excess of 50% of salary.

    Completely bonkers!”,/i>

    Don’t be preposterous, I’m not suggesting anything of the sort, I’m suggesting it’s a more common use case of the pension scheme that people who have only contributed to the scheme for a short period are recipients and the individual payouts aren’t huge sums individually.

    There will be far more people with an annual pension below 4k than above it from this pension scheme.

  • Anthony
    Don’t be preposterous, I’m not suggesting anything of the sort

    Yes you were. To quote you exactly, you said that “Public sector pensions are risible.” You claimed that average local government pensions were less than £5000 pa.

    You initially failed to mention that this figure is the accrued pension from the average time spent working in local government of around 10 years, rather than from a full career.

    So if you really think that the level of public sector pensions are “risible” we can only deduce that you think they should be substantially increased.

    Wouldn’t it be much easier if you merely apologised for using the word “risible”?

  • The reason that private sector pensions are so execrable is that in the eighties they were discredited by mis-selling scandals. Nobody had any confidence in the crooks and charlatans that were offering private sector pensions that the Tory government were promoting. That’s why private sector workers are so now so bereft of pensions. Public sector pensions, on the other hand, have always been honestly administered, which is why public sector workers get the rewards of all the contributions they have paid in. And it’s why the private sector hates
    public sector pensioners because the example of public sector pensions reflects the probity of the administrators of those pensions and by reflection reveals the incompetence and downright criminality of those who provide (ha ha) private sector pensions. Private sector pensions are a paradigm for the sharp practices of the private sector.
    Remember Maxwell? Now Hutton wants us to accept the criteria of private sector pensions in the public sector.
    Shame on him!

  • @Simon Shaw, putting words into people’s mouths is extremely silly, especially when you’re wide of the mark. I did not say that public sector pensions need to be substantially increased, end of story.

    There are more people picking up a pension of 4K or less a year from the LGPS than above it, that’s a fact, length of service is a factor, as is salary.

    Most people wouldn’t consider a pension of around £75 a week as excessive.

  • @Anthony
    Clearly my understanding of the word “risible” is different to yours.

    How would you define it?

    Also, have you ever considered that someone who works (say) 10 year in the public sector – from which they derive a pension of (say) £4000pa – will normally have worked around 30 years in the private sector. Are you saying they have no private or company pension from those 30 years?

    Do you not understand how “risible” your logic is?

  • @Simon Shaw, to get a pension in the LGPS of 4K after ten years you’d have to have a final salary of 70K per annum, now I know there has been an increase in higher earners in the public sector, but your average local government worker is not earning 70K, so let’s get real here. A more likely scenario is someone on 15K being there for 20 years and drawing a pension of less than 4K.

    Private sector pensions are notoriously poor these days, this wasn’t always the case, some employers asked their employees to make no contributions, I believe John Lewis still have a non contributory final salary scheme, that’s their choice and their funds of course.

  • @Simon Shaw, apologies, I’m talking rubbish!

  • I note that no one is willing to refute my argument!

    @Mark Pack

    Come on Mark. Where’s your reponse to Cameron’s speech?

  • @MacK

    If you are referring to your posting at 7.39pm this evening, I think no-one has commented on it as virtually every assertion you make is manifestly incorrect.

  • @MacK
    I refute that statement if it makes you happy.

    Private COMPANY pensions are not as good as they used to be because they had “Contribution holidays”, it was nothing to do with the issues surrounding the sale of “Private PERSONAL pension plans”.

    ” have always been honestly administered”
    Always is a very long time, I assume that you believe that the government skimming of public pension scheme surpluses in the old days was honest then – not very New Gen Lab.

    The reason that both systems (plus the state pension) are going to be in a mess in the future is that everyone worked on the basis that you’d retire at 65 and be dead by 70 (max), now life expectency is increasing and people are expecting to live to 80+. It’s this forthcoming mess that needs to be sorted, hence the deferment of the state pension and the fact that everyone will be paying more for their private/public pensions.

    If companies hadn’t had those contribution holidays and the various governments (of all persuasions) hadn’t dipped their fingers in the till things may have not worked out this way, but they did and now it has to be sorted.

