Teeing up public sector workers like midwives for cuts in their pensions, Nick Clegg spoke recently about the “unreformed gold-plated public sector pension pots” that people like firefighters and soldiers enjoy. We hear a lot about the long-term cost of public sector pension schemes, as if they are a fiscal time-bomb ready to explode at the heart of the public finances.
Firstly, let’s take a look at the reality of these bounteous public sector pension pots. Take the average pension for a female NHS worker, £5,000. What is worse, half of all women pensioners who have worked in the NHS get a pension of less than £3,500 per year. That’s not so much gold-plated as tin-plated.
And let us also take a look at how much of an explosion in the public finances the public sector pension time-bomb will cause. Thankfully, to help us, the pre-Budget forecast report by the Coalition’s own independent Office for Budget Responsibility (OBR) sets this out in detail. Take a look at Table 5.1 of the OBR’s lengthy report, for example. This is information from the Treasury’s own long-term forecasts, which the OBR supports. We see that public sector pensions currently cost the taxpayer the equivalent of 1.8 per cent of GDP; that is predicted to rise to 1.9 per cent over the next 20 years, before returning to 1.8 per cent and then, by 2049/50, falling below current levels to 1.7 per cent of GDP.
So, over the next 40 years, the burden of paying for public sector pensions will remain pretty much static. No ballooning debt, no mushrooming of costs, no explosion of liabilities. Instead, the cost looks set to be steady, predictable and sustainable.
What is more, despite its portrayal as a tax-guzzling monster, the NHS pension scheme actually hands billions of pounds over to the taxpayer each year. More is paid into the fund than is paid out to pensioners, and all that surplus goes to the Treasury – thereby helping, not hurting public finances. Far from being the costly gold-plated public sector pension of tabloid yore, the NHS scheme is more like the goose that laid the golden egg.
The Deputy Prime Minister also refers to public sector pensions as being unreformed. Yet the NHS pension scheme has been reformed. The contributions made by NHS workers such as midwives have risen, as has the retirement age, and the taxpayers’ contribution has been capped – if the scheme ever needs more money either NHS employees have to pay more or benefits have to be cut.
Politicians have argued themselves into the policy objective of guaranteeing equal amounts of impoverished retirement misery to public sector workers as well as private sector workers. That should not be the goal, and certainly not for a progressive party like the Liberal Democrats. The real issue that seems to have been lost is how do we ensure that private sector workers, whose pensions have shrunk massively, have security in retirement; that is the real policy problem.
Professor Cathy Warwick is General Secretary of the Royal College of Midwives.
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15 Comments
Absolutely agree. The numbers involved in maintaining public sector pension provision at a decent level are not at all scary – unless your objective is to manufacture outrage as part of a wide-ranging assault on the legitimacy of public provision in general. That the Lib Dems should be complicit in such a crass attempt to level pension provision downwards so that poverty in retirement is spread more widely is deeply depressing. The real scandal is how private sector pension provision has collapsed so rapidly. Surely we should be aspiring to implement policies that level upwards in order to address inequality in older age.
Much of the argument about pensions is on the basis that money is a tangible thing.
It is not, it is a fictitious device which we choose to believe in because it keeps us co-operating together (religion used to do more of that job).
However it is done, underneath what is required in the future is just the same – younger people working, older people not working but still being provided with their needs and some comfort in life beyond that.
That is not changed whether those needs are provided by the younger people paying tax or some of the fruits of the younger people’s work being taken by the older people as they own property and shares.
As a university lecturer, I have paid large amounts of my income throughout my working life into the USS pension scheme. The impression that Mr Clegg and others are giving that people like me will get our pensions paid by the taxpayer is wrong.
When I started my career I accepted that I was choosing much lower income than my qualifications could have earned me in return for job security, freedom not to be bossed around by a management hierarchy, and a good guaranteed pension when I retire. Since then, the first two of these have been taken away, but the low pay compared to what those who graduated with me in my subject and who went into the private sector earn remains. Mr Clegg now proposes taking away the one thing that remains to balance out that comparatively low pay. He does so from a position of ignorance. It is not good that someone who leads us should get things so wrong.
I thought he was having a go at gold-plated public sector pensions, not saying that all public sector pensions were gold-plated.
Alex M, you are right, and coalition is a difficult thing. But at least our triple lock on the state pension will help level upwards to address inequality in older age as you requested.
