Pensions apartheid

Labour’s policy of featherbedding public sector pensions and clobbering private sector ones is being implemented with great success. We have all admired the new way to riches – lose a lot of money for a public sector bank, get fired and pocket an enormous tax payer backed pension. Today we are reminded of the Labour way to lose your private sector pension. Work hard for a private company, save in a pension scheme, then discover the fund has a huge black hole and has to take action to cut its costs.

The accumulated deficit is now around £240 billion in private sector schemes. The government has made a major contribution to creating that mess by taking the following actions:

1. Imposing a £5 billion a year tax on the funds – that directly relieved them of around £50 billion so far, £50 billion they clearly needed.
2. The £5 billion a year tax also made the shares they own less valuable. As the shares yielded less income after tax, so they were judged to be less valuable by the Stock market. That cut the value fo the capital the funds had invested.The last decade saw no positive return from holding UK equities, which is a commentary on the government’s tax and regulation policies towards business. It didn’t hit the fat cats – they took the money. It hit the small savers and the future pensioners.
3. Driving the interest rates on longer dated government bonds or savings instruments down by their repsonse to the slump and through government purchases of its own bonds. One of the ways of measuring the pension deficit is to ask how much monedy the fund would need if it were all put into bonds so the interest and amortised capital could pay the pensions. Low rates means bigger deficits and the need for more contributions.
4. The introduction of the Pensions Regulator’s tax. All funds now have to pay so the Regulator has money to pay his salaries and to pay for any funds that go under. It’s another charge on employers, another straw which can break the camel’s back.
5. Presiding over the collapse of great banks by failing to control their capital and cash in the good times. The big falls in bank shares and the cuts in dividends that have followed have cost UK pension funds large amounts of money.
6. The slump. This has hit the shares of other companies, again undermining capital values in pension funds.
7. Failing to control inflation as promised. Inflation imposes large extra costs on pension funds, as they need to find the money to pay increases in pensions. Few pension fund actuaries or Trustees are going to value the funds on the basis of zero inflation, whatever the government may say about the danger of deflation at the moment, as they know current inflation is high for pensioners. They also see the government is not worried about triggering a new faster inflation in due course, judging by its monetary actions.

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28 Comments

  1. David B
    Posted April 15, 2009 at 6:47 am | Permalink

    Agreed. But allowing contribution holidays was also wrong. And the funds should have been ringfenced so the company cannot touch the money at all ( which would negate 4 above).

    • Brian Tomkinson
      Posted April 15, 2009 at 9:08 am | Permalink

      Companies were made to take pension holidays because the government didn’t want them to build up large surpluses with money that would otherwise have had corporation tax charged against it. How things have changed and how much worse they are now after continual government meddling.

    • a-tracy
      Posted April 15, 2009 at 9:24 am | Permalink

      Many of us never took a contribution holiday, we’ve still seen pension pots diminish, we’ve had to pay in more and more of our net income and after a decade of boom you’d have expected to see a better retained value, instead they’ve fallen. If public sector pensions had been invested in the same schemes I doubt this would have been allowed to happen, it’s much easier to spend other people’s money.

      The reason Goodwin’s pension mithers me the most is that his pension was ringfenced and protected whilst his company and other similar large organisation blew away my pension. There are people I know approaching retirement in their mid sixties that simply can’t retire even though they want to.

  2. Ian Jones
    Posted April 15, 2009 at 6:56 am | Permalink

    All part of the master plan for a national social pension scheme.

    Quite simple, the Govt is pushing the private pension schemes to buy Govt gilts rather than shares. When in a few years time a socialist Govt comes along and sees that most of the assets of private pensions schemes are in fact the liabilities of the Govt (i.e. gilts) they will simply nationalise them.

    Then they will be able to have a single pension scheme for all, based on need not salary.

    Next step will be to remove the tax relief on higher earners to make it more “fair”…..

  3. Lola
    Posted April 15, 2009 at 6:57 am | Permalink

    Yeah. Right, Mr Redwood. But why weren’t your party – Her Majesty’s Official Opposition – making these points loud and clear w.e.f. day one of this shoddy juvenile adminsitration?

    reply: We did. Peter Lilly dubbed the pensions tax the Robert Maxwell Memorial Tax as Shadow Chancellor, and I as Shadow DTI explained how much damage it would do to pension funds.

