Public sector pensions

Prior to the last election I argued that the MPs’ pension fund should be closed, preventing any new members joining and stopping further accrual by existing members. I suggsted it be replaced by a modern money purchase scheme similar to the experience of most private sector companies. There are few final salary schemes left for new members in the private sector. This could be the prelude to a wider public sector pensions reform to limit future costs to taxpayers by changing the terms on which future contributions could be committed.

My view did not prevail. The Coalition government did, however, agree that public sector pensione generally were unaffordable. They recommended higher contribution rates for MPs and others in the public sector, and said these would control the costs of provision.

It is interesting to compare the costs of public sector pensions in the first Coalition Red Book in June 2010 with the costs in the latest version, Budget 2013:

2010 forecast £5.8bn 2012-13, £8.9bn 2014-15, £10.3bn 2015-16

2013 forecast £10.5bn 2012-13, £12.4bn 2014-15, £13.6bn 2015-16, £16.2 bn 2017-18

Michael Johnson and the CPS have done good work on this, setting out what they see as the pensions cost timebomb for taxpayers and making proposals to tackle the issue. A small part of it is the state assumes responsibility for the Royal Mail pensions scheme payments (£1.3bn). The rest is the rising cost of pensions in payment compared to contribution income.

The Red Book certainly reveals that action to date, seen as tough by some in the public sector, has not been sufficient to avoid a very large increase in taxpayer contribution to public sector pensions.

This entry was posted in Uncategorized. Bookmark the permalink. Both comments and trackbacks are currently closed.

91 Comments

  1. Posted April 2, 2013 at 6:46 am | Permalink

    Once again, the picture is quite the opposite to the truth which you so carefully reveal.
    All we seem to see in TV are old soldiers starving in garrets and teachers out on the streets protesting about the cuts.

  2. Posted April 2, 2013 at 7:13 am | Permalink

    My public sector experience of pensions is deplorable.It was a steady , good pension and one of the reasons why many elected to work in the public sector. In 1995 myself and many others were stopped paying into the pot , by agency take -over of public jobs and by immigrants taking the jobs we had worked for all our lives. If no money goes in of course the resource will not be there to invest . Some might say that in the banking environment it may have been the right choice. The theory behind this shift was that our well experienced staff would work on an agency basis ( and be maltreated to boot) and pay into private pensions. Of course this competition thing spoiled our earnings. We never knew where the money was going to come from , from day to day, never mind pay into a private pension pot. Short term contracts , public institutions kow- towing to certain agencies( for a profit) has stopped growth. Is it a wonder the pay out has become difficult. I made this point 20 years ago , whilst the teeth snarling competitors did all they could to get contracts . Staff were abused being blamed for mistakes when they were not even working .(You see agency staff did not have a right to be legally investigated when false allegations were made)
    I am sorry , but ‘private’ has ruined our finances , it has been foremost in deploying moneys to other organisations who have disrespected the state , weight of service and knowledge and very sadly it looks as though ‘private ‘ is the only solution .
    If I could see this 20 years ago , then why could the fiscal and financial wizards not see it? or perhaps they could.

    • Posted April 2, 2013 at 11:28 am | Permalink

      Margaret

      Private Pension provision has always been the same, the Financial Institutions make sure they look after themselves first, their shareholders second, and their policyholders third.

      Win, lose or draw, they always collect their fees in full FIRST.

      Those who have NHS or Civil Service type Pensions do not realise how very good they have been and still are, and how fortunate they have been and still are.

      The sad fact of life for the rest of us who are not so fortunate, is that we actually subsidise the provision of those very good pension schemes with our taxes.
      Indeed many of us have paid more in taxes than we have put into our own pension schemes.
      I see from recent press reports that even the modified versions agreed last year for those in the NHS and Civil Service and the like, are still financially unsustainable in the longer term.

      Meanwhile the new increased State Pension due to be introduced shortly, will not include an increase for existing pensioners.
      Thus we have the situation where those who have made 49 years contributions (if you are a male) with a lifetime of work and contributions, will get less than those who now only need to pay 30 years contributions for a full pension.

      Only in the UK could you make this up.

      What is your view on this huge disparity John ?

      • Posted April 4, 2013 at 6:05 am | Permalink

        It gets worse – the new increased state pension (for some) is being funded by stripping those of us who had contributed to SERPS of their second state pensions and they are increasing the NI contribution qualification for full state pension to 35 years from 30 years.

        So the message is work longer and harder for much less yet the public sector employee defined benefit pensions which we also have to fund are untouched.

        Doesn’t it just give you a warm glow when public sector unions strike because they want even more money to alleviate the stress of recession?

    • Posted April 2, 2013 at 4:54 pm | Permalink

      The terminology “primary pension” is often used to refer to the state pension which everyone with sufficient N.I. contributions gets . The term “secondary pensions” is often used to distinguish vocational pensions and private pensions from the state pension .

      Everyone should have access to decent secondary pensions whether they work in the private sector or public sector or are self employed .

      Do you think most public sector workers would agree to replacing their current schemes with a transparent defined contribution scheme which is open to everyone (public sector , private sector and self employed) ?

      • Posted April 2, 2013 at 7:02 pm | Permalink

        My primary pension for which I worked and paid into for 40 years has been frozen at the rate I first got when I was 65. Now it is worth a whole lot less than the current rate. This is simply because my wife and I moved to Canada to look after father in law. Also, both this primary and my secondary pension are worth a whole lot less because of the amount the value of the pound has fallen. W are now contemplating returning to UK, bringing to the british taxpayer the cost of our medical attention which is currently falling onto the Canadian taxpayer.

