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October 19, 2005

Public Sector Pensions.

Sigh, a complete clombdown on the issue of public sector pensions.

None of the 5m members of public sector schemes will be required to work beyond their current average retirement age of 60 because the new pension age of 65 will only apply to those who start work in future.

And yes, it’s still defined benefit, not defined contribution. No nerws on whether the other change, from final salary to an average over the years as the basis of calculation, has happened. As noted:

Actuaries - the mathematicians who advise pension funds - were scathing about the deal. Stewart Ritchie of the insurance giant Aegon said: "It is not sustainable in the long term to expect taxpayers to fund more generous pensions for public sector employees than they can possibly acquire themselves.

Quite, why should those with greater job security, nowadays, comparable if not higher wages and much higher fringe benefits also get a higher pension? What’s fair about that?

October 19, 2005 in Your Tax Money at Work | Permalink


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It's fair because that's the pension they were promised when they took the job. A commenter on here the other day was saying that you have to look at the total packgage (wrt to Delphi) and indeed, if there had been a less generous pension then presumably wages would have had to have been higher. So the additional cost to the taxpayer is presumably zero.

Tim adds: No, not quite true. Life spans have increased considerably in recent decades. So promises made 30-40 years ago were to pay for, on average, an extra decade of life after retirement . Now they’re to pay for 15-20 years. That is a substantial change.

Posted by: Matthew | Oct 19, 2005 11:19:34 AM

EXactly. Because a contract is a contract. Where was all this concern with equity when you were bleating about the poor little Railtrack shareholders?

Posted by: dsquared | Oct 19, 2005 11:28:49 AM

Matthew: rubbish.

Gordon Brown changed the rules on private sector pensions, severely to the detriment of those already in schemes. My money purchase pension is now taxed thanks to Brown's changes and will therefore give a much lower rate of return than I had expected when I took it out. Please explain why it's reasonable for the government to change the basis of my pension (to increase its tax revenues) but not that of its own employees (which rely on tax revenues from me)?

Public sector pay is approximately 20% higher per hour than median private sector pay - they are not underpaid. Public sector pay is not determined by the need to attract emloyees - it is determined by vested producer interest and the unions.

The prevalence of early retirement on spurious 'ill health' grounds is also huge in the public sector. Did you know that 40% of local government employeees retire before 60 on 'ill health' grounds? This is despite the fact that they, on average, live longer than private sector employees. In the police and fire brigade, most retire before 50.

It's a scandal and I'm fed up with paying for it.

Posted by: HJHJ | Oct 19, 2005 11:38:31 AM

Contract schmontract.

In the private sector benefit reductions, such as a hike in the pension age, are negotiated all the time, usually with unions pathetically gratefull that the employer isn't killing the scheme off altogether.

The comparison between the pension deals private and public sector workers are now just embarrassing and won't go away. Nor will the bill. The depth of resentment amongst private sector taxpayers is underestimated and one day the electoral price will become too dear.

My theory though is that the Government plan to pick off the local government scheme first.

Posted by: a pension consultant writes | Oct 19, 2005 11:57:05 AM

The state should have to fund these Pensions as if they were building a Money Purchase scheme.

It would be fun to see peoples faces when their council tax trebles.

Some of the state pension schemes are so generous/taxpayer-onerous that if they were Money Purchase they would not be allowed to get tax-back on all of their contributions!

Posted by: Rob Read | Oct 19, 2005 12:05:33 PM

There is much wrong with the way the DW&P went about this, but in your comparison with Gordon's grab you forget that the government is the employer- one party to a contract. Much as you may like to think you have, there is no general contract between the taxpayer, pension providers etc, and the government. If you think Broon's policy was unfair or whatever, your remedy is in the ballot box!

Posted by: Tony Hatfield | Oct 19, 2005 12:49:27 PM

The remedy is to follow Tim W abroad.

Let the state parasites leach their pensions off each other.

Posted by: Rob Read | Oct 19, 2005 1:06:15 PM

I thik you mean HJHJ, not me, as I agree with you.

Tim - That's just not right. If the pension scheme had a fixed number of years on it when it was setup then it would be, but I can't believe it did. Such a justification now seems about as sensible as a firm telling its suppliers that it's only going to pay half the bill as it misjudged other costs.

Tim adds: Well, that’s just what they do do when they go bankrupt. As, without change, the pensions schemes will.

More generally I find it strange this insistence that the government move its pensions to money-purchase schemes. No-one argues it should fund its other obligations in this way.

Tim adds: I would likethe Govt to issue index linked treasuries for the accrued value of all oftehose public sector pensions. Then, from here on, defined payment schemes only.

Posted by: Matthew | Oct 19, 2005 1:13:33 PM

But the government is in no danger of going bankrupt.