    • Lola
      Posted April 15, 2009 at 1:48 pm | Permalink

      To my mind not loudly enough – but to be fair you may have been marginalised by that well know independent broadcaster whose remit is to inform, educate and entertain – the BBC.

  4. Acorn
    Posted April 15, 2009 at 7:47 am | Permalink

    Redwoodians should read the following and its original. It is the best account of the public sector pension nightmare and the accounting tricks the government uses when calculating the taxpayer’s liability.

    http://www.iea.org.uk/files/upld-book428pdf?.pdf

    You can get to the original via this IEA page.

    http://www.iea.org.uk/record.jsp?type=pressArticle&ID=389

  5. Brian Tomkinson
    Posted April 15, 2009 at 9:24 am | Permalink

    Pensions apartheid is a good headline for this massive problem. The other problem is, as with so many other things, that MPs have the best index-linked scheme in the land paid for by the taxpayers and so most of them are oblivious to the issue. The Conservative party should employ Dr Ros Altman to help sort out the mess.

  6. Posted April 15, 2009 at 11:30 am | Permalink

    This is just a part of the disaster, the fall out and its effects on those who depend on savings as well as small private pensions may well be worse for those who are most vulnerable. Look for the fuller explanation of the kind of thing that is happening.

  7. Richard
    Posted April 15, 2009 at 11:33 am | Permalink

    There is a simple and attractive solution to the problem of public sector pensions: convert them all compulsorily to money-purchase schemes. Put a cap equal to the private sector lifetime allowance (£1.8m in 2016) so as the big fat cats are capped. Ban the offer of new defined benefit pensions by any public sector body. This would have the following benefits:-
    1. The true extent of public sector debt would be recognised. Recognition of the problem is the first step to a solution
    2. A cap would be put on any further growth of this element of public debt
    3. Lower-paid public sector workers could be offered relatively attractive conversion terms
    4. Public sector workers would become much more market aware, as they would manage their own pensions
    5. A spin-off benefit would be a boost to the private wealth management sector

    • Lola
      Posted April 15, 2009 at 1:51 pm | Permalink

      Point 4 is key. It lets the state worker see the true price of his pension and engages him in the need to support a vibrant entrepreneurial wealth creating sector that is private business. We would all sink or swim together.

  8. Freddy
    Posted April 15, 2009 at 11:37 am | Permalink

    I think that the gold-plated public sector, index-linked, final salary pension should have a cap.
    For higher paid public sector folk, any pension rights over this cap should be converted to a normal, private sector type pension scheme. The amount of contributions to the pension should be immediately visible, so we can see just how much these people are costing us.
    The cap should be set relatively low, but high enough that, for example, a lifetime NHS nurse, or a lifetime school teacher, should not be affected.
    This should be in a new Tory Government’s “First 100 days” program of legislation, along with lead-plating EU directives and various other good stuff.

    • Freddy
      Posted April 15, 2009 at 1:55 pm | Permalink

      And, following Lola above, MPs in particular should be given entirely private sector type pensions, to give them a motivation to manage the economy properly.

      “Competent economic management is the most important part of a social conscience.”

  9. David Burch
    Posted April 15, 2009 at 12:56 pm | Permalink

    I think that this is a major issue as there are millions of people now heading towards their retirement with an inadequate pension. The fact that one of Brown first actions as Chancellor was to remove the pension tax credit should be brought back to haunt him. (Strangely if you post this on the BBC site they reject this comment).

    It now looks like the stakeholder pension has been a serious failure and the promised 2012 reforms are yet to be finalised. The Conservatives need to have an alternative and also need to tackle (as they probably can) the Civil Service pension black hole. At present I am not sure what is Conservative policy on this matter, but surely it is time to suggest a viable alternative to the current mess.

    • Lola
      Posted April 15, 2009 at 1:54 pm | Permalink

      In re stakeholder pensions I predicted that they would fail. They are simply a price controlled personal pensions. Price controls never work. They invariably achieve the exact opposite of wehat they are intended to achieve. Anyway, we were already supplying PP’s at lower AMCs than specified by stakeholder. Stupid government.