Henry, it’s my understanding that the triple lock on the state pension only applies to people who have earned a full state pension while those who rely on pension credits to top up their pension (often women who have had their careers fragmented by caring for children or elderly relatives) will suffer the fate of all people on benefits – to have their annual rise in line with inflation measured by the least generous rate of inflation, resulting in a cut in real terms. This is not my area of expertise, so I may be mistaken, but this does appear to benefit the more able rather than the less able.
Public sector pensions are not gold plated. Just because private schemes have become unfair, is no reason for the public sector to follow suit. In terms of the living wage and a cap on bosses earning more than 20 times their lowest paid staff, the coalition seems to support the public sector leading by example. Why shouldn’t it lead by example on pensions too? Or is the public sector to only lead the way when it will cause them to be less competitive than the private sector?
Totally agree with Cathy Warwick.
The real scandal is how private companies took “holidays” from contributing to their final salary pension schemes when they were in surplus and have axed them now they are underperforming. This is just another example of big business shirking its responsibility towards society as a whole, along with tax avoidance.
The report published today on public sector pensions that was dressed up as coming from a “commission” when in fact it has been funded by right wingers and a bosses’ group just really takes the biscuit.
I wait in vain for either Nick Clegg or Vince Cable to give a forthright condemnation of what has gone on and for positive policy proposals to FORCE companies to take responsibility for their employees. When will they draw a clear line between themselves and the “hate the state” ideologues? Or are they on the same side of the barricades?
Why wait? Chris Huhne gave one just a few months back. It’s in the archives somewhere.
If you were expecting the new government to address all the economic problems within their first six months in office, sorry about that…
Yeah, that’s not what he’s talking about. Public sector pensions are currently set up on “defined benefits” schemes, which have been abandoned by the private sector in favour of “defined contributions” schemes. The short version is: a defined benefits scheme pays out the same amount regardless of whether the economy does well or poorly. If the economy does well, then the employer (government) pays less to support the scheme; if the economy does poorly then the employer (government) is left holding the bill. A defined contributions scheme is basically an elaborate investment account, the pension will be based on the performance of the investments, and there is no possibility of a shortfall – although you might get no pension at all if your investments fail.
Clegg is not talking about pensions being “gold plated” in the sense of paying too much money. He’s talking about moving them from DB to DC. Debates about what this means for workers are ongoing (influenced by the awful mess some companies have made of the transition), but it is undisputed that DB schemes are currently hurting government finances, and it is difficult to argue that public sector workers should get to enjoy DB when private sector workers don’t.
The actual average pension wouldn’t really be changed much by this. Individuals may get more or less.
Most of the complaints you hear about DC schemes are coming from people who have worked for decades on a DB scheme, and then had their employer force them over to DC when they’re due to retire in under 20 years, which means they lose a lot of money and their employer refuses to cover the difference. (This is the behaviour mentioned by the other poster)
The average figures, of course, include people who were only worked in the NHS for a little while. It isn’t really a very meaningful average. That is not to say that the pensions are unaffordable – they are affordable – but that figure is not a sensible figure.
@Tim
The average NHS pension also includes the pensions of very highly paid medical consultants and GPs, It’s disappointing for the average NHS worker to hear Nick Clegg attack them so directly – they don’t deserve such abuse when all they are trying to do is get enough pension to avoid having to rely on means-tested benefits.
@Andrew Suffield
‘it is undisputed that DB schemes are currently hurting government finances’
Did you not read the OBR report? The cost of these pensions will remain static over the next 40 years – and thats before the effect of contributions from employees is factored in. In the good years, the Government is happy to take the surplus of contributions over expenses, and now there are some tought times they want to make cuts? Thats unfair, and not something the Liberal Democrats should be supporting.
Contributions don’t really have an additional effect on the cost of DB schemes. This point will return in a moment.
Static is precisely the point: the cost in cash does not change, even when tax (or sales) revenue drops below the level needed to pay it. And that’s the problem with DB schemes. They’re based on the assumption that future revenue will always be above a certain point, and that the government will borrow or devalue if it isn’t.
You’re confusing this with the corporate abuses. A pension which is receiving contributions has no expenses: the pension holder is still working. There is a “surplus” because of working population growth: more people are working, and paying contributions, than people that are retired and claiming pensions. This is a pyramid scheme sort of thinking, which is why pensions don’t actually work that way. The cost of pensions cannot be offset by the contributions of people who are not yet claiming their pensions, and the government does not “happily” abuse this.
It’s actually not a cut, per se. It’s just a change in how the pension funds are operated, which has complex results that are not clearly better or worse for the pensioner, but are clearly better for the government. The value of pensions would not change overall, although individuals will experience some market-based variation in both directions, in the same way that they do with their savings accounts (it’s the same level of risk).
