Gold-plated public sector pensions?
The claim
“Can we really ask [private sector workers] to keep paying their taxes into unreformed gold-plated public sector pension pots? It’s not just unfair, it’s not affordable.”
Nick Clegg, Deputy Prime Minister, speech, 14 June 2010
Cathy Newman checks it out
The Daily Mail loved it. (UNFAIR – AND UNAFFORDABLE screamed today’s headline). The unions didn’t. Unison, the biggest public sector union, accused Clegg and his coalition of “scaremongering, peddling myths” and “breathtaking double-speak”. They say cushy pensions for pen-pushers are a rarity. And they blame the government’s decision to freeze pay for the soaring shortfall in public sector workers’ pensions. So who’s right?
Over to the team for the analysis
Clegg seized on shocking figures published yesterday by the OBR – that the Treasury will spend £4bn this year topping up public sector workers’ pensions payments. In four years’ time this will have more than doubled, to £9.4bn. This is the first time the figure has been published more than a year ahead.
So why is it so high – and getting higher?
That £4bn is the difference between what’s paid into public pension schemes by state employers and by employees, and the amount being paid out in the same year. The taxpayer makes up the difference.
In theory, pension contributions now should be funding payments in future – a complex set of calculations. These numbers just look at the actual amount the Treasury will end up having to pay in the near future.
The Treasury said the expected increase was down to several things. The number of public sector employees increased around 40 years ago and more of those baby boomers are now reaching retirement age. Pensioners now also tend to be living longer – so they’re drawing on their pension for longer.
But unions say the main source of the problem lies elsewhere: staff redundancies and pay freezes. Although the size of the state increased under Labour, the tide is now turning. And because contributions are a percentage of salary, pay freezes mean the amount being paid into the scheme is on the slide.
Affordable?
One simple way to make pension payments affordable – at least in the short term – would be to hire a lot more public sector workers now. Then contributions into the scheme on their behalf would increase and cover the £4bn shortfall. But clearly the coalition government wants to reduce the public sector payroll, not increase it.
Gold-plated?
Regardless of whether we can afford public servants’ pensions, are they all they’re cracked up to be anyway? Unions say gold-plating is a misnomer – bronze would be more appropriate. They often give the example of local government pensions – which average just £4,000 a year; less for women. If you look beyond the town hall, the average public sector pension is only around £7,000 a year, according to the TUC.
But then, most pensions aren’t overwhelmingly generous – latest figures from the Pensions Policy Institute put the average occupational pension at worth £8,320 a year, or just £5,600 for a single pensioner.
In addition, most public sector pension schemes are final salary – where a guaranteed pension is paid out based on earnings in the year or years before retirement. Such guaranteed schemes are increasingly rare now in the private sector.
Unreformed?
Unions say there has been considerable pension reform in recent years. For example, most state schemes have increased the age at which new entrants can draw a pension from 60 to 65 – bringing them into line with their private sector colleagues. NHS pensions, for example, changed for new entrants in 2008. And the TUC says nurses, teachers and local government employees are now paying more on average towards their pensions than they did before reforms. But the IFS described the reforms as “very modest”, saying they would only close about half the gap between the average generosity of public and private sector schemes – and that only for new workers.
The government still thinks there is some way to go.
A Cabinet Office spokesman said Nick Clegg wasn’t singling out a particular scheme yesterday, but pointing to the fact public sector pensions hadn’t felt the pain in the way private schemes had.
Cathy Newman’s verdict
The public sector may have carried out some reforms to their pensions, but it simply doesn’t compare to the pain endured by their private colleagues. Just yesterday, a report by PricewaterhouseCoopers revealed that nine out of 10 private sector businesses in the UK are set to close their final salary pensions to existing members – not just new ones. The unions are right to point out that not all public sector pensions are worth their weight in gold. And, in the short term at least, pay freezes will increase the shortfall. But on balance, “unfair and unaffordable” isn’t double speak but plain speech.
There are 12 comments on this post
Thank you for such an informative and balanced article – and I agree with the conclusions. I have repeatedly heard how these pensions are not what they are cracked up to be, but having worked in the public and private sector I haven’t been able to believe the largesse and lack of drive to be efficient in the public sector, and the distorted nature of the pensions in public bodies. I heard a report on the radio this morning by another broadcaster, explaining the difference between funded and unfunded pensions, then completely failing to compare like with like and rounding it off with a comment only from the unions, not any employers or representatives of government to balance a very biased piece. Thank you for setting the record straight with actual facts.
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There is a difficulty in separating out claims on pensions from pay. Traditionally the majority of public service workers have tended to earn less than their private sector counterparts. That was more true of the civil service than other areas like local government. The government used to justify wage differentials with the private sector by claiming civil servants enjoyed better job security and generous non-contributory pensions (at least in the 80s/90s when I worked in Whitehall). I think it would be wrong for the government to concentrate on pensions alone without visiting the whole pay and compensation package for public sector workers.
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Why target people who go out and actually do something for a living,I have paid 11% of my wage into my pension for the last 27 years and required no handouts from the tax payer ..unlike the army of British and imigrants who have never worked and enjoy a LIFETIME of free housing and benefits..work it out..thats whats unsustainable…
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This misses several crucial points.
Most pubic sector workers are in unfunded pensions schemes, so their contributions just go into central government funding, they may think they are contributing to a scheme but they are essentially just paying for those that have already retired. If the rest of the world this would be considered a ponzi scheme but for some reason HMG is able to get away with it.
