Pensions with a Cabinet office atttached

The Cabinet office weighs in as one of the cheapest departments. Its total spend for 2009-10 is an apparently modest £7,500,000,000. £360,000,000 of this is the administrative cost of the place, whilst the bulk, £7,140,000,000, is the civil service pensions bill.

The Cabinet Office employs 205 higher paid employees, and a total staff of 1279 (full time equivalents). It also accounts for the Intelligence Agencies, whose staff have shot up from 8,984 in 2003-4 to 12,633 for 2009-10. Their budget had doubled over the same time period. Let’s leave this on one side, and turn to the really big spending that goes on under the eyes of this department.

If the government had a proper balance sheet, it would show like the company sector the accumulated pension deficit as a liability. The civil service scheme is totally unfunded – there is no money saved to pay future pensions. Along with the other unfunded schemes (e.g. teachers), and the deficits in the funded public sector schemes(e.g. Councils), the total liability is now around £1,000,000,000,000 – yes, that’s right folks, £1 trillion, or more than the £800,000,000,000 of debt the state has acknowledged in the recent borrowing figures. That’s another £1 trillion on top of all that borrowing.

The private sector has long since decided it has no option but to cancel, limit or otherwise modify defined benefit (final salary based) pension schemes. We live in a world where for many access is denied to good final salary schemes these days. Even members of some final salary private sector schemes are finding they are blocked from saving more under them, and may have to agree to a reduction in benefits.The public sector has made far fewer moves to limit the costs. It is true the MPs funded and contributory scheme is now consulting members on how to worsen its terms to cut its future deficit, and there have been some modest moves to reduce costs on the unfunded civil service scheme.

The country cannot afford to go on making these generous promises to new comers. These schemes, like their private sector counterparts, have to be closed to new members. New employees need to be helped to save for a defined contribution scheme, where they will get a pension based on what they and their employer has saved and the investment returns made on the money.

We need to ask if we should go further. One option is to stop existing members accruing extra pension from future service on these terms, and whether they too need to go over to defined contribution saving for the remaining years. As the MP consultation shows, there are numerous ways in which the cost of such a scheme can be lowered. It would be right to consult members of these schemes and seek agreement to changes, based on more affordable levels of employer contribution.

One way to cut future costs would be to agree a higher retirement age. Another help would be to be more careful about granting early retirement, which has become common in parts of the public sector.

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23 Comments

  1. Colin D.
    Posted July 29, 2009 at 7:50 am | Permalink

    Your proposals are sound but nothing sufficient will be done unless MPs lead by example.
    At the next election, new MPs must be on a pension scheme which matches the current norms in the private sector. Current MPs need to offer concessions which reduce the cost and generosity of their current scheme to reflect the parlous state of this country’s finances and to connect them to the pension realities of the rest of us.
    With the news that, despite all that’s happened, MPs can cheerfully pocket some more thousands without receipts, I have little faith in their voting to do ‘the right thing’ in respect of pensions.

  2. Brian Tomkinson
    Posted July 29, 2009 at 8:06 am | Permalink

    Stories also abound of early retirements in the public sector followed by re-employment, often doing the same work. Is this true? I read today that another £1,000,000,000 of borrowed money is to be spent on government created “jobs” to further increase their client state. Will this madness ever end?

    • StevenL
      Posted July 29, 2009 at 11:01 pm | Permalink

      Yes, early retirement, followed by re-employment (though often on a part time basis) is not uncommon in the public sector.

  3. MartinW
    Posted July 29, 2009 at 8:25 am | Permalink

    These short pieces on departments and how they could and should be reformed are most informative. I hope this will be a continuing series.

  4. Paul
    Posted July 29, 2009 at 8:37 am | Permalink

    I would go further than that. I don’t think the promises made to current employees are viable.

    I would consider for all public sector pensioners (including your good self) calculating the current value of their pension at a given point, and then converting it into a self funding pension.

    This would reduce any future expenditure and give us an accurate estimate of the problem.