      • David Burch
        Posted April 16, 2009 at 12:38 pm | Permalink

        I had just sat through a meeting with one of my companies pension advisors and although we have a stakeholder option this was there on paper and ignored in practice in favour of existing Group Personal Pensions. Our advisors stated that it can take up to twelve years for an IFA to return a profit on the sale of a stakeholder pension and that was one of the main reasons that it had not been a success. In reality whilst my company has an stakeholder scheme it is useless alongside the GPP. We then had a muted laugh over the 2012 pension changes that look just as half baked and that if we were the Labour Party it could be ignored until after the next election when they are probably unlikely to be in power.

        I personally think everyone should have a pension but also the choice not to have one. I do have one and have paid in for the past twenty years with a mixture of final salary and money purchase. People if they do save for a pension will have to save more and that is a fact. The Government will have to come clean on it plans for the future of the state pension and must tackle the pension aparthied between the private and public sector which is probably a balck hole of banking crisis size.

        No one will end up happy in my view.

  10. Posted April 15, 2009 at 2:46 pm | Permalink

    Water under the bridge.
    The huge question now is this: what do the Conservatives plan to do about it?

    Reply: Lots. Stabilise the economy, change the rules on annuities, get inflaiton under proper control etc

  11. Adrian Peirson
    Posted April 15, 2009 at 4:47 pm | Permalink

    Pensions, ah yes, another Scam played on us by the Moneymasters.

    http://www.youtube.com/watch?v=OcrfaWzREVM&feature=channel_page

  12. fox in sox
    Posted April 15, 2009 at 5:03 pm | Permalink

    As a Consultant surgeon I have made significant contributions to my NHS superannuation scheme, currently 9% of earnings. GPS make both the employees and employers contributions, currently 24% of salary. We have certainly contributed heavily to these pensions over our years of NHS service. That the government has squandered this money rather than put it in an investment fund is hardly our fault.

    Any reform of public sector pensions for Doctors, Nurses, lab technicians, soldiers, sailors and airmen in a confiscatory manner will lead to significant recruitment difficulties and early departures. Closing the schemes to new entrants may be possible, but is likely to reduce reruitment further. Britain is now a net exporter of Doctors, with the antipodes and Canada particularly benefitting. Medicine is a highly marketeable skill. And we all favour market forces don’t we?

    • alan jutson
      Posted April 15, 2009 at 8:00 pm | Permalink

      Fox in a Sox
      Yes you probably have put a lot of your salary into your pension but so have the Taxpayers as well.
      Is it not correct that NHS staff have a sum equivelent to 14% of their wages put into their pension by the NHS (Taxpayer) as well.
      Self employed people have to contribute 100% of their own money (out of their own income) no one puts in any extra save for a tax allowance which everyone gets.

    • Ian Jones
      Posted April 16, 2009 at 7:04 am | Permalink

      What % of your final salary will you get as a pension? Those of us who put in a similar amount into a defined contribution scheme just watch as our funds go down and our taxes go up to pay for the public sector pensions

      Everyone should be on defined contribution, then we all sink together.

      Reality is we cannot have an open economy and a welfare state. Not going to work.

      Reply: That depends on how many years I work as an MP, as it is a contributory scheme. I support closing the MP scheme to new members and going over to a defined contribution basis. I agree that public sector pension costs need to be controlled.

    • a-tracy
      Posted April 16, 2009 at 9:42 am | Permalink

      When you say GPs contribute 24% of their salary, is this in addition to the 11% and 12.8% (23.8%) that those of us in private employment pay over the lower earnings level (lel) or is this simply their employee and employer national insurance contribution as private contractors to the state? Do they pay this 24% on every pound or the earnings over the lel, and does this amount stop at the higher earnings level or do they pay it on very pound they earn?