        • Posted April 4, 2013 at 4:44 pm | Permalink

          Richard

          Yes, frozen pensions are a disgrace, after all you paid into the scheme.

          Why does it matter where you now live !

          • Posted April 5, 2013 at 6:22 pm | Permalink

            Agreed, but I dont expect much to be done in the present climate. What gets me is that politicians of all stripes say one thing when in opposition but always seem to reverse themselves when in power. Our retirement is not anything like we had hoped it would be!!
            Thanks for your thoughts.

  3. Posted April 2, 2013 at 7:16 am | Permalink

    It is hardly surprising that MP’s still have one of the best scheme going after all they are the ones who voted for it and would have to vote to change it. Doing the right thing or setting a good example is not something most MPs are usually noted for.

    MPs get about £50K of pension benefits PA (1/40 of salary RPI linked still) for a contribution of 13.75% of salary (or about £7K after tax relief PA). It is worth nearly as much as their salary is PA to them.

    So the private sector, most of whom have no or very minimal pension provision, have to find (by 2017) about £700 each (and rising rapidly) to fund the state sector worker’s pensions. But these workers already have pension more than 6-10 times better than theirs and are (including pensions) remunerated at about 150% the rate. Still, we are all in this together as they say (other than those who have sensibly left already) or work for the state sector.

    How can the private sector compete in the world market and make provision for their own pensions, when loaded with all these demands from the overpaid, over pensioned, very inefficient and largely dysfunctional (and often pointless or worse damaging) state sector?

    • Posted April 2, 2013 at 9:24 am | Permalink

      MPs can also marry and/or have civil partnerships after retirement with their widows/widowers/partners pension going to the last in the line of pension succession.

      No other public service pension provides this benefit .

      The argument put forward pre election was that this is the model we must all aim for.

      • Posted April 2, 2013 at 9:29 am | Permalink

        In Ireland civil servants have had to pay a 6.25% levy on their salary to secure their pensions.

        We really pussy foot around when it comes to ‘austerity’.

        • Posted April 2, 2013 at 5:48 pm | Permalink

          MPs would need nearly a levy of 80% to pay for their own pensions more if they have a young wife or “partner”.

      • Posted April 2, 2013 at 5:46 pm | Permalink

        Indeed take a younger wife and you really get a bargain pension, or rather she does.

    • Posted April 2, 2013 at 3:23 pm | Permalink

      To say nothing of the humungous amounts we pay for the EU “civil servant” pensions and expenses – don’t forget them !!

      • Posted April 2, 2013 at 5:49 pm | Permalink

        Indeed and with “special” tax rules just for them.

        • Posted April 2, 2013 at 6:24 pm | Permalink

          Given the package that a relative gets as a teacher at a private school educating the children of Eurocrats in Belgium, I shudder to think of the total cost of this scam.

          €6,000 a month that is effectively tax-free, a “basic teacher’s salary” of £30,000 plus a year paid in the UK on which tax and NI are levied, VAT exemptions initially on some purchases while they settle in to their new country and free schooling for her two children. Top this up with relocation allowances and generous child benefit payments from the Belgian government and you’re looking at a very handsome package indeed.

          Some of the most recent arrivals at her school have to struggle to make ends meet on a salary of €4,000 a month, the poor dears. Some of the time-served, however, get as much as €10,000 a month.

  4. Posted April 2, 2013 at 7:31 am | Permalink

    Lets face it, MP’s will never vote to cut any of their benefits or their co conspirator bureaucrats benefits. With a very few exceptions they are in the job purely for personal gain which would be fair enough if they were not such hypocrites. They ride the gravy train for all it’s worth and that is no surprise. Government is entirely about forcibly removing wealth from one group and giving it to others so the type of people attracted to the work are never going to be the most moral in society are they?
    The theft and waste will continue until one day the system collapses under the weight of it’s own greed and it will be the tax payers that suffer as usual.

    • Posted April 2, 2013 at 3:00 pm | Permalink

      Indeed depressing but true in the main and even when it collapses it will often be replaced by something that ends up being rather the same, or worse.

  5. Posted April 2, 2013 at 7:53 am | Permalink

    Yes I agree with you, but all civil servants, rather than just MP’S, should transfer over to money purchase schemes including NHS staff, Teachers and other public sector workers.

    Such schemes could work like this.

    1) Each employee would have their own pension account (pot).

    2) Both the employees and the employers contribution would be put in to the account each month.

    3) At the end of the year, day to day interest would be added. Interest would be based on the consumer price index (CPI) plus say 1% to 2%. The plus % aspect would be the only gold plating the scheme enjoyed, by guaranteeing a return above inflation.

    4) On retirement the employee would be offered the same choices as everyone else in the country, namely a level pension or an indexed linked pension with or without a lump sum. The pension would be based on life expectancy. The pension could be taken from the age of 55.

    5) If an employee left before retirement the current pot value would form the transfer sum or alternatively the pot could be left where it is and grow at the CPI plus interest rate.

    The pension pot would of course be notional, that is it would not really exist except on a computer. The employees contribution would be returned to the treasury to be spent on other things. A more enlightened government could hand those contributions over to trustees who could then lend the money to government to build schools, hospitals and other infrastructure projects, rather than use PFI.

    On the annuity side the government would pay out of general taxation, like it does today. There is also scope for a guaranteed annuity rate so that pensioners are not subject to the ups and downs of economic cycles, most pensioners have little control over when they retire.