    Staff will whinge and some of them will strike. But they will also hit a reality. Contrary to what they think, the private sector is not desperate for public sector employees, they do not work really hard, and they are not underpaid. In the end they will have to put up with it.

    You would be amazed at the number of teachers who think :

    – they pay for their own pension
    – they deserve it
    – they are underpaid compared with other graduates
    – who all earn £90k per annum and get lots of bonuses
    – they work much harder than anyone else
    – the holidays don’t count.

    • Martyn
      Posted July 30, 2009 at 1:12 pm | Permalink

      Paul’s proposal to move from final salary to defined contribution is the obvious solution. At the end of career for, say, a teacher, their and their employers’ contributions would be given to them as a pot from which they would buy annuities. By the time a teacher retires this would be £4-500k. This sounds a lot but would currently only buy about £15k a year of inflation-proofed annuity. The problem is that each of these pots will cost real money upfront for the government. At present government funds teachers’ pensions through the contributions of existing members. My back of the envelope calculation suggests that year on year the government would have to fork out up to £40 billion just to convert teachers’ final-salary pensions into defined contribution pensions.

      We can get all moral about the feather-bedded public sector but there is a huge fiscal problem that limits the scope for reform.

    • Posted July 31, 2009 at 5:38 am | Permalink

      This is a very fair point. If you look at a teacher’s working hours* as well as their working year** and pro rata this up to a full-time job, they really don’t do too badly

      * 30 hours a week despite all the hyperbole about marking, preparation and after school activity compared to everyone else with 40-60 hours

      ** say three half terms, Easter and Christmas and six weeks summer break various odd days, say 12 weeks in total compared to most people’s 4 weeks

  5. Lola
    Posted July 29, 2009 at 8:57 am | Permalink

    I have previously posted my thoughts on state employees pensions schemes, but it bears repeating just in case someone influential reads your blog and actually thinks about it and acts logically.

    State DB schemes are not only a giant Ponzi scheme but they are also deeply divisive. Their main failing is to disconnect the State employees from the consequences of wealth destruction policies pursued by their political masters and the stultifying effect on wealth creation of their own bureaucracy. If you made all State employees pension defined contribution schemes – and capped the State (that is taxpayer) contributions at a sensible level, say 6% of gross pay – they would have a connection with the creation of wealth and ther retirement income. There would be an incentive to run the country to create wealth.

    As far as changing from where we are now to where we need to be I am of the camp that says ‘That’s it’. ‘These DB schemes are closed’. ‘No new members and existing members will accrue no further benefits, but their existing benefits will be preserved’. And what’s more I would make it very clear that the preserved benefits would be based on pay as at the date the change was announced, not when it was implemented, so as to stop a whole load of senior mandarins playing games with their salaries.

    I am about to pay my tax due for July. I am very tempted to telephone the HMRC and ask them why I should pay this any income tax at all as you don’t. It all goes round in a curcle to fund your pensions. And then ask them to have whip round in their offices to help me out. In fact I am going to.

    I cannot express politley how deeply angry I am about all this. And all the other nonsenses implemented under Blair / Brown.

    • Martyn
      Posted July 30, 2009 at 2:01 am | Permalink

      This is all very nice and I agree with your sentiments, but how do you unravel from unfunded to funded schemes?

      Actually you can do it, but it requires an off-shore bank and some tough securitizing. Not quite flavour of the month!

      Do tell us your proposal!
      M.

      • Lola
        Posted July 31, 2009 at 10:00 pm | Permalink

        You don’t unravel the FS schemes, funded or unfunded. You close them to new members and – possibly – existing members as well. And then open the new DC schemes. The liabilities of the existing schemes would then run off over time.

        In theory you could make block transfers of CETVs to the DC schemes, or deferred annuities, but I really don’t think it is at all practical to go down that road for all sorts of reason not least the immediate costs of doing so.

        All of this is about capping the liabilities. By implementing my suggestion is that they immediately stop getting worse, and over time will atrophy.

        In passing I should say that I have been arguing this for years. It was transparent many years ago that the whole State Employees Pension ferrago was going to end in tears.