  • @Chris-sh

    Thank you for your response. I certainly don’t think that the government skimming of public sector pension scheme surpluses was right but ‘contribution holidays’ were an absolute outrage and contributed to the demise of private sector pensioners. However, I was using the term ‘honest’ in the sense that, as far as I am aware, no public sector pensioners have failed to receive their pension when their period of contribution has ended. The exception has been those unfortunate people whom Thatcher’s government persuaded to transfer their public sector pensions into private sector schemes which either failed to provide an adequate return or actually failed to provide any pension whatsoever. It was Thatcher’s government which also abolished SERPS. Many people who paid into private sector schemes for years sadly failed to receive a penny back and now face a penurious old age.

    I suspect that the justification for raising the age at which public sector pensions are received because of increased life expectancy is a piece of cynical deception. and that implicit in the
    projection that many people will live beyond eighty is the assumption (and hope) that many won’t, and their pension will consequently never have to be paid out. Besides, it is not longevity in itself which is crucial but the quality of that longevity. Do we really want to be rescued by 68 year old firefighters? Or have our primary children taught by 70 year old teachers? Do we want 69 year old policemen confronting criminals? Or 71 year old surgeons operating on us? Do we want our windows cleaned by 72 year old windowcleaners?
    The solution to this mess should be a national scheme involving mandatory contributions. When I started working as a teacher I was astonished to discover that 6% of my monthly salary was deducted to pay for my pension without my consent and I could do nothing about it. As a young man, if given the option I would have opted out of the pension scheme. Now, I am grateful that I was unable to, because in old age I will not have to rely solely on the state pension.

  • @ Simon Shaw, I’ll try again after my massively ridiculous miscalculation, 10 years on a wage in your last two years of 30K would bring a pension of 4K. 30K isn’t a massive salary but it is above the national average.

    I can’t speak for all pensions, but you’re basing your 30 years in private sector on the basis of it being a third of the contributions of a public sector pension, this is certainly not true of all private sector pensions, my employer does not pay three times my contribution.

    John Lewis have a final salary pension scheme, that is non contributory, they are however a private sector employee with a stellar reputation for employee relations, it’s a shame there aren’t more.

  • Anthony
    10 years on a wage in your last two years of 30K would bring a pension of 4K. 30K isn’t a massive salary but it is above the national average.

    Three comments:
    1. I wasn’t saying that the average length of service in local authorities was 10 years – it was a round figure. I guess we would all assume it lies somewhere between 8 and 15 years.

    2. Under the “new” LGPS scheme, a final salary of £24,000, with 10 years service, would give a pension of £4000pa on retirement. 12 years ending on £20,000 would give the same pension.

    3. Of course, 30 years in the private sector is likely to produce proportionately less occupational pension than the 10 years (or whatever) in the public sector. That’s one of the key reasons why Hutton was set up. Although, as people working in the public sector are paid so much less than their equivalents in the private sector (at least that’s what public sector unions seem to think), there will obviously be bags of spare cash to top up into a private pension during those 30 years working in the private sector.

  • @Simon Shaw, yes you’re right, 24K on the current scheme, I keep calculating based on someone retiring today, which would be 8 years on the old scheme and 2 years on the new scheme.

    People are living longer, yes that’s why Hutton was setup and it is something that needs addressing, it’s not just an issue in this country, there’s some nastiness going on in Califronia involving Meg Whitman a Jerry Brown staffer and pensions, we do need a sensible debate on this, we don’t need a chainsaw.

  • The reason why the Blue Tories want to reform (i.e reduce) public sector pensions is because they are an obstacle to reforming and privatising the remaining parts of the public sector. Tony Blair tried to reform public services but the private sector wouldn’t touch them with a bargepole because of the public sector pension costs, Get rid of them and you make it easier for private companies to carve up the public sector. And then the Blue Tories can go for the State Pension. Don’t believe me? Go to the article by the director of Reform!
    http://www.spectator.co.uk/coffeehouse/6350733/hutton-points-the-way-forward-on-pensions.thtml

  • @MacK
    “I certainly don’t think that the government skimming of public sector pension scheme surpluses was right but ‘contribution holidays’were an absolute outrage…”

    They are one and the same thing though, the politicians skimmed the surplus from public sector funds and used it on their pet projects. Private companies had contribution holidays and those contributing spent the money saved on their pet projects instead.