    I would not, under any circumstances, support the idea of handing over large pension pots to the pension industry to provide annuities, they have offered such poor value for money over the years. Indeed, with the proposed pay as you go system, it is undesirable for the government to hand over large sums to anyone.

    Overall this plan would be affordable for the nation and much more fair to the public at large. It would certainly reduce the long term pension burden on the countries finances.

    • Posted April 2, 2013 at 8:36 am | Permalink

      Who pays the inflation plus 1%

      The notional fund means its just another debt and the state can’t pay.

      Now replace it with this scheme. Fund in your own name. Money invested in real assets. State provides a guarantee. If and only if your fund runs out in retirement, will we all help. Just in time welfare.

      Since a 26k a year worker would have had a fund of over 560k under such a scheme, they are better off than a 130k state pension.

      And no state debt, plus lots of economic growth fro the investment.

    • Posted April 2, 2013 at 6:47 pm | Permalink

      We would need to find a trillion to fund the transfers as they are largely unfunded, we don’t have that money. Public service pensions are paid out from taxes collected 3 months before.

  6. Posted April 2, 2013 at 7:53 am | Permalink

    Do these ‘public sector’ numbers include local government, or are they only the pensions directly payable by central government? If the latter, as I suspect, then surely the picture is far worse than is being painted as there have been many articles about the pensions time bomb in local government facing council taxpayers.

    • Posted April 2, 2013 at 8:35 am | Permalink

      I believe most Local Council Pensions schemes are funded. Where I live, Hampshire, the fund was £3.55 billion, and grew by some 8.3 % in 2011 through investment.

      Strangely teachers are not included in these schemes.

      • Posted April 2, 2013 at 3:34 pm | Permalink

        In my area the council taxpayers’ contribution to local government workers pension schemes was running at 23% five years ago. Goodness knows what it is now.

  7. Posted April 2, 2013 at 8:01 am | Permalink

    Vote CON will take all you have savings, PENSIONS please do point out to me any single one member of your party that is going through what we are going through High class greed has screwed this country up and now the spine of the country Working class are paying the bill. My anger towards your party is becoming a hatred which is good because that will remind me to never be so blinded that this party will ever do anything that does not line there pockets and those of there chums. I am beyond hoping for change by dipolmacy and pray for the day that the people of this country stand together because for LAB and CON you both have a lot more to lose then we do. Gov’s in this country forget on whom they stand. MR J R what needs to be done is simple but your Party and DC just wont do it because it means a little less cash for them to busy trying to keep there frineds happying and paying. A question if i may “Who will our Gov turn to when the people come knocking ??? The Police? The Armed Forces? Europe? is there anyone in this country that the Gov hasn’t pooped on?

    • Posted April 2, 2013 at 12:47 pm | Permalink

      I’ve tried to make sense of your reply ; it is incomprehensible !! I thought all replies were “moderated” and those deemed “fit” for publication were included ; yours should have been excluded .

      • Posted April 2, 2013 at 3:36 pm | Permalink

        I think the gist is quite clear

      • Posted April 3, 2013 at 7:08 am | Permalink

        Arrrrh A quite cute atempt at belittlement. yes you can keep your lips well pressed at current location my countryman. Im not here to post a reply to slide in a lil deeper, im a person whom has had enough of the way this country is run and lucky for me people like me out number people like you on a massive ratio. So when time comes your pathetic Big man ego will dissipate rather quick. Mr J R feel free to ED this post as it is a slight personal attack but only in reply to my own felt attack which you was happy to post.

  8. Posted April 2, 2013 at 8:21 am | Permalink

    The taxpayer should not be subsidising public sector pensions. If the “pot” does not contain enough money that is because the beneficiaries have not put enough in. Pay-outs should be capped. (Capping rather than scaling-back would protect the lower paid.)

    • Posted April 2, 2013 at 3:34 pm | Permalink

      Often the public sector pot doesn’t have enough money because the treasury kept the surplus during the good years, then panics when large numbers of people retire.

  9. Posted April 2, 2013 at 8:26 am | Permalink

    The real issue isn’t the current cost but the pensions debt. That tells us what is going to happen. After all you can solve the immediate problems by screwing people in the future. Spend their pensions now and borrow and print. That leaves a bigger mess because you have to add interest on.

    So what was the increase?

    2005-2010 it was 736 bn a year, borrowing not included. Taxes now are just 550 bn a year. Spending 700 bn.

    So why spin the lower number?

  10. Posted April 2, 2013 at 8:32 am | Permalink

    What about the elephant in the room ; the private sector pensions time bomb .

    Five times as big isn’t it ? What are your proposals for private sector workers ?

    I will have to look at the red book to see exactly what those figures for cost of public sector pensions are supposed to mean because they do not appear to have any relationship with the cost of old age pensions .

    Assume there are half as many public servants retired as working then the figure of £16b per year only works out at a pension of 16,000m/2.75m = £5,818 and the average pension for someone who has worked full time in the public sector worker for their entire working life will be over double this amount .

    How about a bit of transparency ; a scheme for public sector workers that will also be open to private sector workers ?

  11. Posted April 2, 2013 at 8:35 am | Permalink

    Thank you once more for setting out comparative facts. Unfortunately, each time you do it shows how useless your party has been in office and reinforces my intention never to vote for them again.

    • Posted April 2, 2013 at 7:54 pm | Permalink

      Indeed, not that anyone else will be any better.

