There’s been a lot of noise for some years about the high cost of public sector pensions. The last government talked a little about it, but tried to ignore it. Indeed, most of their actions led to a large surge in the overall costs, as they added to the public sector payrolls, put the pay up, and finally presided over a surge in UK inflation. BY the time they left office the unfunded liability of public sector pensions was over £1 trillion, or more than the stated public sector debt.
The public sector overall gets better pensions treatment than the private sector. There the ravages of inflation, poor investment returns and greater longevity of pensioners combined with Mr Brown’s tax attack and regulatory strictures to close most final salary schemes or lead to cuts in future benefits in the ones that survived. The more the last government regulated the funds, the fewer stayed open or survived. The funds were literally taxed and regulated to death.
Within the public sector there are very different terms and conditions. At one end of the spectrum lie the contributory schemes with employees paying a sum each month creating a fund to pay the bills – like the MPs scheme. At the other extreme are the pension plans like the civil service one where there have been no funds put aside and no contributions.
The Public Sector Pensions Commission has recently reported on this topic. They claim that the government will pay £18 billion in 2010-11 for pensions, when it should be putting aside £35 billion if all the pensions were properly funded. The huge gap between public and private is summed up in two figures. In 2008 94% of the public sector employees were members of a final salary pension scheme, compared to just 11% in the private sector. The normal pension age in the public sector outside local governemnt is 60 and in the private sector 65.
The Review offers nine different ways of closing the gap – a flexible menu from which a suitable set of policies can be drawn. They are:
1. Higher employee contributions
2. Later age of retirement
3.Lower accrual rate – so people have to contribute more over their lifetime
4.Using a career average salary for the final pension
5.Salary ceiling
6.Lower index linking of pensions in payment
7.Ending the contracting out lower rate of National Insurance
8.Switch to funded defined contribution, ending the final salary promise – people get the value of what they save
9.Notional defined contribution
Different people will have different views of how they would like to see reform. As a future beneficiary of the MPs scheme I prefer 1 and 2 – a full contribution rate to cover the cost coupled with a higher age of retirement. As long as the extra burden is removed from the taxpayer there is much to be said for fashioning flexible choices for public sector employees to gain the maximum consent to changes that will be far from popular with many of them.
July 30, 2010
I can't see past number 8 myself. We already have one unfunded time bomb with the state pension, no need to save up even more problems. I have no problem with the employee paying a percentage into a pot and the state matching it, but the money must be paid in – no more Ponzi schemes.
I wonder how number 2 will affect MP's. Some MP's may still be serving at 65, some may have done one term from the age of 40 to 44.
Do you receive your pension at 65 regardless?
July 31, 2010
Same here , 8 is the only way .
J.R. , I realise you have made sacrifices in engaging in a career in public service but you are going to have to sacrifice a D.B. pension if you want history to show your legacy to be a real reform of pensions .
July 30, 2010
Surely we also need a very simple 10th action: All future public sector pension accrual must be fully funded from now on.
This will have a huge impact on the disposable budget of any such body and ram home the catastrophe that faces us. If a public sector body say they cannot afford their pensions then they should be forced to take one or more of the other nine actions you propose to solve their problem.
Over time we might even begin to understand the full horror of our liabilities.
July 30, 2010
Another option would be to pay out the promised pensions but claw some of the money back with a special tax on those pensions. That way no promises will have been broken. It may bot be "fair", but Gordon Brown taxing my pension fund was not fair either.
July 30, 2010
Surely the fairest way is a defined contributions system. It would be
1 fully funded
2 in line with the private system
Pay Public Servants an equivalent salary and provide them with an equivalent pension, with equivalent terms and conditions to the private sector.
July 30, 2010
How about setting the maximum contribution by the Govt to 10% of salary then the employee has to fund the rest. Those in the private sector are lucky to get 5% never mind the 30% the civil service get or the almost 70% the police get. I shudder to think what % it is for you MP's…….
July 30, 2010
Within the public sector there are very different terms and conditions. At one end of the spectrum lie the contributory schemes with employees paying a sum each month creating a fund to pay the bills – like the MPs scheme.
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Like the MPs scheme? Pull the other one.
How many schemes that have a short fall get the tax payer to bail them out? You voted for a huge extra payment from the taxpayer because the gold plated MPs fund didn't perform.
July 30, 2010
You can start by having an inquiry in what has gone wrong.
People have paid serious sums of money for their state pension. You as a government are now defaulting on that contract.
