The Coalition government has, in just two months, attacked pensions on an unprecedented scale. This attack has also been comprehensive – attacking the state pension, public sector pensions and private sector occupational pensions.
This has been implemented in the context of a ‘pensions timebomb’ – because people are living too long or because public sector pensions are too generous. This is false, the real ‘pensions timebomb’ is the potential for a huge increase in the levels of pensioner poverty.
Before looking at the specifics and impacts of the new government’s policies, it is worth considering the current state of pensioner poverty in the UK.
Pensioner poverty today
In 1998 the government calculated that 2.9 million pensioners lived in poverty. By 2005-06, pensioner poverty had declined to 1.9 million – thanks to a combination of the means-tested Minimum Income Guarantee (which later became Pension Credit) and the Winter Fuel Allowance.
However, as inflation increased and the economy collapsed this progress was less consistent. In 2006-07 pensioner poverty increased to 2.1 million – with London pensioners affected most severely (23% of the capital’s pensioner population). In 2007-08 it fell back to 2 million. In 2008-09 it fell further, to 1.8 million.
Pensioner poverty still however compares unfavourably with the rest of the EU. A European Commission report in July 2009 showed that only in Cyprus, Latvia and Estonia was there higher pensioner poverty than in the UK. On the EU measure, 30% of UK pensioners live in poverty – the EU average is 19%.
The Basic State Pension
The current basic state pension is £97.65 per week (£5077.80 per year). In 1981 the state pension was worth 23.7% of average earnings. That year the Thatcher government broke the earnings link, and the value of the state pension has declined to just over 14% today.
The Coalition Government has been praised for immediately re-establishing the link between pensions and earnings – something that New Labour resisted for 13 years, and had only pledged to do in 2012, “subject to affordability and the fiscal position”.
For most of New Labour’s years in government, the rise in earnings exceeded RPI inflation. Restoring the link with earnings would have meant a real terms increase in the basic state pension. In 2010, earnings are expected to be well-below inflation, and probably in 2011 too. The government’s pay freezes in the public sector will help this to be the case.
The new government has though committed to a ‘triple-lock’- the higher of earnings, CPI and 2.5%. Unfortunately for pensioners, in the next couple of years at least RPI is expected to be higher than all three of the ‘triple-lock’. The Budget redbook reveals that the move from RPI to CPI on pensions and benefits will save the Exchequer £13 billion over five years (no disaggregated figure for pensions only is yet available).
Raising the state pension age to 66 by 2016 will also have a devastating and very unequal impact. An average 65 year old man in Kensington and Chelsea can expect to live a further 23 years, while in Glasgow it is only 14 years.
By the age of 64, the majority of men are not working. Raising the pension age to 66 will neither make more jobs available nor them more attractive to employers. For some it will mean them claiming Jobseekers Allowance or Employment and Support Allowance – both cheaper than the basic state pension.
Public sector pensions
There is no greater mythology than that surrounding public sector pensions. A Guardian editorial on 5 July stated:
“if only union leaders would show the steely pragmatism that so often eludes them, and borrow a line from the Conservative manifesto – we're all in this together”
“If the state's workforce can convince the country that it is after copper- and not gold-plated pensions, then it might just start to win hearts and minds”
The infamous and ubiquitous “gold-plated” public sector pension is of course largely a myth. The average local government pension resides at just under £4,000 per year. Excluding the upper echelons of the senior civil service, the average civil service pension is only slightly higher at £4,200 per year (a positively tin-plated £80 per week). For teachers the average is a more healthy – yet far from gold-plated – £9,000 per year . Overall, the TUC suggests the average public sector pension is £5,500 per year.
Nevertheless, these sums are overly generous and the government has commissioned former New Labour Minister John Hutton to review public sector pensions. All indications suggest that higher employee contributions (for lower pension values) will be recommended – further hitting the real incomes of pay frozen public sector workers.
Public sector pensions have already been attacked though by the indexation changes announced in the Budget. According to TUC research , an eighty year old pensioner with an average public sector pension would be more than £650 a year worse off – equating to £12.50 per week.
The net cost of paying public sector pensions in 2009/10 was a little under £4 billion. The cost of providing tax relief to the one per cent of those earning more than £150,000 is more than twice as much. The cost of providing tax relief to all higher rate taxpayers is more than five times as much.
Private sector occupational pensions
Shortly after the Budget, on 8 July, Pensions Minister Steve Webb MP announced that the government would legislate to alter the standard for calculating defined benefit schemes from RPI to CPI.
This is a significant saving for corporate Britain – already benefiting from the £24.7 billion of corporate tax breaks over five years announced in the Budget . The exact saving has been calculated by Pension Capital Strategies as £100 billion over the lifetime of existing schemes.
Meanwhile, the private sector continues to close or dilute final salary pension schemes. BBC management is proposing to change current pension scheme rules, to allow no more than a 1% annual increase in the amount of salary that can be considered toward a pension, irrespective of any pay rise or promotion staff might get.
This could cost staff tens or even hundreds of thousands of pounds in retirement. For example, a man aged 25 who joined the BBC five years ago, currently earns £25,000 and gets a 4.7 per cent pay rise every year, could have looked forward to a pension worth £31,266 a year on retirement at age 60. Under the new proposals, his pension collapses to about £9,200 a year. Over a retirement of twenty years, this is a loss of over £400,000.
It’s not bad news for all private sector pensions though. According to the TUC's 2009 PensionsWatch survey, the average accrued pension for FTSE 100 Directors was £247,785 a year – an increase of 28% since 2007.
And of course top earners in the private sector benefit most from pensions tax relief. 60% of the gross tax relief – more than £22 billion a year – goes to higher rate taxpayers. A quarter of tax relief – nearly £10 billion a year – currently goes to the one per cent of the population who earn more than £150,000.
Conclusion
The Coalition government is clearly using the national deficit and its own honeymoon period as an opportunity to introduce measures that have little to do with tackling the deficit and more to do with protecting the privilege of its class base.
The comprehensive and simultaneous attack on pension rights should enable public and private sector workers and trade unions, as well as existing pensioners to unite in common campaigns to tackle this attack on the most basic security for working people – dignity in retirement.
Thats interesting, need to look into this.
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