Public sector pensions: unaffordable? untenable?

Is there anyone who hasn't listened to Cabinet Office Minister Francis Maude's mauling on the Today programme last week? (it really heats up at about 8 minutes in)

As well as being evasive about what was up for negotiation, it was clear that either Maude hadn't read the Hutton report or was willfully trying to misrepresent it by saying pensions were getting more costly, and that Hutton had said public sector pensions were 'untenable'.

Later in the day, other Ministers took to the airwaves and suggested that the Hutton report's projected falling costs was based on certain assumed changes that the unions were opposing, including the change in the inflation measure for indexation from RPI to CPI.

It's therefore worth looking at the National Audit Office report, published in December 2010 (in between Hutton's interim and final reports) and does not take into account the indexation change, nor does it make any assumptions in the size of the workforce. It shows reforms agreed between the unions and the then Labour government in 2007-08 "reduces costs to taxpayers by 14 per cent".

It also says, "long-term costs are projected to stabilise around their current levels as a proportion of GDP". So even without these disputed areas (which the government obviously aims to force through) the costs are still not rising, but stable.

The 07-08 agreement is also "transferring from taxpayers to employees additional costs arising if pensioners live longer", which means savings are being provided by public service employees in form of increased contributions or reduced future pension.

The 07-08 deal raised the pension age to 65 for new starters, introduced a career average scheme into the civil service pension scheme, and introduced 'cap and share' arrangements so that unexpected rises would be borne by employees. Labour Cabinet minister at the time, Alan Johnson MP, said it was a "fair and reasonable" deal.

And so to the Labour Party and Ed Miliband, who was very clear (some might say repetitive) in his opposition to the strikes. However, in a briefing to Labour MPs 'PLP brief: Strikes and public sector pensions- 28 June 2011, From the Leader of the Opposition' Ed sets out Labour's position more fully (over 7 pages) yet no more clearly.

In it he says (p.1) "we support serious and long term reform of public sector pensions" and says "John Hutton's report should provide the starting point". But despite repetitively saying that "negotiations are ongoing", the document does acknowledge:

• "Even before John Hutton's final report was published, the government slapped a 3% surcharge on pension payments for millions of public sector workers" (now 3.2% according to Danny Alexander's speech to IPPR on 17 June); and
• "Lord Huton argued that public sector pensions in the UK are affordable in the long run"
• "[The government is] switching the indexation of public sector pensions to CPI from RPI"

The above seems to counter Ed Miliband's line that negotiations are ongoing, and even the document hints at this by saying "If the government wants, they could have proper discussions. If that happens, there's no need for these strikes". This strongly implies proper discussions are not happening, undermining Ed's insistence that it's wrong to strike when negotiations are ongoing. Even Francis Maude was virtually forced into a confession of the sham nature of the talks under scrutiny from Evan Davis and Mark Serwotka (Radio 4 Today).

Unions met with the government again this week (for the first time since 30 June), but little movement seems to have been achieved, according to this Reuters report.

It is important that both the media and the Labour opposition begins to cut through the spin and misrepresentations and hold the government to account on this issue. It is even more bizarre for the Labour Party since, by tacitly supporting further changes, they are saying their own 2007-08 deal was ineffective, despite the National Audit Office proving the contrary.

Hutton and the government: wrong and unfair on public sector pensions

Full text below of letter printed in today's Guardian


As economists we are opposed to the public sector pension reforms proposed by this government and Lord Hutton.

Public sector pensions are far more efficient than private pensions. 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 total cost of providing tax relief to all higher rate taxpayers, on their private pensions, is more than five times as much.

By changing pension calculations from the RPI measure of inflation to CPI, pensioners (in all sectors) will be made hundreds of pounds worse off, with the loss accumulating as pensioners get older. The vast majority of economists and statisticians recognise that RPI is a more accurate inflation measure.

Taken as a whole these changes are a substantial disincentive to save because they will encourage people, already burdened by student debt, high housing costs, and the need to save when the social security safety net is being withdrawn, to leave public sector pension schemes and abandon provision for their old age altogether. This contradicts Iain Duncan Smith’s words earlier this week about rewarding saving. If public sector workers opt out of their schemes because of rising costs, it could leave some schemes in jeopardy.

The government claims these changes will help reduce the deficit, but they will take money out of the pay packets of today’s workers and from tomorrow’s pensioners, suppressing demand and damaging any prospect of recovery, as well as increasing pensioner poverty.

On public sector pensions, as on so much else, the government has got it wrong.

Richard Murphy, Tax Research LLP
Andrew Fisher, LEAP
Howard Reed, Landman Economics
Dr Stephanie Blankenburg, SOAS
Professor Prem Sikka, University of Essex
John Christensen, Tax Justice Network
Professor Gregor Gall, University of Hertfordshire
Colin Hines, Green New Deal Group
Bryn Davies, Union Pension Services

Perpetuating the myths on public sector pensions

There is no greater mythology than that surrounding public sector pensions. There second great mythology is that John Hutton (now Lord) was ever anything but a Tory - he was picked to write a report on public sector pensions (interim report published today) because he would write exactly what the Tories wanted to hear.

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.

Public sector pensions have already been attacked though by the indexation changes announced in George Osborne's Emergency Budget in June. 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, on their private pensions, is more than five times as much.

Ignoring all the facts, Hutton today said "This is a problem and we can't go on as we are."

So he recommended higher employee contributions, raising the retirement age, and ending final salary schemes.

Osborne will indicate government thinking on public sector pensions in the Comprehensive Spending Review on 20 October. When setting up the commission Osborne described public sector pensions as "unsustainable". Thing is they're not: the cost of public sector pensions today is 1.9% of GDP in 2010-11, but by 2060 that will have fallen to 1.4%.

Of course, the other calculation to make is that if public sector pensions are reduced, it will simply result in more people being entitled to means-tested benefits such as Pension Credit.

The final report will be published just prior to the March 2011 Budget - and then the attacks will start. Until then expect to hear lots more about 'gold-plated', 'unsustainable' public sector pensions. Just remember, it's bollocks.

Update: great article in the Morning Star on unions' responses to the report

Update 2: Great letter from Richard Murphy in today's Guardian: "in 2007-08, private pension funds in the UK received subsidies amounting to £37.6bn while paying pensions in that year of just £35bn to those in retirement. The result was that in that year every single penny of pensions paid in the UK were paid at direct cost to the UK taxpayer, and none in effect by anyone else. The question Hutton should therefore be asking is not whether pensions should be paid by taxpayers or not, but whether there is in fact any viable, working alternative to pensions being paid by taxpayers?"