The usual excuse that its longevity is trotted out. However, that's not the main reason. The main reason is that you spent the cash.
A worker on median wages (currently 24K pa) who saved their NI in the FTSE over the last 40 years would – post crash – currently have a retirement income of 20K pa. Instead they have 5K.
Explain where the 15K has gone and why they are poor.
July 30, 2010
Now for fixing the state employee system.
Greater contributions. Do they change the 1.2 trillion liabilities? Nope. Not one iota.
July 30, 2010
A lot of the discussion on public service pensions is based on the observation that the private sector has made a big mess of its pension schemes. It seems only fair that we should make a equivalent mess of public service pensions as well. But in fact there are inherent differences between the public and the private sectors when it comes to providing pensions.
A pension is delayed payment of salary. In the private sector it suffers from all the usual problems of delayed payments – the payer refuses to pay, or he can’t pay, or the money gets misappropriated, or he makes erroneous estimates of how much money to put aside and ends up with not enough, or the value of money declines, or the annuity rate falls, etc, etc.
The public sector is different. Because the payer is the government and can use taxation to raise money: the payer can always pay, the money cannot be stolen, it doesn’t matter that forecasts are inaccurate, it can guarantee index linking, and it is not subject to annuity rates. Saving money to pay pensions in the future is just a waste of resources.
We have to decide whether that is just the way life is, and you should take account of this when you decide whether to seek a career in the private or the public sector, or whether we should in the interests of fairness ensure that everyone gets access to the same type of pension scheme. If we decide everyone should have the same type of scheme it must either have all the disadvantages listed above of a private scheme, or the advantages listed above of a public scheme. Or we could abolish pensions for everyone and make it clear that people are responsible for saving for their own old age. The only sensible answer is that the government should guarantee all pension payments.
The nine ways of closing the gap that you list are just re-arranging deck chairs as the ship sinks. They have nothing to do with the inherent difference between public and private sector pensions. They address symptoms, not problems.
July 30, 2010
I like 8. It puts a stop to any future nonsense (e.g. possible future Labour governments bribing people with future money, again).
The last few words are the tough ones. I'm quite unusual, a Tory teacher. You would be astonished how many teachers (who aren't thick) think they either pay for their pension or it is some sort of absolute right, or that public pensions aren't a lot of money, or that it'll work out somehow. You can show the numbers till you are blue in the face, but they take no notice.
IMO the later resolution of this is left, the worse the solution will be.
Incidentally, do I remember correctly that Blair tried to fix this early in his time ; by raising the retirement age ? He then backed down under the whining and threats of the public sector unions.
July 30, 2010
All in favour of flexibility in the Public Sector as long as the taxpayer does not subsidise any Pension scheme.
We have a situation at the moment where a private (self employed) person pays in 100% of their own money to their own pension scheme with no employer contribution, who is then exp[ected, and has to also pay by way of tax into subsidising a much better scheme for Public sector employees.
The problem us out in the Private sector have had for years, is the constantly moving goalposts, the poor performance of funds (personal choice I know) and the taxation system.
Why not make it very, very simple.
Pension contributions get no tax allowance at all.
Pensions funds do not get taxed in any way on performance or trading of funds,
Pensions paid are all absolutely tax free.
Also abolish the neccessity to HAVE to purchase an Annuity which at the moment are crap rates and are not expected to get any better.
Also any form of savings/investment out of taxed income be tax free.
The merry go round of tax allowances and tax charges is all very inefficient, It employes thousands to administer and is a confusion too far.
July 30, 2010
Where I live, I am surrounded by a lot of little people who scrabble around for "pots" of one sort or another. The idea of a pension for them is rather like you becoming President of the USA. As the money dries up, they are becoming more and more defensive and are looking desperately round to stave off the dreaded future when hand outs will cease.
The people who are scooping in the billions are, of course, well hidden. We never see them. They are far too important for the likes of us.
July 30, 2010
If this sort of injustice is not fixed, and fast, then maybe this issue will be the principal catalysts for massive public disobedience campaigns in the future. Taxpayers, on defined income schemes at best, and at worst, just on a state pension, will be paying for the extravagent pension schemes of the public sector.
Absolutely no way can this be fixed by the proposed measures in the short or medium term so, for a couple of generations at least, public sector workers will be retiring in comfort at the expense of the taxpayer.
We've not had a good rebellion in this country for a long time and maybe it is what is needed just to wake everybody up.