  12. Posted April 2, 2013 at 9:17 am | Permalink

    Why have the 2012 – 13 costs doubled? The pensions have not doubled and I would be very surprised if the number of people receiving them has doubled.

    Why was the 2010 forecast so different from the 2013 forecast? Is this our old friends the OBR getting their sums wrong again?

    • Posted April 2, 2013 at 4:16 pm | Permalink

      Very good questions.

    • Posted April 2, 2013 at 6:36 pm | Permalink

      That one might have been Lord Hutton using completely unrealistic growth rates at the time, he was still assuming we were in the post war boom.

    • Posted April 2, 2013 at 7:06 pm | Permalink

      Martyn ,

      Those figures don’t seem to equate to pensions payments to retired people or employers contributions being made by the state on behalf of those currently in work so we will have to read the red book to find out what they are .

  13. Posted April 2, 2013 at 9:28 am | Permalink

    Here’s a suggestion:-
    – Transfer all public sector pensions to money purchase schemes, with members given a fund comprising newly issued gilts;
    – members are free to adjust their portfolios which would initially be 100% gilts;
    – The max fund issued would be the lifetime allowance as it applies in the private sector (now down to £1.2m, perhaps an exception would have to be made for senior civil servants to allow the old limit of £1.8m);
    – members could make contributions in future as private sector employees do, same restrictions to apply. Salaries adjusted to reflect removal of final salary scheme.

    Among the benefits of this would be: clarity on the pension liability; the introduction of much greater employment flexibility in the public sector so as people could move more easily into and out of it; giving public sector employees an exposure to and an interest in financial asset prices. Employees whose pensions were dependent on investment performance would be much less likely to agitate for growth destroying taxes and inflationary borrowing by the state.

    • Posted April 2, 2013 at 3:38 pm | Permalink

      So you want the public sector to be more reliant on the economy. All this will result in is every union striking when the Government does anything that may harm their pensions in any way.

      • Posted April 2, 2013 at 6:54 pm | Permalink

        Oh well then Uni, if they go on strike we must just automatically give in to their demands.
        Perhaps the Unions might be able to tell us where the money is coming from to pay for their demands.

      • Posted April 2, 2013 at 10:45 pm | Permalink

        Absolutely & I think the opposite would be the case. If public sector workers had a real stake in the economy and could see tangible results from good (or bad) economic performance they would be much less likely to strike.

      • Posted April 3, 2013 at 1:16 am | Permalink

        Well yes, the more one thinks about it, the more that sounds a good idea. Senior civil servants would also be keener to advise against anything that damaged the economy or the pension prospects of the general citizenry.

    • Posted April 2, 2013 at 4:29 pm | Permalink

      Richard1 ,

      Another benefit , money pension schemes are demographically neutral .

      Demographically neutral pensions schemes are surely preferable to the current ponzi scheme which relies on never ending population increase .

      FWIW I think there is merit in increasing the state pension up to a liveable level first which dispenses with means tested benefits even if this means state sector vocational pensions need to be reduced .

      • Posted April 2, 2013 at 7:07 pm | Permalink

        Typo : Money payment .

      • Posted April 2, 2013 at 10:48 pm | Permalink

        I agree. There should be a guaranteed minimum income for everyone, meaning increased incomes for pensioners, with high tax thresholds, negative tax rates for low incomes and a flat tax above, with the removal of all tax avoidance schemes. That way we would get fairness and real incentives to growth.

    • Posted April 2, 2013 at 4:29 pm | Permalink

      Where public sector pension schemes are unfunded, wouldn’t that involve the Treasury supplying gilts and getting nothing in exchange?

      And wouldn’t the volume of new gilts required be so great that it would depress the market prices of gilts, raising interest rates?

      And wouldn’t the Treasury then have to arrange for the Bank of England to create more new money to buy up the surplus gilts and store them away along with the £375 billion stock that it already holds?

      And where would that newly created money go after it had been paid to private gilts investors in exchange for some of their holdings of previously issued gilts, as in this case, unlike QE as so far practised, the Treasury wouldn’t be selling more new gilts to much the same set private gilts investors at much the same rate, but would instead be giving them away free of charge to the pension schemes?

      • Posted April 2, 2013 at 10:42 pm | Permalink

        It would mean a huge increase in the volume of outstanding gilts, but the unfunded liability the govt currently has is still a real cost and is factored in to the market price of gilts. Potentially its better to be really clear what the liability is – and to cap it. I don’t see why new money creation would be needed. The govt would issue gilts directly to members of the scheme in return for cancelling the uncapped current liability.

        • Posted April 3, 2013 at 10:35 am | Permalink

          I read here:

          http://www.bbc.co.uk/news/business-14134847

          “The OBR’s figure for pension liabilities, at £1.13 trillion, is an estimate of the stock of assets the government would need now, if an investment fund had to be established to generate the cash to make all the future public sector pension payments.”

          So it would roughly double the volume of outstanding gilts.

          You suggest:

          “members are free to adjust their portfolios which would initially be 100% gilts”

          which means that potentially all of those new gilts could be offered for sale on the secondary gilts market.

          In recent years the supply of new gilts to fund the current budget deficit has exceeded the demand from private gilts investors at any affordable interest rate, so like the EEC buying up surplus butter and putting it into cold store to support the market price the Bank of England has been creating new money to buy up surplus gilts and take them out of circulation.