    I try not to let outrage into my thinking as it just interferes with the thought process, plus of course a persons level of outrage is often proportional to their position in the political sphere.

    “… contributed to the demise of private sector pensioners …”
    Well it certainly didn’t help, but the recession isn’t helping either, I can’t imagine that the 2004 act helped either as funds felt pressured into purchasing government bonds (i.e. lend the government money), thus reducing the level of potential return on their investment.

    “Thatcher’s government which also abolished SERPS…”

    SERPS was actually phased out in 2002 and replaced by the state second pension. According to a well known ultra right wing institution (the TUC 😉 ), the S2P is “probably the most complicated – and least understood part – of the pensions system”

    “I suspect that the justification for raising the age at which public sector pensions are received because of increased life expectancy is a piece of cynical deception. and that implicit in the
    projection that many people will live beyond eighty is the assumption (and hope) that many won’t”

    That’s true of all pension funds, they make a best guess of who long the membership will live and budget accordingly. You may be surprised to learn that the Armed Forces Pension Scheme used to estimate that a large chunk of people who served the maximum possible time (i.e. enlisted by age 18 and discharged at 55) would be dead before they were 60, it all sounds callous but if they didn’t try to work it out there would be chaos. However, I’m not a member of a public sector pension so I can’t really comment on why they would increase the age (I would guess it was to do with affordability, have you checked their assumptions to see if the figures work, or is it just a gut feeling).

    “The solution to this mess should be a national scheme involving mandatory contributions ..”

    I hate to state the obvious, but we have that now and it’s called National Insurance, it’s been there ever since the implementation of Beveridge. But, of course, it was decided to put NI into the general taxation pot instead of setting up a seperate fund.

    For that reason, you may have problems persuading people that this is the way to go, especially as the political rhetoric since the time of Beveridge has been “pay your NI and get a pension”, thus implying that is an insurance for the future as opposed to a tax for the present. If that wasn’t bad enough, you can’t swap NI for a new contribution scheme as the current/near future state pensions still need to be paid for – so it would be classed by many as an additional tax. Then regardless of which party implements the change, the opposition will go to town on them.

    As I think I said earlier, pensions are an emotional subject – the only real way that it will ever be settled is for everyone to sit down and work out the true scale of the problem and then find a good solution (it doesn’t have to be perfect – as someone once said to me, never let perfect get in the way of good). This is unlikely to happen with politicians, so perhaps a group consisting of a wide vatiery of interested parties should be put together to sort it out and the politicians accept the solution that they come up with.

    With regard to your later post (“The reason why the Blue Tories want to reform “), I would remind you that John Hutton was the Labour Work and Pensions Secretary, so I some how doubt that there was some Conservative conspiracy. However, I will look at the link later.

  • @MacK
    “The reason why the Blue Tories want to reform (i.e reduce) public sector pensions is because they are an obstacle to reforming and privatising the remaining parts of the public sector.”

    The remaining parts? The public sector is vast and a lot of it can’t be hived off anyway. I’m thinking you may be stretching things on that comment.

  • @Chris_sh
    Posted 9th October 2010 at 8:01 pm | Permalink

    As I think I said earlier, pensions are an emotional subject – the only real way that it will ever be settled is for everyone to sit down and work out the true scale of the problem and then find a good solution (it doesn’t have to be perfect – as someone once said to me, never let perfect get in the way of good). This is unlikely to happen with politicians, so perhaps a group consisting of a wide vatiery of interested parties should be put together to sort it out and the politicians accept the solution that they come up with.

    Agreed, we can’t bury our heads in the sand on this issue, by the same token we should be looking for a system that treats our elderly with respect, pension arrangements in this country are by and large not good and pensioners are amongst the most vulnerable in society, the campaign should be for better pensions for all, not worse pensions for all, that’s the part that sticks in the craw of public sector workers.

  • @Anthony
    Posted 10th October 2010 at 12:03 am

    “by the same token we should be looking for a system that treats our elderly with respect, pension arrangements in this country are by and large not good ….”

    It would be very hard to disagree with that statement, again there are lots of historical reasons why we are where we are. I think it is especially true that the state pension has become a political sacred cow, hence the idea of taking it out of the hands of politicians (after dawdling around all day, it did actually occur to me that any future system would also have to be politician proof after implementation).

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