Now, it is possible to operate the transition from DB to DC schemes in a “cut” way, and screw over the people who are transitioned. That is what certain corporations have done, and that is what people are angry about. Neither Clegg nor anybody else in the government is proposing to do this.
As a female civil servant – thanks for speaking up Cathy!
I could earn far more in the private sector than I do right now but I choose not to as I want to use my skills for public service. The trade off for me has always been – lower pay in the short term but more security and better pensions in the long term. If they break their end of this bargain then they will see a lot us walking away…which is not good for anyone least of all the people that depend on public servants.
The only public sector pensions that are gold plated are the Parliamentary scheme and the Judges’ pension scheme. Everyone else’s is less generous than many private sector DB schemes were – for example, accruals on the basis of 1/80s rather than the typical private sector rate of 1/60 of final salary per year worked.
It is nonsense to say that public sector DB is hurting govt finances across the piece. As pay-as-you-go schemes, the civil service and other unfunded schemes are much cheaper Govt at the moment than a DC scheme targetting the same level of benefits would be – Government would have to be making contributions now against current workers accruals, rather than just paying pensions as they fall due.
Private sector organisations have moved away from DB for two reasons: value for money and volatility. Private sector employers are not backward in paying people huge sums of money – often much more than equivalent public sector jobs – where they think they get a benefit in recruitment and retention. But they have found that they don’t get bang-for-buck in pension provision as staff are myopic and prefer headline salary rather than future benefits. I don’t think the Government has evidence that public sector workers think the same way. And on volatility – the deficit or surplus on a DB scheme is the difference between the value of its assets (a large number that changes constantly as market values change) and its liabilities (another large number which changes in a different way) – this gives the large swings in deficit numbers. This volatility is now obvious through the FRS17/IAS19 accounting standards, and worries analysts and hence affects access to finance etc. Unfunded public sector schemes are not subject to the same volatility – there are no assets to value. Rather, there is a much more predictable cash flow need as pensions fall due. Volatility therefore doesn’t have the same risks for the public sector as it does for private sector organisations.
Let’s not pretend this is about fairness – this is is a mean-minded attack on millions of people who took lower salaries because they had a commitment to public service. I am going to reduce my LD subscription to the absolute minimum in protest.
Huge numbers of private sector workers, particularly those working for small firms, have never enjoyed the benefits of a company pension. Those who have enjoyed this benefit have tended to work for medium and large employers; it is these firms that are now abandoning final salary schemes (often called DB schemes). Many of the problems arise from regulations that have been imposed upon them by central government. These regulations were intended to improve the security of pension benefits, particularly if the sponsoring employer goes bust, but the result has been substantial increases in the cost of providing pension benefits. The regulations have not been applied to most public sector schemes – on the basis that their sponsoring employers cannot go bust. Given the restrictions on councils raising the council tax, the result is, for instance, that local councils cut services in order to continue to provide generous pension benefits to their employees.
Another major factor raising the cost of providing DB schemes is the accelerating improvement in life expectancy. This means that in reality inadequate financial provision was made to cover the cost of past accrued benefits. The new regulations mean that this deficit must be eliminated in a relatively short period of time, typically less than 10 years, whereas most public sector schemes are in fact funded on a pay as you go basis – if the contributions being paid by existing employees are insufficient to pay existing pensions, then the tax-payer or rate-payer simply makes up the difference. Lastly, private sector schemes have relied on the so-called out-performance of equities to keep contributions at an acceptable level, but in the past ten years, in real terms, the value of such investments has stood still. This has two consequences. Firstly, sponsoring employers have had to find extra cash to cover this real terms loss, and secondly, as they close their schemes to future accrual to cover this loss, they have to invest in “safer” assets classes, which produce smaller returns. They therefore suffer a double-whammy.
While it is true that during the boom years of the 1990s many large schemes were in nominal surplus (using actuarial assumption acceptable at that time) and their sponsoring employers took contribution holidays, in retrospect it is now clear that they were doing so on the basis that the good times would continue to role. However, the savings that they then made were actually quite small in comparison with the costs that companies now face. (It should however also be noted that by having these contribution holidays they inflated their profits and therefore paid higher corporation taxes to central government, which of course proceeded to spend this extra cash.)