          If say 30% of the ca £1 trillion of your new gilts were offered for sale on the gilts market then roughly speaking the magnitude of that would be twice the volume that the Treasury needs to sell each year to fund the budget deficit, and it seems inevitable that the Treasury would only be able to do that if the Bank created an additional ca £300 billion to buy up your extra gilts, on top of whatever it will have to do anyway to make sure that the government doesn’t run out of money to pay its bills.

          Where would that £300 billion go? Well, the members would be selling the gilts to adjust their portfolios, so presumably it would be used to buy other assets.

          Unlike the £375 billion already created by the Bank, almost all of which has been passed to the Treasury via the gilts market and then spread around the economy when the government paid its bills.

          I don’t think yours is an intrinsically bad scheme, but it would be a very bad time to do it; a good time would be when the government was consistently running a budget surplus and reducing the total volume of outstanding gilts, and the gilts put into safe storage by the Bank had already been released back into circulation.

          But if it was going to be done before then, it might be a canny move for those who already had investment portfolios to adjust them away from gilts to equities before it was publicly announced.

          • Posted April 3, 2013 at 8:54 pm | Permalink

            Yes those are reasonable points, but bear in mind that it should be possible to get people to exchange their theoretical pension rights for hard cash-equivalent assets at less than the nominal best value of £1.1tr. Hopefully the highest paid public sector officials could be convinced to accept the private sector max of £1.2 / 1.8m (a few extra knighthoods might be needed). Also bear in mind that the credit risk and appetite for gilts would be transformed by the removal of the huge off-balance sheet liability for pensions. A government which showed real determination to solve the UK’s debt crisis might find its bonds in much greater demand.

  14. Posted April 2, 2013 at 9:40 am | Permalink

    Here is an idea .

    We have a problem in the UK where the old people have all the money and all the influence and appear to use it to prevent any sort of industrialisation and basically try to turn the whole country into an idyllic Eastbourne .

    The younger generation should have much more interest in real solutions rather than maintaining the status quo .

    How about removing the right to vote from anyone over the age of 70 ?

  15. Posted April 2, 2013 at 9:54 am | Permalink

    The biggest problem with pensions is that investment returns have collapsed, and the real return for annuities is negative. You now have to live to 100 simply to see the real value of annuity capital returned, let alone any return.

    It is of course little wonder when so much government policy is aimed at creating investments with negative returns, such as energy policy, HS2, pumping up the housing bubble, QE/ZIRP. These policies also add to household bills unnecessarily, making it hard to save for a pension. Money wasted on funding a bubble house price is not available to invest in a pension: instead it pays the pension of an overseas lender.

    None of this has been helped by tax raids on pension funds and compulsory investment in gilts with negative real returns ever since Brown started the fashion. It makes pension saving a poor, risky investment. The state has seemed to seek to be the sole provider of pensions, trying to create clients out of everyone who survives long enough.

    Against these attacks on private pensions, public sector pensions now seem unduly generous. However, we all grow old: the real problem seems to be rather the bloated size of the public sector, much of it not concerned with adding real economic value (and too much of it concerned with subtracting value). As those people retire, not only are the worthless jobs of their successors a burden to productive taxpayers, but also their pensions.

    Pensions would be much more affordable for everyone if we had sensible economic policies.

    • Posted April 2, 2013 at 4:33 pm | Permalink

      I’d say the real problem is accommodation prices are too high .

      Bring accommodation costs down to a sensible level and people won’t need a positive return on savings .

      As it stands people are spending money which should be saved for old age enriching the land owning class which is farming them .

      • Posted April 2, 2013 at 7:08 pm | Permalink

        i.e. Ricardo’s Law of Rents in action .

      • Posted April 3, 2013 at 8:18 am | Permalink

        There should always be an incentive to save – otherwise everyone becomes a burden on the state.

  16. Posted April 2, 2013 at 11:31 am | Permalink

    There was a proposal to cap pensions at 60k per annum…the equivalent of a 1.5m fund…Under Labour a vast number of salaries topped 100k so this trend will worsen. Nick Clegg and the Lib Dems want the size of private funds to be limited to 1m yet say nothing about the public sector funds. No wonder many people don’t bother with pensions!

    • Posted April 3, 2013 at 9:22 pm | Permalink

      Look what happened to Cypriot depositors. What makes public sector retirement promises inviolate?Particularly pensions £60k+ pa. Seems like another benefit cap is needed for public pensions.

      Look no further than MEP’s, MP’s.

      Should council taxpayers with less income than the said pensioners fund local government pensions?

      At least with the BBC you can choose not to watch live over the air broadcasts.

  17. Posted April 2, 2013 at 11:31 am | Permalink

    Who in your party would disagree with getting rid of final salary pensions and replacing them with money purchase schemes? When was this voted on? I must look up the voting list.

  18. Posted April 2, 2013 at 11:54 am | Permalink

    Who need Keynsian stimuli with figures like this?

  19. Posted April 2, 2013 at 11:55 am | Permalink

    Probably stupid questions but why is the government so set on just cuts? How much would a penny on tax increase raise? Would it be enough to ease the crisis? Could we not raise interest rates by a percent, would that ease the drain on savers and pensions. Cut VAT to try to get people spending. Do we need to create controlled inflation. Is it time to start looking at other methods to raise money and boast public spending to kick start the economy as well as just cuts. Or is that political suicide?
    We think the public are ready to listen to other options if they get results. Short sharp pain is better than long term agony.

  20. Posted April 2, 2013 at 12:07 pm | Permalink

    The sooner that everybody moves to money purchase pensions the better. There are, however, a couple of major issues.