July 30, 2010
I would prefer to see a money purchase scheme enacted which is incredibly fair to all and the tax payer has no continuing liabilities once the current crop has passed through the system. You could then maybe, use this money to buy Government debt, which would incentivise civil servants to think very carefully about spending money.
Public sector pensions are little more than thinly disguised Ponzi Schemes, and if they were currently forced to pay out of their own sources they would be wound up just like many private ones.
The new scheme also has to reflect the rise in state pension age, have some kind of flexibility, and deliver what it actually sets out to do.
July 30, 2010
John – the problem with your preference is that, if implemented, it would require you to put about 50% of your MPs salary into the scheme – the benefits are that generous.
The general problem with public sector pensions, whether unfunded (as most are) or funded (e.g. local govt. scheme) is that they still have the option – in fact, the right – to demand taxpayers cough up as and when required in order to maintain pension entitlements. This is why the private sector no longer offers such schemes – companies cannot guarantee that they will be in a position to do this as they do not have the right to extract money from the taxpayer – only from their own earnings, which may be insufficient (they might not even be in business when the time comes).
Until the taxpayer guarantee is removed from public sector pensions, they will remain unfair to the private sector workers who have to fund them.
July 30, 2010
Off subject but, if you have trouble separating your Keynesian-ism from your Austrian-ism have a read of:- http://mises.org/daily/4578
July 30, 2010
An excellent summary – the government regulations on pensions is a mess and a lot of head burying and rank unfairness continues. One example – it is quite outrageous to have retired people on modest private pensions paying ever more in council tax to finance local government pensioners.
July 30, 2010
John ,
Public sector pensions must become fully funded and the entire risk of poor investment performance must be borne by recipient of the benefits NOT THE NEXT GENERATION .
As far as I can see only 8 (defined contributions) adheres to these rules .
MP's really have to show they have balls by facing down the unions and stop putting their vested interests first .
What are you going to do about the bigger problem that well over 3/4's of private sector workers will not be able to save enough to generate an income that will put them above the level at which means tested benefits kick in ?
For people to be able to save more they have to be spending less and paying less to the financial services industry in cavernous interest rate margins on overpriced houses .
Public servants work for us and if we can't have pensions then they can't either . Thought we were all meant to be in this togeher .
July 30, 2010
Mr. Redwood, Could this item be number one on the agenda for the Economic Policy Committee (apologies if my title is incorrect)that you are to chair. It is long overdue for action and only with the foresight of the very few like you is anything ever going to be done about it.
July 30, 2010
I think that switching to DC, for future contributions, is the best way forward. There is no good reason why the government (ie the taxpayer) should cover the longevity risk of only the public sector over and above the state pension.
For past contributions, options 2-6 really are ways of reducing the scale of the benefit for individual employees and therefore the liability of the govt. I don't like that idea very much, although it may be necessary, because it it is not very different from Mr Brown's tax raid on pensions.
I think the most important thing is for the public sector pensions deficit to be recognised as a public liability like govt debt (there are no sensible circumstances in which the govt defaults on its debt but not on at least some element of its pensions liability). Then the debt can be managed in some manner.
One possibility is to follow the Marks and Spencer route: M&S put the real estate value of some of its stores into its pension fund. The government could grant the rent from some of its buildings to a pension fund for its liabilities. The government would have to start to pay rent which would be a real cost and force the govt to recognise the liability. The pension fund would then build up a real asset (quite small in relation to the liability, admittedly) but at least there would be some cash available to pay for benefits other than pay as you go taxation.
July 30, 2010
A very interesting summary of the dire situation. In view of the size of the cash shortfall and the likely outcry over any proposals likely to usefully reduce such a deficit, may I suggest a tenth item be added to the list of proposed remedies along the following lines:
10. An effectiveness filter, the rate of which is to be determined by an independent body of private pension recipients. Categories of civil servants who have dutifully fulfilled years of service in humble positions would receive 100% of their accrued entitlements, MPs who have connived at handing their responsibilties overseas at say 60% while Cabinet Ministers who have contrived to hugely devalue the nation's currency and destroy our country's democracy and sovereignty would receive 0% and try to live on the mean OAP on which they expect others to survive. Gay Rights PR Officers and the multitude of other useless parasites now due pensions might also perhaps be put into the 0% band.
July 30, 2010
How do public sector final salary pensions work, if you take a woman who retires having worked for 35 years, the main 20 of those years are part-time (16-20 hours per week) but for the last 7 years she works full time 37.5 hours and gets promoted 2 years before she retires does she get a pension based on 35 years at a % of her full time final salary for the rest of her retirement?
