Yesterday’s strikes passed without huge passion or support. The Labour party did not come out for the strikers. Union leaders were split over the wisdom of the strikes. Most newspapers wrote mildly in support of the government’s approach to public sector pensions.
Some public sector employees feel strongly that their pensions should not be altered. They should understand that the government has promised to honour all pledges made to date – there will be no attempt to take away pension entitlement already earned. The pensions issue has created a divide in the country between public and private.
A couple of decades ago the defence of the more generous index linked public pension was simple. Public sector employees on average earned less than their private sector neighbours. They were given a better relative deal in retirement as some compensation. The funded public sector schemes were capable of paying the future pensions.
The last twenty years have seen three hugely important changes. The first was the rapid increase in public sector pay, leading to the average public sector worker now earning a little bit more than the average private sector employee. The second has been the big increase in longevity, as better diets, lifestyles and health care have enabled many more to live in to their 80s and 90s. The private sector, once the home of the final salary pension plan, was hit badly by the taxes imposed on pension plans in the 1990s, and by the poor investment returns of the noughties. Companies have in the main closed their funds to new members, many to new accruals. A significant number of funds have been closed down altogether.
As a result we now have pensions apartheid in this country. Many in the private sector think it most unfair they have to pay more tax on their lower earnings to pay for generous pension schemes in the public sector that they cannot enjoy. Some wanted the new government to do to public pensions what has been done to private sector pensions. They wanted the funds closed to new members, and maybe to new accrual as well.
Instead, the government has gone for a more moderate approach which will still leave the public sector with more generous pensions than the private. The government is proposing that indexation be switched from RPI to CPI, that the age of retirement be delayed and that public sector employees contribute more themselves for their pension provision. The details of the changes are up for negotiation.
The country cannot afford to pay for a large number of public employees to retire at 60, or even at 65, on final salary pensions indexed to the RPI. The outgoing Labour government admitted that, and a former Labour Cabinet Minister has prepared the Report on pension changes that the government is using as its text for the deal on offer.
Something has to give. If anything governments have been slow to raise the retirement age in line with rising expectations of longevity.The total pension liabilities of the UK state are bigger than the national debt, and do need controlling.
The government must not concede or lose the argument about affordability. On BBC figures there will be an increase of £2.4 billion a year in the taxpayer cost of public pensions between this year and 2015-16. That means each family having to pay around £500 a year more tax to meet the bill. The accumulated capital cost of the unfunded schemes and the deficits on the funded ones now amounts to a debt of around £20,000 for every man, woman and child in the country. There has to be some limit. Let us hope both sides negotiate about what that limit should be, and then agree the best way of hitting that target with least damage to the future benefits of public sector pension recipients.