        • Martyn
          Posted August 3, 2009 at 10:45 pm | Permalink

          With you on this! And I can see how it can be done, although I note your nervousness in para 2, which is my main point.

          The other problem is that reform has an enormous time-lag to benefit (a point Finkelstein made recently).

          I hope John is reading! (I suspect, however, that public-sector-pension liabilities are ‘flavour of the month’ — another awful and equally enormous gap will soon yawn!).

          Best wishes,
          Martyn

      • Lola
        Posted August 4, 2009 at 8:52 am | Permalink

        If it was me I’d also raise the retirement age for all the deferred members in the now closed FS schemes to 65. This would broadly halve the liabilities. I’d phase it in so that older deferred members weren’t discriminated against. The union’s would hate it. Tough.

  6. Sally C.
    Posted July 29, 2009 at 9:11 am | Permalink

    Government expenditure is out of control. We have reached a tipping point where the private sector is now being crushed by the demands of the public sector. The private sector is the only engine for growth in any economy – it can no longer create enough jobs. This is why Yvette Cooper is today announcing ‘make-work’ jobs for our growing army of unemployed young people – paid for by the taxpayer. The Labour party cannot understand why the economy is collapsing beneath their feet. They still expect a recovery any moment now. Once the Conservatives are in government, the only chance for a revival of the private sector is if the Conservatives grasp the nettle and cut public spending sharply. If you don’t, the private sector will continue to wither and unemployment will continue to rise.

  7. John
    Posted July 29, 2009 at 12:02 pm | Permalink

    I suspect that many people will find the administrative costs for the Cabinet Office you’ve described to be quite extraordinary.

    I’m only a layman but is it really necessary to have so many people employed in the “security services”. Despite the international threast we keep being told about do we really need so many spooks? What on earth are they all doing? Do we really need over 5,000 personnel at GCHQ?

    I welcome this series of articles examining areas of public spending. To a pleb like me who is working very hard indeed just to keep pace with Labour’s taxation, let alone avoid unemployment which is affecting so many private industries, it is simply heartbreaking to read so much detail of how this wasteful Government is maintaining a pampered and bloated Public Sector with my money.

    The challenge for you Mr Redwood is to get David Cameron to sound genuinely convincing on the issue of spending reductions. At the moment I do feel he does tend to dance around issue still. You guys really do need to be more aggressive and specific in how you tackle Brown & Mandelson on specific detail within departmental spend and headcount. Your articles are a good start for those questions.

  8. Simon
    Posted July 29, 2009 at 2:00 pm | Permalink

    Not so long ago people talked about taking early retirement at 50, with at best 30 years of contributions and a life expectancy of another 35 years.

    Raising the retirement age (and perhaps defining it by reference to average life expectancy) sems the obvious response, but that does leave the problem of people keeping / finding work until they reach retirement age. Speaking from experience, finding work over 50 is no joke.

    Incidentally, one of the drawbacks of recent equality legislation (or possibly of public understanding of it) is that no one dares give anything more than the blandest feedback on a failed job application.

  9. Posted July 29, 2009 at 2:07 pm | Permalink

    This one has been coming for over two decades. I have posted it in recent months, and back in 2003 had something on record. To use an overworked phrase, it is a gorilla in the room that everyone is terrified of mentioning, because it will not be polite. It would have been difficult enough to cope with had the government had budget surpluses with low debt and the economy was on a high. Now it represents a huge financial challenge with perhaps either default or freezing the pensions and letting inflation rip as the only answers.

  10. Martyn
    Posted July 29, 2009 at 4:35 pm | Permalink

    The unfunded pension sector will be a nightmare to unravel. Essentially what has happened here is that both employees and employers have paid into a notional pot which is actually used to fund current govnt expenditure. Pensions are paid out of the contributions of current members, not out of investments on the sums paid in, in what amounts to a huge Ponzi scheme.

    If new joiners and even current members start paying into a real fund, there will be no money coming in to pay the pensions on those retiring or in retirement. So, the full liability will pass directly onto the government’s books.