People who have a final salary pension get a 1.5% reduction in national insurance, if they retire at 60 in a contracted out scheme will they in the future get their second pension 8 years earlier than everyone else will be allowed to get it through their employer (usually the taxpayer as the public sector is the main provider of final salary pensions)?
July 30, 2010
Here is a far better way of organising it.
1. Stop all future accruals.
2. Move to a funded scheme for future civil service pensions. At least it gives them an interest in companies doing well, rather than adding to regulations.
3. Contributions from the state are 10% of salary.
4. Civil servants get the choice of 10% now as extra pay, or to take it as contributions.
5. Those wanting the cash now agree to a no strike deal. If they go on strike, they lose the 10% permenantly.
That leaves the 1.2 trillion of debt that the government has run up for past civil service pensions, all unfunded.
July 30, 2010
Yes, some of those young men in our government are in danger of forgetting their history!
Public sector workers such as doctors and MPs didn't have an equivalent alternative private sector employer to choose from when they gave up the chance to earn megabucks in business and went into public service instead. I can't speak for MPs!, but I do know that some doctors now in their fifties obtained 10 grade A O-levels and 4 grade A A-levels and went to our finest universities way back in the seventies and they have now completed thirty years of work based on a long standing and unchanging contract with the state. If the state defaults, by retrospectively changing pensions, then it will engender a visceral hatred for the perpetrators and will never again be able to attract such talent. You won't get strong professions and institutions like that.
The recent budget change to CPI pension indexation wasn't chickenfeed and has already shut my purse and will be extra hard on the widows and widowers.
Can we please have pension changes from this point in time forwards and not retrospective changes?
If public sector pay now exceeds that in the private sector then it would be reasonable to increase contributions and that would be fair. There has to be a recognition that older people worked in a different era with a different ethos from today. If the government keeps punishing people for doing the right thing then there will be chaotic results.
The danger for the Conservatives as they rush to clean up labour's pension, economic and 'moral' mess is that they'll create their own future mess by pouring fuel onto the fire of potential forthcomming battles between state and private sector and between say, the under and over fifty year olds. Is civil war on several fronts a good idea at this point in time?!
There is the world of difference between increasing productivity and competition within a shrinking public sector by reasonable diplomacy and smashing it completely.
August 2, 2010
Come off it. Very few people – and certainly not most medics – got 10 grade A 'O' levels and 4 grade A 'A' levels in the 1970s – those were the days before grade inflation.
Some of those medics are now being rewarded with huge pension rises because of recent huge pay rises, for the simple reason that they are on final salary pensions. They haven't contributed more, yet will receive far bigger pensions than they could ever have expected.
In contrast, many equally well-qualified people in occupations with much less stable and less well remunerated employment the private sector put money into funded pension schemes for years on the understanding that fund growth would not be taxed (they'd only be taxed when it was taken as income). What then happened that Brown taxed their pension funds – including funds already invested on the understanding that they wouldn't be taxed.
Private sector pensions have been taxed to help fund increasingly expensive – and far more generous – public sector pensions. It is time this was stopped.
August 2, 2010
I was being facetious. In the seventies you could get into medicine with three C's at some universities but my man, who is a senior NHS consultant doctor, did get those grades and I am of the opinion that our host would have a similar academic record, and that is my point, that neither of them are 'numpties' doing non-jobs in public service and don't deserve to be ratted on.
The private sector had a terrible time over pensions under Labour but I never voted for them and I don't think that retrospectively stealing doctors pensions is retribution for this. One could say that those who now argue for the removal of accrued rights are just trying to get out of paying for all the work done in past decades by doctors who treated disease and saved lives for the whole population including the private sector.
The issue of overpayment has already been addressed by the pay freeze (cut if inflation is added in) which will lower pensions.
I don't think there's any moral authority to change the pensions of old retired doctors and their spouses and the recent budget change to CPI indexation is already a step too far.
July 30, 2010
8 is fairly simple and applies now to most of the private sector now. Freeze the liability and divert all future contributions into a defined benefit scheme. Sell it by saying that it is not retrespective. That also takes away the retirement age issue as they can retire when the like (but get less if it is too early). No one who is not in one of these open ended schems will object which is most of the working population. Take responsibility for your own destiny should be the Conservative watchword. Do it now and the general public who usually ignore their pension until it is too late will have forgotten in four years time. Sorry about being a bit cynical.
