Public sector pensions: Too far, too fast

By Joseph Ottaway

Thursday saw a 24 hour stoppage by teachers’, college and university lecturers’ and civil servant unions in protest at the coalition government’s proposed reforms to public sector pensions.

As ever, the press have obsessed about the politics and process of the story, analysing Ed Miliband’s response, discussing the reaction of inconvenienced parents and speculating about the possibility of future disruption.

What deserves our attention most of all however, is the issue of public sector pensions and how and why the government want to reform them.

The Tory-led government hope to change pensions so that teachers, lecturers, civil servants and other public servants pay more, work for longer and receive less upon retirement. Under their proposals employee contributions would rise by 50%, and many ‘lump sum’ pay-outs on retirement would cease or be severely reduced. Retirement age would rise to 66 (an increase of 6 years for teachers) for those currently aged between 43 and 57, to 67 for those aged 34 to 42 and to 68 for those aged 33 or younger.

What’s more, public service pensions have until recently been linked to the Consumer Price Index which tracks the price of goods and services such as house insurance, mortgage interest payments and council tax – goods and services that pensioners are likely to continue paying for even after retirement. This link has recently been broken by the government and replaced with a new link to the far slower rate of inflation offered by the Retail Price Index, which tracks the price of student accommodation fees, stockbroker fees, foreign student fees and unit trust fees, amongst others. Not only is the rate of inflation for these goods and services far less relevant to pensioners, but the CPI to RPI switch means public sector workers will also receive considerably less in retirement.

This increase in employee pension contributions, taken in the context of the CPI/RPI switch, a 3 year pay freeze for all public sector workers earning over 20k, the increase in VAT to 20%, inflation of 4.1% and the ever increasing cost of living means that not only are they being denied a fair deal on their pensions, but public servants are having their current income severely squeezed too.

The government, and their supporters in the right-wing press, claim that although these changes may be painful, but they are unavoidable in the current economic situation, and have the virtue of establishing a greater degree of parity between private and public sector pension provision. They argue that private sector workers have faced a much bigger squeeze on their pensions for years and it is unfair to expect them to continue subsidising the far more generous pensions of their public sector counterparts.

The coalition also claims that public sector pensions are ‘out of control’, ‘unaffordable’, and ‘unsustainable’. On the morning of the June 30th strikes, commentators were busily telling news reporters across the TV channels that public sector pensions represented a £1.2 trillion black-hole in the UK’s public finances and were making ominous comparisons to the social and financial chaos currently enveloping Greece.

The truth of the matter is somewhat different however. While it is true that the government’s total exposure to the entire pension pot of all its public sector employees is around the £1.2 trillion mark, this figure is highly misleading and inappropriate when used in this context. The £1.2 trillion figure would only be relevant if the government suddenly had to pay out the pensions due to all its employees, in full and in advance.

A far more appropriate way to look at the cost of public sector pensions is to view them on a year-on-year basis, and look at the likely changes in their cost in the future. Public sector pensions currently cost the government £30 billion a year, with 85% of public sector employees playing into a government backed scheme. However, the most recent figures show that around £26 billion of that figure is accounted for by employer and employee contributions, meaning that the taxpayer’s ‘subsidy’ of public sector pensions is approximately £4 billion, or 13% of the total (the Office for Budgetary Responsibility claimed that in 2008-09 it was more like £9 billion, or 28% of the total).

The Hutton Report, the basis for the government’s reforms, itself reveals that the cost of public sector pensions is likely to fall in the coming years, possibly by as much as 25%, due to the CPI to RPI switch and expected public sector job losses. Therefore, taking into account the CPI/RPI switch already introduced, and the falling cost of pensions that will follow, further reforms to reduce the burden on the taxpayer are unnecessary and entirely avoidable. Public sector pensions are affordable, sustainable, and likely to become more so in the future.

So what of the government’s second argument, that public sector pensions are currently considerably more generous than private sector pensions and it is unfair for this discrepancy to continue? Once again the Hutton Report offers a clear conclusion; public sector pensions are far from ‘gold-plated’, with an average pay-out of a ‘modest £7,800’ per year (Hutton’s words). Over 50% of public workers receive less than £5,600 a year.

However, Hutton also points out that only 25% of private sector employees pay into a pension scheme, and those that do will receive less on average than their public sector counterparts. But by reducing public sector pensions in order to bring them in line with or closer to levels of provision in the private sector, the government is not only doing nothing to address the problem of low and inadequate private sector pensions, but enshrining a justification for this low and inadequate provision in government policy.

So, if these swingeing cuts to public sector pensions cannot be justified on grounds of fairness, long-term affordability or by comparison to the private sector, then why are the government pursuing them? Once again this is an example of the government going too far, too fast in their efforts to pay-off the budget deficit.

Inevitably, whether the budget deficit is paid off in 4 years, or 8 years as proposed by Alistair Darling, or over an even longer period, public sector pensions will make a contribution and that means a cut in provision of one sort or another. When it comes to reducing the cost of public sector pensions, there are many levers that the DWP or the treasury can pull. They can pull levers to switch from CPI to RPI, as they have already done, to move from a final-salary to an average-salary scheme, to increase employer and employee contributions or to reduce lump-sum payments.

The coalition have pulled all the levers at once. Why? Because of their cynical, irresponsible and unnecessary obsession with wiping out the budget deficit in the ludicrously short time-frame of just 48 months.