Those people who talk about the small size of the “average” public sector pension seem to forget entirely that the average private sector pension is equally small – probably smaller because so many private sector employees in the past never had access to any form of employer sponsored pension. The reason why there are so many former public sector employees with small pensions is that many of these people will actually often have worked in the public sector for relatively short periods of time. Typically, you need to have worked for 40 years to get the maximum pension. In addition, it should not be forgotten that in addition to receiving an annual pension, public sector employees will have received a tax-free cash lump sum when they started to draw their pension.
It is entirely justified to describe public sector pensions as “gold-plated”. Firstly, until recently most public sector pensioners could start drawing their pensions at the age of 60, whereas in the private sector (with the exception of the financial services sector, and the big oil and pharmaceutical companies) the normal retirement age has been 65. If you start drawing your private sector pension at 60 you will usually suffer a reduction of up to 30% in the pension you receive. Secondly, these pensions have for many years been fully inflation proved. In the private sector this has only applied to benefits accrued since 1997, and then the level has been limited to a maximum of 5%. The cost of full inflation proving is beyond the means of most private sector companies, and could double the contribution rate. (Indeed the limited indexation that has existed since 1997 is another factor which has made DB unaffordable.)
The public sector trade unions, and evidently many Liberal Democrats, argue that the problem is not that public sector pensions are generous, but that private sector pensions are inadequate. This totally ignores the difference between the way private sector pensions have to be funded and the pay-as-you-go nature of most public sector pensions. Indeed, when the last government proposed to privatise the Post Office the proposal involved transforming what is essentially a private sector type scheme into a pay-as-you-go public sector scheme. In exchange, the Government would have received all the assets currently invested by the Post Office pension scheme in return for accepting liability for paying future pension benefits. The beauty of this from the Government’s point of view is that it would have produced a short-term boost to its income, thereby reducing the public sector borrowing requirement, with the cost of pensions born by future generations of taxpayers. I am sure that every private sector scheme would be happy to accept the same sort of offer. This is in fact how most private sector pensions are financed in continental Europe, but even there governments are starting to realise that they cannot indefinitely mortgage their children’s and their grandchildren’s futures.
Thank you all for taking the time to comment on my post.
Alex M, Robert C and Pamela, thank you for the support. You are right that the real policy issue here should be sorting out wizened pension provision in the private sector, rather than undermining what half-decent pensions still exist. John Ruddy, thanks for reiterating the Treasury’s own estimates, supported by the independent OBR, that the long-term burden of public sector pensions is essentially static (in fact, it falls) over the next four decades. Tim & Andy Dowland: that average for female NHS workers will indeed be pulled up by the pensions of much better paid consultants; I’ll also say that most midwives work in the NHS for long periods of time, it’s not the sort of profession which people dip into for a short period – therefore the average will likely represent many years’ pension contributions.
Matthew Huntbach – I agree with you that undermining public sector pensions will act as a strong disincentive to people working in the public services. Nishma, you also make this point, and thank you for the support. Henry, I hope that Nick Clegg only meant to criticise certain, particularly high pensions within the public sector, but I fear the atmosphere created will lead to them all being slashed, regardless of how much they burden the taxpayer, if at all.
Andrew Suffield, you say that “it is undisputed” that defined benefit schemes like the NHS scheme “are currently hurting government finances”. Well, given that the NHS scheme is putting billions of pounds of surplus every year into the Treasury’s coffers, I would dispute your assertion, and I would be right.
Gordon, you make an interesting point about the lower volatility of pay-as-you-go schemes. Thanks for that. Finally, Graham, my response to your point would be that those with private-sector pensions will be no better off if we stamp down on what remains of the public-sector pension. What people working in the private sector need are policies from the political parties that will begin to restore the value of private-sector pensions. What we must do is not destroy everyone’s pension, leaving us all penniless in retirement; no, what we must do is ensure that all of us will have enough to live on in our later years.
I note that Cathy Wright makes no specific proposals regarding “policies…. that will begin to restore the value of private-sector pension”, and she makes no effort to address the factors which have led to the death of DB schemes in the private sector. Moreover, even the existing pay-as-you-go schemes which operate in much of continental Europe are being down-graded as they are no longer financially viable. It therefore comes down to a matter of fairness and equity. It is fundamentally wrong that private sector employees should have to continue to subsidise generous public sector pensions through their taxes, while they themselves are having to suffer real cuts in their own pension benefits. If Cathy Wright is so keen on improving the lot of those working in the private sector, while preserving the existing pension benefits of those in the public sector, then she should admit that this requires far higher pension contributions from those in the public sector, so that those in the private sector can save more for their own retirement.