July 30, 2010
In the interests of equity, why cant HMG have a standard public service scheme- same for all state employees- same conditions.
Then extend it to private sector workers who do not have a comparable scheme?
Otherwise i favour ending the 'Final Salary Scheme' completely.
We would all be in it together!
25% + further increases on council tax to pay local pensions is not sustainable going forwards.
July 30, 2010
then you have pension funds like the BT fund which has a government guarantee
and which the current employees dont benefit from as anyone joinging in recent history just gets 10% contribution not final salary, yet they are in practise funding as such large sums go out of the pot into the final salary scheme
July 30, 2010
When comparing pensions schemes you also need to include employer contributions, and also range of pension benefits, such as for widows and indexation.
Final salary schemes are usually seen as the best pension, but there is no inherent reason why a defined benefit scheme should give a better pension than a defined contribution scheme. I think final salary schemes compare favourably because of higher employer contributions.
I think it is time all pension schemes, including the state pension, allowed benefits to be taken at time of the pension beneficiaries choosing, as has been the case for a long time with personal pensions. The later you start to take the pension the higher it is, and individuals can choose what suites them best.
July 31, 2010
When I worked for the Civil Service, it was always claimed that the rates of pay were lower than for corresponding work outside, because we got a "free pension" and had greater job security. As an engineer, I think that this was true for the engineering and technical grades.
Certainly, when I was compulsorily moved to a government authority with a contributory scheme, I was given a pay rise so that my effective take-home salary remained the same.
However that was some 40 years ago, and I am clearly out of touch as to the current comparison between salaries inside and outside the Civil Service. I do get the impression, however, that Civil Servants now get equal, or better pay than those outside, and if so, the "free" pension can no longer be justified.
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July 31, 2010
I retired after 38 years in the RAF with a Service pension based on a median figure based on the salaries paid to everyone else of my rank in the RAF. Since my final 5 years were served at the top of an engineering branch my salary was higher than those at the same rank in all other branches except aircrew. Mine is not a final salary pension and would appear to match the points you made at paragraphs 4, 5 and 6 above? If this is considered to be an equitable arrangement for armed forces pensioners, why should it not be applied to everyone else in the public sector? I have been advised that my pension increase this year would be precisely 0%. Has this been applied across the board to all public sector pensions, or have some parts of the sector have had a real increase further separating armed forces pensioners from the majority of the public sector?
July 31, 2010
The employer contribution should be the average that the private sector gets.
The public sector has to realise that any deficits must not be a burden on the rest of us.
P.S. Is Mr Pickles sorting out Local Authority Pensions? hopefully they will stop clobering council tax payers for the underfunded pensions in local government.
July 31, 2010
All excpet the military should be immediately moved to no. 8
August 1, 2010
On a related issue, how can the Post Office be privatised given the huge deficit in its pension fund? Is the taxpayer to pick up the tab or is it possible to allow for the deficit in the selling price? Does it need higher employee contributions? I would prefer to the the issue of this deficit addressed sooner rather than later.
August 7, 2010
This statement is so completely false it begs the question as to how you Mr Redwood are able to be a representative of the mother of all parliments with such a lazy attitude towards basic research. This blog is nothing more than a soundboard for your confused notions on the nature of life and it’s organisation. It holds little in the way of logic or empiracle thought beyond the sophism one would expect of a Man utterly imprisoned by what he feels than what he has the ability to actualy think. For the record Mr Redwood, since 2008 new recruits in the CIvil Service are no longer entitled to final salary pensions. Also contrary to your comment that those in the service of the Government pay no contributions, it is in fact 3.5% of every new employees salary. On my current salary this should work out as around £9500 per year by the time a retire. Not exactly a King ransom eh? Oh and by the way my age when I retire? 65. The same as a private sector employee. Poor Mr Redwood.Very very poor…
Reply: Most civil servants have a non contributory final salary pension, which is what I am talking about.
August 9, 2010
I am an 84 year old pensioner.Governments of all shades have seen fit to freeze my state pension at the 1997 rate. That was the date when my wife and I joined our remaining family in Australia. Currently the government take from my wife and myself £300 each month. I contributed towards my state pension for 49 years,16 years for the GRB and 17 years towards my SERP..All told 82 years in total. Like the UK we too in Australia suffer astronomical price increases making life difficult. It is our intention now to return home to Britain so that we may enjoy once again a full pension and all the other trimmings offered by the UK.
Derrick Prance