    If an employee, with or without the help of a Trade Union, has a contract that implies that a defined benefit pension will be provided sine die, how does an employer end that agreement? It may need to be contested in the courts. Common sense suggests that defined benefits schemes are (a) fully funded by increasing employee contributions and (b) closed to new entrants.

    Should contributions to money purchase contributions be compulsory? If not, people must understand that there is no obligation for the State to help them except for a small OAP.

  21. Posted April 2, 2013 at 12:17 pm | Permalink

    I wonder how much longer the tax-payer in private employment (who, by definition, will not benefit from a, presently, excessive public sector pension) will tolerate the present situation.

    Not much, I posit.

  22. Posted April 2, 2013 at 12:20 pm | Permalink

    Many years ago I wrote a pamphlet for the FSB entitled, “Cuckoo In The Nest” which showed how much of a drain on taxpayers’ money public-sector inflation-proofed pensions had become. Iyt was not liked by the Civil Servants!

    In order for a self-employed person to achieve a similar perk at that time it would have cost them 150% of their annual income.

    Why has it taken so long for the penny to drop???

  23. Posted April 2, 2013 at 12:22 pm | Permalink

    As a recently retired Independent Financial Adviser, I’ve know for years that the current public sector pension system has been unsustainable. They are also completely out of step with the benefits available to the vast majority of workers in the private sector whose pensions were systematically destroyed by Gordon Brown over his 13 years in Downing Street.

    The real situation is even worse than John’s figures show :
    When you look at local authority pensions, the retired communities in small towns and villages will rapidly becoming two tier societies : those with public sector pensions and
    those without.

    As a result, impoverished retired private sector workers face higher and higher council tax payments to fund pensions of retired council employees at a level they can only dream about.

    The proportion of Council Tax going to pay for pensions in payment will continue to grow rapidly and little has been done to try and tackle the problem. Labour chickened out and it doesn’t look like the Coalition is going to do anything substantial to bring costs under control.

    It used to be argued that lower public sector wages was compensated for by valuable final salary pensions. This is no longer the case because public sector salaries are now 10-20% higher.

    Final salary schemes in the public sector are completely unaffordable and therefore should be replaced across the board by cost effective money purchase schemes.

    • Posted April 2, 2013 at 3:47 pm | Permalink

      Exactly. But there are none so blind as those who refuse to see.

      The political leaders of most councils are so close to their senior officers they will not do anything to upset them.

      And of course a good number of those politicians have voted themselves public sector pensions…..

  24. Posted April 2, 2013 at 12:56 pm | Permalink

    There seems to be a general recognition that public sector pension liabilities are a ticking time bomb, but politicians would rather keep it ticking and hope it goes off on the other team’s watch than attempt to defuse it.

    • Posted April 2, 2013 at 3:47 pm | Permalink

      see above.

  25. Posted April 2, 2013 at 1:57 pm | Permalink

    If we in England only had MP’s from this Country who’s salary was paid by the tax payer excluding Scottish, Welsh and Northern Irish MP’s who have nothing to do with us yet are allowed to vote here, I would assume still funded by us. Then the number of English MP’s cut dramatically as 80% of our legislation comes from the EU then I am sure the cost to the tax payer would have a dramatic saving.
    We have seen how corrupt a lot of MP’s and Lords have been and lets face it some still are who are on such a good thing then they will never give up their gold plated pensions. The same applies to inept senior managers in public service who instead of being sacked are moved side ways with a protected pension. T he working class down the bottom get shafted whichever way you look at it and until there is a form of revolution in this Country the status quo will apply.

  26. Posted April 2, 2013 at 2:05 pm | Permalink

    Local Government pensions are not all tax-payer funded, they are largely self-sufficient, although not entirely. Be it public or private sector I do think it is unfair to change the terms of a contract unilaterally. People sign up for a pension and enter into a contract, whether that be for money purchase or final/average salary schemes. To change that to the detriment of the pension payout is unfair on those who may have contributed for most of their working lives. They have done so in good faith and have attempted to make provision for their retirement. What you take away in private pension you may well make up in means-tested benefits. Not all public sector workers are highly-paid. I have no issue with changing schemes for new entrants – at least they know what they can expect from the start. Unfortunately no contract is worth anything nowadays. At least these people have made a contribution. I look forward to the flat rate state pension, when someone who works all their lives gets the same as someone who has claimed credits of NI because they have never worked. It may be simpler, but is grossly unjust – hardly “making work pay” to borrow a quote.

  27. Posted April 2, 2013 at 2:35 pm | Permalink

    John, what happens to an MPs pension when he looses his position?

    Reply Like all funded pension schemes, he is entitled to a deferred pension based on his contributions, or takes a pension on leaving office if old enough etc

  28. Posted April 2, 2013 at 2:38 pm | Permalink

    Dear Mr Redwood,

    You were right about MPs’ pensions. It is not just a matter of putting MPs in a privileged self-spun cocoon that separates them from their constituents. It is also a key part of the web that captures you all as central government employees rather than representatives sent by their local citizenry to represent their general interests and attitudes.
    As I have argued here and elsewhere for the past six years, MPs should be self-employed persons paid a generous overall fee by their constituents collected locally. I feel sure that many real MPs like yourself would rather have it that way than being classed just as a combination of Spad and local ombudsman.

    • Posted April 2, 2013 at 3:57 pm | Permalink

      If the political elite really had any belief in the future of the country, they would be open with taxpayers about the future cost of public sector occupational pensions.