Posted by: Matthew | Oct 19, 2005 1:54:26 PM

I think if I'd been employed for 20 - 30 years on well understood and stable terms of contract, and my employer turned round and said that, due to unforeseen circumstances, my pension was going to be halved, I would feel pretty justifiably agrieved and would consider this unacceptable.

As a general principle I don't think we should be encouraging retroactive breaches of agreed conditions. Which is a little different from saying that, for example, future additional years of work might bring lower benefits (due to higher taxes)

I also find it pretty lousy to say that because people have been screwed in the private sector, due to firms going belly up and underfunding their pension schemes, then it's OK that public sector employees should be screwed too. Maybe a better and less spiteful idea is to come up with a sensible insurance scheme for private sector pension schemes.

In the medium run it makes a lot of sense to revise public schemes to make them defined contribution. And more generally it makes sense for most schemes to evolve into flexible, floating instruments that travel with you between jobs, as we live less and less in a "company man" world. But that doesn't mean reneging on past promises because its convenient.

Posted by: rjw | Oct 19, 2005 2:04:46 PM

There is so much rubbish being written here about the government having an immutable contract with its employees.

Many private sector employers have closed their final salary schemes to current members as well as new members and insisted that any pension rights above those already accrued are on a defined contribution (i.e. money purchase) basis. In other words, they've changed the contract.

Posted by: HJHJ | Oct 19, 2005 2:23:20 PM

>> "But the government is in no danger of going bankrupt."

It's just the monopoly money it prints won't be worth anything. Which is effectively the same thing.

Posted by: Rob Read | Oct 19, 2005 3:35:14 PM


A woman retiring at 60 on 14000 GBP per year would have to pay 350,000GBP to purchase the annuity. as the annuity rate for her is 25.

Someone born in 1983 would need to contribute 560 GBP per month to their pension scheme to afford this annuity.

Annuity Rate 26.812
Months 458
Net Investment Yield 6%
Inflation 2.5%

Can the country afford this? No.

Posted by: Rob Read | Oct 19, 2005 3:45:08 PM

rjw the proposal was to phase in a pension age of 65 from 2013. Not really that draconian.

Of course the Government has just implemented a compensation (not insurance) scheme - the Pension Protection Fund by which the well funded schemes get to bail out the shoddy ones.

And the problems of private sector DB plans cannot simply be laid at the door of contributions holidays and company failures. It's actually a mix of historically low long bond yields, improving mortality experience, free lunch trustee investment strategies, the abolition of ACT credits and legislation (the MFR) which encouraged employers to fund at a minimum.

The point is that, unlike government, private sector employers can't just raid the taxpayer to plug their black holes and as someone pointed out there will be an electoral price to pay for this in Middle England and elsewhere. The Sun's coverage today - "Betrayal - public sector workers get their pensions at 60, the rest of us have to work to 65+ to pay for it". There's a kernal of truth there.

BTW Portugal has the least sustainable retirement system in the EU, eclipsing even Italy's.

Tim adds"Portugal just announced a change. Pensions are now calculated on lifetime earnings, not final. A step in the right direction.

Posted by: a pension consultant writes | Oct 19, 2005 3:47:50 PM

'rjw' should consider the fact that because the cost of providing defined benefit schemes has increased hugely (due to greater longevity and Gordon Brown's taxes) then most companies cannot afford the cost of maintaining them if they wish to stay in business against overseas competitors. There is now a legal obligation on companies to report and correct funding deficiencies against future pension liabilities. It is not a question of private sector empoyers 'screwing' their employees - it is a question of staying in business.

However, there is no such legal obligation on the public sector to report or fund their pension obligations in this way - they just push it onto future taxpayers, however costly.

What the government has now agreed allows a new 21 year old nurse to stay in the same defined benefit scheme for the next 40 years and retire at 60 in 2044. It is then expected (on life expectancy predictions) that she will then get an index linked pension for the following 29 years at taxpayers expense. Had you argued that pension benefits already accrued should be maintained, but future benefits should be accrued on a less generous basis, you might have had a reasonable point. But the government has conceded no change in future pension benefit accrual (including retirement at 60) for ALL current public sector employees.

It is a disgrace. The rest of us just can't afford this generosity with our money, especially as the government has robbed our own pensions.

Posted by: HJHJ | Oct 19, 2005 3:52:37 PM

HJHJ writes: The prevalence of early retirement on spurious 'ill health' grounds is also huge in the public sector. Did you know that 40% of local government employees retire before 60 on 'ill health' grounds?

It's even worse. Some of these public sector parasites who are made redundant (it does happen) have their employers' pension contributions topped up as if they were still working to 60 even if they start a new job elsewhere the next day.