    Private companies that have real money in their pension funds can shift fairly easily from final salary to defined benefit schemes: although this will often (but not necessarily) hurt the members.

    For unfunded public sector schemes, converting in this way would be like trying to get Madoff to start trading in real cash.

    • alan jutson
      Posted July 29, 2009 at 7:36 pm | Permalink

      Martyn

      Agree with your points but remember it is not the Government who will have to find the money, but those of us who are also trying to provide for our own pensions.

      We end up paying twice, those in the public sector as Lola has pointed out given employers contributions and tax allowance, do not even pay once.

      Afraid someone has to say enough is enough, the system is closed, MP’s could do this if they did it themselves to their own scheme, then it would be, if its good enough for us, its good enough for you.

      Get the MP’s to lead by example John, you have made the argument, you have suggested the Solution (to MP’s Pensions a few weeks ago) now get them to act and resolve the issue, before we sink under the weight of future tax rises.

      National Insurance, another Ponzi scheme.

  11. Gareth
    Posted July 29, 2009 at 5:29 pm | Permalink

    Is it possible to compare the annual cost of the debt and the pensions and also the rate at which both are expected to increase?

  12. Posted July 29, 2009 at 7:29 pm | Permalink

    A fish rots from the head down.
    The EU is the head and it is financially rotten. We all know this, so I won’t bang on.
    Now the head of our country is getting rotten too. We are being forced to go back on our word and that is something English people have always not done.

    The Cabinet was formed, quite reasonably, to control parliament under Sir Robt. Walpole. It made absolute sense to have a few friends round to discuss the way forward and to form a bond of silence. You could tell Stalin’s mood from the way he lit his pipe and you could tell Sir Robt’s by whether he showed you the inside of his cabinet…..
    Nowadays the real cabinet consists of the people who inhabit No 10 Downing Street and environs.
    The nominal “cabinet” is just a system to reward loyal aparatchiks and ought to be got rid of immediately.
    We are a small country. We do not need a lot of government now. The Empire, let me remind you, went over half a century ago. And then we had a much cheaper and smaller government.

  13. Posted July 29, 2009 at 10:17 pm | Permalink

    There are a couple of things to remember about pensions.

    The first is that the future pensions liability is inversely related to the return on investments. With the returns on shares been negative for the last couple of years and interest rates being pushed very low in the past year, then pension deficits have decreased. The termination of final salary schemes has been largely impacted by the (now failed) attempt to terminate boom & bust.

    The second is that basic state pension should also be included in the future pensions liability. It is a liability that should not be contentious, but it is a growing liability.

    Perhaps it is time for the government to graduate from cash book accounting to the grown-up balance sheet and accruals-based accounting. The balance sheet approach (though contentious) would show the huge losses made in the past couple of years, and the true economic impact of short-term anti-recession measures.

  14. THE ESSEX BOYS
    Posted July 30, 2009 at 7:27 am | Permalink

    Thanks for this, the latest of an excellent ‘series’ which tackles the real nitty gritty of government administration.

    Revealing the sheer weight of numbers and figures that make up Britain’s enormous overspending splurge is the way a management team would begin solving UK PCL’s problems – and what a change to this governments continuing ‘eye-catching initiative’ method! It certainly brings home the excesses.
    We particularly approve of your way of spelling out the zeros instead of the normal billion/million shorthand, even if 1 trillion is a few zeros too far!
    One of the dangers of the bank bail-out is that anything less than a few billion is seen as chicken feed…most particularly by the current crop of ministers!
    Hopefully this analytical approach is being adopted by Mr Cameron’s team?

  15. Jon
    Posted August 1, 2009 at 11:54 am | Permalink

    The move to defined contribution is a necessity especially as we move closer to an aged population in 10 years time. The sooner the better. It should have been done a long time ago, delaying it will only further increase the cost.

    I think the Tory’s need to get this message out. There will be a backlash but the public need to be aware of the facts so that they can hold out of the may months of public sector strikes that will come.

    The change will have high upfront costs but there will be huge investment into industry as a result.

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    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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