      The only way to do this is to have fully funded and accounted pension schemes, not notional accounts based on dodgy, unjustifiable assumptions no better than those taken by former Greek governments. Instead, as the Post Office pensions scandal illustrates, it is moving in the opposite direction for purely cosmetic political advantage. Short-termism rules at the Treasury, as it has for many years.

      If these currently unfunded public sector occupational schemes were invested in newly issued index-linked gilts, the nominal national debt would roughly double. But I see no reason why this should disturb markets because the Treasury could also issue a figure net of debt held by these funds.

      The cost to taxpayers would be lower if a portion of the funds were invested in risk capital for British industry, company shares that have historically earned a much higher real return.

      You could start by transferring the state’s existing commercial assets to some or all of the funds: eg UKFI , the Post Office. These holdings could then be built up and diversified on a conservative basis.

      Even so, the funding cost to taxpayers is bound to rise disproportionately because it is the policy of government to cut the numbers of public employees. There will therefore be fewer contributing relative to those entitled to pensions, a problem that has faced many big companies, particularly former state companies such at BT and the old British Airways.

      • Posted April 3, 2013 at 10:53 am | Permalink

        Of course it would disturb markets if the volume of outstanding gilts was suddenly doubled and all of those extra gilts could be immediately offered for sale on the gilts market in order to obtain money to invest in other asset markets. Without the Bank of England expanding its present role as the largest single gilts investor by miles, the gilts market would crash and the government would be bankrupted. With the Bank of England creating yet more new money to rig the gilts market in order to prevent that crash and so save the government from going bust, by buying up more surplus gilts and storing them away out of circulation, that new money would find its way into other asset classes and help to inflate asset price bubbles.

        • Posted April 3, 2013 at 8:59 pm | Permalink

          @Denis Cooper,
          Well of course the huge one-off start-up funding of index-linked gilts would have to be kept as core assets. As I thought I had made clear in my penultimate paragraph, diversification would be effected from the state equity holdings transferred to the fund, which might initially make up only about 5 per cent.

    • Posted April 2, 2013 at 4:50 pm | Permalink

      Before Class 4 NIC kicked in ALL MPs were self-employed. To escape this added tax they all voted to become “elected office holders” which exempted them since they had their Class 1 Secondary NIC paid for them by the Fees Office.
      The fact that this, effectively, made them ALL employees of the State and thus collectively should have made them apply for the Chiltern Hundreds and resign made a good talking point at legal dinners.
      Essentially then every piece of legislation that is passed by them since that time is nul and void since it has not been properly approved by the Lower Chamber before going to the Lords, etc. and then the Royal Assent..

      Reply I cannot see why becoming employees of the Fees Office makes it illegal to pass laws! Most consttituents have been keen to encourage a public servcie approach to the role of the MP, with MPs’ staff now also employees governed by Fees Office rules and paid for by the Fees Office using Fees office salary scales.

      • Posted April 3, 2013 at 11:37 am | Permalink

        Because, John, you have your Employer’s Class 1 Secondary NIC paid for you by the State. Something that MP’s are barred from doing. Becoming “elected office holders” was a way of using weasel words to disguise the fact that you were no longer self-employed so that you all escaped the dreaded Class 4 4% levy.

  29. Posted April 2, 2013 at 3:45 pm | Permalink

    The problem with pensions isn’t so much to do with public sector pensions, many of which are producing a surplus for the treasury, but the state pension which is currently underfunded.

    Reply The state pension has never been funded at all! This has alarmed some people writing into this site, but from its origins it has always been a pay as you go scheme. Changing from a pay as you go to a funded scheme would entail the generation undertaking the change to effectively pay twice, which has never semed like a winning idea to governments.

    • Posted April 2, 2013 at 7:04 pm | Permalink

      The first recipients of the state old age pension hadn’t paid anything specifically towards it, there having been no scheme into which they could have paid; it was a straight means-tested welfare benefit paid out of taxes, which required no record of contributions because nobody had made any contributions at that point.

      http://www.bbc.co.uk/news/business-11619379

      “When the state pension was introduced in 1909, the maximum payment was five shillings (25p) a week – the equivalent of about £20 today.

      Just over 500,000 old and poor people queued up to receive it. They had to be at least 70 years old, have an income of less than 12 shillings a week and not have too much furniture, which was judged as a sign of wealth.”

      104 years later, and we still have no fund with assets productively invested to pay for the state pension in the future, instead we have huge and increasing contingent liabilities which the government is trying to trim to manageable proportions.

      Mind you, the Irish do have some kind of national pension fund, and they had to use part of it as a contribution towards their own EU/IMF bailout.

    • Posted April 4, 2013 at 6:37 am | Permalink

      Which public sector pensions are producing a real “surplus” for the treasury? – returning tax money as employer contributions to the treasury does not constitute “producing a surplus”.

  30. Posted April 2, 2013 at 3:51 pm | Permalink

    “I suggsted it be replaced by a modern money purchase scheme similar to the experience of most private sector companies.”

    Presumably you would be content that your money would be invested in the same pool in which City spivs are legally permitted (by default) to deploy computer systems designed for front running, flash trading etc and where ‘proprietary’ trading with insider dealing and the holding of short positions in order to misprice over substantial periods is common practice? Before pushing more people into the same waters as sharks, would it not be wise to clear out the predators first? There is also the charges which are actually acknowledged, which have an inhibiting effect on growth and are much higher here than those in other Western countries. Company stocks should be investments for people to save for their futures including through their pension schemes, not the vehicles whereby spivs can make a quick buck today.