      • Fox in sox
        Posted April 16, 2009 at 5:51 pm | Permalink

        I refer to nhs superannuation at 24% of salary, this is as well as NI. This entitles to 1/80 of final salary for each year of service. NHS final salary pensions are one of the few reasons to work in the NHS, without them I would leave for the private sector or abroad. With the dumbing down of medical training via MTAS and the EWTD decent doctors are going to be hard to find in the UK in the future. If decent pensions go then so dies the motivation to work in the NHS. Australia or the Gulf beckons, Market forces you see…

        • a-tracy
          Posted April 16, 2009 at 8:07 pm | Permalink

          I looked up NHS superannuation websites this evening as it seemed extreme for a GP to contribute 24% and it seems the GP pays 6% of their wage towards their pension. The website says “the scheme’s benefits are substantial” and “payments are relatively cheap”. See http://www.bradfordvts.co.uk/ONLINERESOURCES/26.%20NHS%20STRUCTURE%20AND%20POLITICS%20(added)/NHS%20pension%20scheme.doc

          When you say you’d leave the NHS after being trained in the UK does the State not require a certain number of years NHS time to be worked in the UK? If not this is a great deal for Australia and the Gulf, it’s no wonder they can pay higher salaries if they don’t have to train their staff. I wonder how many qualified doctors still work in the NHS five years after the end of their UK based training?

  13. Matthew Reynolds
    Posted April 15, 2009 at 8:00 pm | Permalink

    The retirement age ought to rise in stages to 68 for people in both public & private sectors with state sector employees having to contribute to their pensions like private sector workers rather than just draining the public purse. Cutting the public sector wage bill by 10% over say three years would save £15 billion now and by firing the jobsworths hired by Brown to vote Labour in marginal seats you save money on public sector pensions long term.

    By axing the pensions regulator tax , ending the £5 billion p/a pension fund raid , repealing stamp duty on shares , axing basic rate tax on share dividends and repealing CGT with gains taxed as income for the first two years & then tax free after that you would boost share prices and thus help pension pots improve.

    The MPC inflation target should be 2% on the more accurate RPI-x measure so that people on pensions do not suffer excess price rises. Banks should have to hoard more capital in good times to fund sustaining credit levels during a recession while ensuring no need for dividend reductions and thus helping pension funds.

    A Citizenship Pension set at a flat rate for the over 68’s could be brought in to end pensioner poverty and would boost saving. With an end to means-testing you could encourage pension saving & wealth creation which would add more to pension funds due to share prices being boosted and more cash being saved for peoples retirement.

    It is unfair that prudent people who have cash in the bank , a dividend income & a private pension should be subject to double taxation by paying tax on that income. They have paid for those things out of taxed income and by providing for their old age in that way they are reducing the burden on the state. Ending basic rate tax on income from pensions , savings & dividends/shares can only help the pensions situation.

    Oh & by the way lets end the scandal of excess MP’s pensions. That might give the House of Commons the moral right to legislate on pensions if MP’s renounce this unwarranted perk.

    Private pension regulation needs reform so that it is less cumbersome & smarter so that funds are protecting without red tape stifling the sector. There must be a middle way that works better than Labour’s over-regulation.

    These reforms might well address the issues that John Redwood raised in his excellent blog. Pensions policy must be at the heart of David Cameron’s first term as PM with a new settlement aimed at making things fairer ( i.e. less feather-bedding for the Client State & MP’s and more help for the suffering private sector worker).

  14. Posted April 15, 2009 at 9:42 pm | Permalink

    I know this is about the public sector but…
    Are company pension funds still “plunderable” by the companies that supposedly supply them? i.e are we still open to another Maxwell? If so why would anyone put a penny in pension scheme?
    Julian

    Reply: Pension funds are heavily regulated to try to stop theft and inadequate contribution levels. There is also a compensation fund.

  15. Charles Noon
    Posted April 27, 2009 at 5:21 pm | Permalink

    As a teacher with an index-linked pension I am aware of growing public hostility to the ‘us and them’ element of pensions. I have also been a District Councillor for 30+ years and been infuriated at the way Senior Officers have been given increased years and encouraged to take early retirement. Indexed Linked pensions as they now stand cannot be afforded and many Councils are being cripled by the provisions they have to make to meet Pension bills.

  16. Charles Noon
    Posted April 27, 2009 at 5:31 pm | Permalink

    [Sorry! not finished] I suggest
    1. Index-linking only apply to the first £25000 of pension. Any pension above £25k not to be ‘linked’

    2. No index linked pension to be paid to anyone until they reach the age of sixty [or 65?] unless they are deemed medically unfit for work by a doctor chosen by the pensions authority.

    3. The maximum pension to be paid to public sector workers to be fixed at say £40k.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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