The notion of the final salary pension is insane, irrespective of investment returns a pension is paid based on someones final salary ? these were dreamt up in and age where a long retirement or even any retirement was a pipe dream but times have change, final salary schemes are not viable.
I’d like to know for those public sector workers on apparently low pensions just how much have they contributed over the years, how big was their pension pot, what would it have bought in the annuity market, I’d guess it would be substantially less.
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I thought that all pensions (including public sector pensions) are covered by existing pension legislation, and any changes made to them can’t be retrospective. If this is true how can changes made next week give the kind of savings that David Clegg was talking about? The only way to raise the kind of money being talked about would be for public sector employee contributions to increase dramatically. Also has anyone in the government factored in the impact any changes may make to a shortage of nurses. There are a large number of nurses who can claim a pension at 55, any potential reduction in their pensions will cause a large number to start claiming their pensions immediately. Thus increasing the pension bill for the government and causing a shortage in nurses.
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I would like to echo the point made earlier that specific reference was made in at least some civil service pay settlements to the fact that civil service salaries were lower because of the benefits of the pension scheme. It seems to me that the Government is trying to get it both ways. More generally, I can completely understand why public sector workers feel they are being singled out for bearing the cost of excesses by the banks, people who pay themselves so much they don’t need to worry about pension schemes. The only public servants who deserve this treatment are those at the Treasury, FSA and Bank of England who failed to regulate the bankers and whose supervisory failures contributed to the crisis.
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Why would current contributions cover current outgoings? People retiring now will have spent most of their working lives under schemes introduced prior to ca 1995. A lot of these were modelled on the Principal Civil Service Pension Scheme, where the employee made no contributions at all (notionally – where comparable posts were available in the private sector, the public post would generally offer a salary ~8% lower, coincidentally the cost to the employee of a good company pension scheme). Contributions being made today are from staff on less favourable employment terms, and are intended to cover the notional cost of their less generous pension when they eventually reach retirement age. The real questions to be answered are
1/ Why haven’t governments made contributions to ring-fenced funds to cover their contractual pension liabilities?
2/ Why should anyone trust the government to deliver the pension for which they now make deductions, in the absence of of an identifiable fund where these contributions are held?
3/ Why is this issue, which can only affect the deficit reduction programme marginally in the course of this parliament, being presented as a “solution” to the current budget problem?
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Could someone please inform me as to why MP’s are not included in this so called unafordable Public Service Pension reform.
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Eddie Wrote: “I HAVE to pay 7.4% of my salary into it, my employer pays 14.5%. The scheme is run efficiently and well”. I can’t speak to the full details of your scheme, but my private sector final salary scheme had the same contributions levels and a retirement age of 65. It was based on 100th of Salary (not 60ths like my old Civil Service Pension scheme) and yet this year, after years of topping up the scheme over and above their 14% contribution by several millions pounds a year, my private sector IT company employer closed it to existing members (they closed it to new members 8 years ago) because they could not afford to keep it open. This implies that overall contributions of 22% per annum of base salary are not sufficient to fund final salary pension schemes with a retire. Incidentally the major of people in my company have had no pay rise for 2 years and the vast majority receive no bonuses either. The public sector may feel its pensions are about to be squeezed, but the private sector pension provision has been squeezed and squeezed for years.
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How many private sector workers face abuse and violence on a daily basis? How many of them always work Christmas and bank holidays? How many of them give up their days off and holidays in order to keep their departments running? We have been fed the argument that our wages are low partly because we have a ‘job for life’ with a fair [if not brillant] pension. We have been taken for mugs yet again. Mostpublic sector workers are dedicated and hard working, they did not enter their chosen professions to make megga bucks. Our pension is a long way off ‘gold plated’ shame on you Nick Clegg. Incidently, how much are you giving up?
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Start increasng the retrement age for existing pubilic servants until they increase from 55/60 or 65 at the rate of 2 months each year from now on, until they reach the state retirement age of 68. For those in deferred Civil Service schemes defer their pension payouts at the same rate. That way, gradually, existing Public Servants can start to bear some of the pain the we in the private sector are suffering, but without overly penalising those who were expecting to return in the next year or 2. The change could take effect immediately while a Royal Commission into full pension reform (public sector, state and private) is carried out.
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There are alot of untruths being bandied about by all and sundry who seem to know all about public pension schemes. I work for a University which opted to stay with the local government LGPS. This is an independantly funded pension scheme which is in the blck and healthy, I HAVE to pay 7.4% of my salary into it, my employer pays 14.5%. The scheme is run efficiently and well. The big problem with most private pension schemes is that they have been neglected and badly run over the years and effectively plundered by the government indirectly. It is most private pension schemes that are bad that is the problem. I have also paid in extra contributions into an in hose AVC scheme to enhance my pension to the tune of an EXTRA 9% of my salary for many years, I have probably forgone som luxuries and frivolous spending to do this, where is the fairness in attacking someone who is in public service trying to be dilligent and careful with their finances? Look at any private pension or investment scheme and there are many charges and handling fees which degrade their value, these are going into the pockets of a financial sector which soaks up money on a large scale. Look at real excess in bonuses in the private sector, the public sector where I have been for over 23 years have never had them. I have always contributed to a pension scheme, I get no more holidays than any of my friends in the private sector. Lay off public servants unless you want to be a bin man, policeman etc
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