    One of the problems with third party pension schemes is that, as was my experience, the provider, the legislation and the law can change frequently and always in an adverse direction. Furthermore, much of what constitutes choice of provider and funds in the pension industry today is simply badge engineering after a period in which mutuals were demutualised and then passed around to the highest bidder. Most pension products are overcomplex and therefore expensive to administer, entirely as a consequence of unnecessary legislation and unnecessary charging.

    Reply It is not easy distinguishing buyers and sellers of shares you do not like from those you do like, and finding good legal rules to allow the one group to buy and sell whilst stopping the other group.It is impossible for a single coutnry to do this, as the buyers and seller you dislike simply move somewhere else to do it. If you set up a money pruchase scheme you do n ot have to invest in shares if you are that worried by them. There are bonds, property investments and near cash instruments etc.

    • Posted April 2, 2013 at 6:38 pm | Permalink

      Reply to reply. Thank you for your reply; however, I would have thought that shares could only be traded on markets where they are registered. I agree that you couldn’t legally ban gambling, however it would be perfectly possible to make rapid automatic trading uneconomic with a low tax threshhold and as for market-rigging with the aid of computers or otherwise, I doubt whether this is technically legal now. A long time ago, before the big bang, jobbers had to declare their buy/sell prices without knowing which a prospective broker was; now computer programs operated by companies with several different hats are used to fish out what is the least advantageous price at which a customer’s order may be executed. Although many crooks would wish to migrate to where the rules are least enforced, currently the UK, many others with serious money to invest would wish to trade where ethical standards are highest.

      Reply: The larger companies are usually quoted on more than one exchange, and can be traded off exchange.

      • Posted April 3, 2013 at 1:00 pm | Permalink

        Reply to reply: “The larger companies are usually quoted on more than one exchange, and can be traded off exchange.”

        I was aware of that but it still seems paradoxical that we are so prepared to jeopardise our future prosperity in one aspect where our impact is minimal, namely in responding to alleged AGW, but so little in another where the damage to the world economy in the recent past has been indisputed and vast and our impact would be immense, namely by cleaning up our financial services industry.

    • Posted April 3, 2013 at 8:55 am | Permalink

      There are options other than “city Spivs”, Forthurst

      While UK Government Gilts proivide almost no return at all, you could always insist that your pension money to be invested in a “safe” deposit account paying a high interest rate in a “sound” currency like the Euro ?

      Might I suggest the Bank of Cyprus ?

  31. Posted April 2, 2013 at 4:37 pm | Permalink

    Keep it simple. All public sector workers including MPs purchase their own pensions out of earnings. No special arrangements, tax advantages other than those available to the rest of the population. Many public servants are paid way above what they could earn in the private sector so they can afford . Let them join the real world.
    It is only then that the theft by Government and the pension industry is likely to be better controlled.

  32. Posted April 2, 2013 at 5:38 pm | Permalink

    The demise of the private sector final salary scheme is largely through legislation and regulation so I feel it wise to press for a more money purchase approach for government pensions.

    The changes too public service pensions were small and totally inadequate. It will make for a more cohesive society to have all workers on similar types of pension rather than the chasm that currently exists. The public service is not only in an unrealistic pension scheme but often regarded by those people as not enough. The teachers union throws out grossly inaccurate figures on a type of scheme that many don’t understand or can compare with their own scheme.

    Its accepted that its too expensive to switch to a real money purchase scheme whilst running the final salary at the same time but they could switch to a money purchase accrual basis still on a pay as you go basis as is today. That would mean both the private and public sector people would understand better what the scheme offered and what the taxpayer was funding. It would be more cohesive for society as I think this will be a much more contentious issue in 5 to 10 years time.

    The teachers are unhappy where as they are likely to get the equivalent of a fund of £700,000. Change the scheme to a nominal 12% employer 5% employee contribution with an accrual rate based on an average of collective fund performance. Then they would also have an interest in whether the markets grow or contract. The difference just creates a divide so lets all be on similar type schemes.

    • Posted April 2, 2013 at 5:43 pm | Permalink

      It also creates anomalies such as contracting out of S2p stopped last year. Final Salaries were allowed to continue on a nominal basis. I suspect this was because there was a union agreement not to make any more changes to public service/sector schemes so we the taxpayer make up the difference for the public service schemes on something that ceased in 2012.

  33. Posted April 2, 2013 at 6:07 pm | Permalink

    Anyone signed the petition calling for IDS to live on £53 per week?
    google change.org
    You know you want to.

    • Posted April 3, 2013 at 10:56 am | Permalink

      No, I don’t want to.

      • Posted April 3, 2013 at 6:21 pm | Permalink

        Sleep on it maybe?

  34. Posted April 3, 2013 at 12:19 pm | Permalink

    I suspect nothing will be done about this until the proverbial hits the fan (i.e. the IMF come calling) as far too many folk work in the public sector and do they know how to complain.

    It is a bit like council tax revaluation and banding – too hot to handle.

  35. Posted April 3, 2013 at 2:58 pm | Permalink

    cookie

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

  • John’s Books

  • Email Alerts

    You can sign up to receive John's blog posts by e-mail by entering your e-mail address in the box below.

    Enter your email address:

    Delivered by FeedBurner

    The e-mail service is powered by Google's FeedBurner service. Your information is not shared.

  • Map of Visitors

    Locations of visitors to this page