Posted by: David Farrer | Oct 19, 2005 4:27:59 PM

Lets not go overboard - some public sector jobs do have high burn-out rates. If I was a 55 year old teacher at some of the schools in inner London I'd probably blow a fuse as well. Also the most egregious incapacity scams - the Police were probably the worst - are largely a thing of the past.

Most public sector workers are not the "parasites" of Daily Mail Land but perfectly hard working people often doing difficult and demanding jobs. For every pointless pen-pusher there are plenty of nurses, teachers and what have you who are perfectly good value for money and who deserve decent pensions. It's just that the current model for delivering them is broken and no-one in Government has the guts to address the problem.

I'd start with the Parliamentary scheme myself.

Posted by: a pension consultant writes | Oct 19, 2005 4:46:10 PM

Who is saying that they're all parasites? I'm just saying that their pensions are not affordable.

On the subject of burnt-out teachers, my A level maths teacher (in a perfectly normal comprehensive) only became a teacher because his doctor told him to get a less stressful job (he was an electrical engineer). He was aged 50 when he first became a teacher and didn't regard it as particularly stressful.

Plenty of private sector jobs (with their longer hours, less holiday and much lower job security) are at least as stressful. Should the taxpayer subsidise their pensions too?

The point is that, due to greater longevity, the cost of providing pensions is increasing hugely. Someone has to pay for this or the cost has to be curtailed. There is no other way. The point is that only the public sector has the option of forcing the cost of maintaining current benefits onto everyone else at no cost to themselves. It is patently unreasonable.

Posted by: HJHJ | Oct 19, 2005 5:26:30 PM

[Got you right this time. (sorry Matthew)]
The employer can vary the contract conditions either with the agreement of the employee(s) or by dismissing them all and re-employing them on new terms including the new pension provisions.
If you really think a contract can be varied by one side, just pop along to your building society and tell them you have decided to pay no more interest to the greedy sods.
Tim adds: But in extremis, this is precisely what people do. They go bankrupt and start again. As Delphi just did in the US. Much of the argument here is about how we try to change the current obligations before that happens to UK PLC. Or the hard pressed taxpayer, your choice of phrase.

Posted by: Tony Hatfield | Oct 19, 2005 5:29:00 PM

Tony Hatfield,

All sorts of contracts get changed by demands from one side, especially when external pressures not originally anticipated make this a necessity. This has happened through my working life in business. I presume you have no experience of business.

Once you know that the other side either has no choice if their business is to be sustained or that they won't give you any future contracts without renegotiation, then it changes the whole picture.
Any government worth its salt should have said: "these pensions can't be afforded and unless you agree to change, then we'll be forced to sack 10% of staff to pay for them"

Or do have the public sector also gained contractual rights never to be made redundant while I wasn't looking?

Posted by: HJHJ | Oct 19, 2005 6:04:39 PM

Sigh - it seems I need to clarify. Retrospective changes bad. Prospective changes much better. Is that clear? If HJHJ wants the longer version it was in paragraphs 2 and 4 in my comment above. In particular the clue to look for is the statement that public sector schemes should evolve into defined benefit schemes.

I thought paragraph 2 was also pretty explicit on the difference between changes in acquired rights and changes in future benefits. But perhaps using the term "agreed conditions" was not the best choice of words. In the longer run the obvious way to reform is that companies (and the public sector) offer some kind of defined contribution to portable schemes.

The downside is the risk transfer, but maybe we just have to live with that in the interests of transparency and flexibility.

Posted by: rjw | Oct 19, 2005 6:15:41 PM

damn - I meant defined contribution of course.

Posted by: rjw | Oct 19, 2005 6:16:49 PM

rjw: You really have written a load of nonsense here.

The point is that the deal that the government has cut with the public sector unions preserves the old conditions for all current employees throughout their working lives, even for 40 years into the future. It makes no attempt to freeze accrued benefits and change the terms henceforth.

Posted by: HJHJ | Oct 19, 2005 7:54:11 PM

I don't dispute any of that. I butted in when I read that nonsensical comparison you made between an employment contract and Broons tax take.
I'll now leave it to you ecomomists to sort out the difficult stuff!


Posted by: Tony Hatfield | Oct 19, 2005 8:27:07 PM

Tony Hatfield,

You're a bit slow, so let me explain. I put money into a pension plan accepting the legal restrictions on what I could do with the money in return for the tax advantages - in effect, a contract with the tax man. Once the money was in there, Brown decided to change the terms of the plan - which affects the money already in there (and which I can't take out). This is effectively a change in the terms of the contract imposed on my by another party.

There is a direct analogy with one party forcing a change to another type of contract.

The idea that because a pension is part of a contract (employment or otherwise) and that consequently it can't and shouldn't be changed be shows that you know nothing. A public sector employee, perhaps?

Posted by: HJHJ | Oct 19, 2005 9:17:10 PM