From the TUC

The Guardian’s public sector pensions myths

14 Dec 2009, by in Pensions & Investment

Phillip Inman has had a brave go at exploding public sector pensions myths in Saturday’s Guardian.

…there remain many often contradictory “facts” swirling around in the now heated debate about public sector pensions. Here, we examine the main ones. What are the true costs, and are politicians right to worry about soaring costs tomorrow?”

I am not entirely sure that he has got the top myths, though there are so many that may be a hard task. But here is my take on some of his points. I’ve ignored those where there is nothing much to add.

1 PUBLIC SECTOR PENSIONS ARE NOT FUNDED BY EMPLOYEES

This is a source of big confusion. All workplace pensions are funded by a mix of employer and/or employee contributions. A few don’t have employee contributions (though usually wages are lower instead), and some don’t have employer contributions (but they don’t really count in my book as a workplace pension.)

But you can also argue that all contributions come from the employer as the employee contribution comes out of their wage packet – and that’s provided by the employer.

Joe and Joanna may do the same job for different employers with the same wage, same pensions benefits and same total pension contribution. Joe gets £20,000 pay out of which he pays £2,000 in employee contributions and his employers put in a further £3,000. But Joanna gets £21,000 pay from which £3,000 in employee contributions is deducted and her employer puts in £2,000.

They both get the same take-home pay and will get the same pension. The cost to the employer is the same. But in some discussions Joe will be seen as better off and in others Joanna will be.

There’s no great conclusion here – other than always ask hard questions when people are comparing pensions or talking about who pays for them.

3 THEY COST £770BN

Phillip says:

The official bill is £770bn. This covers the cost of providing pensions to nurses, social workers, soldiers and other public sector workers over the rest of the century. Yet a growing band of experts calculate the cost at more than £1tn and rising. They argue that the government fiddles the figures to make the cost look smaller and delay any action. Coupled with official state pension costs of £1.3tn, pension commitments add up to two of the biggest bills in government.

The government actuary’s department is entrusted with estimating the cost of pensions for the Treasury. Experts say it uses out-of-date figures for life expectancy and overly generous interest rates and inflation and have called for an independent review.

This is the issue that provokes the most heat, and the least light. What is being argued about here is what would be the cost of funding all future pensions if a sum of money had to be set aside now to cover these costs.

This of course is what is known as a hypothetical question – only a few fringe small-statists think that should happen. People who argue the higher figures insist that the figure should be worked out by calculating the amount of money that would need to be set aside and then all invested in government bonds. There are two issue here. Because of the recession, interest rates are fantastically low at the moment, that means bond rates are also very low. That won’t happen for ever so this figure will go down as interest rates rise.

Secondly – and much more importantly – this is not how public sector pensions are funded. It is entirely reasonable for the government to cost its future commitments by assuming a nominal rate of return based on what it actually expectspublic finances as a whole to generate. This should be based on the future growth of tax income, which goes up in line with GDP.

Everyone involved in private sector pensions thinks that this way of calculating the future cost of private sector pensions  is daft as it flows from accountancy standards setting, not pensions expertise. If it doesn’t make much sense in the private sector, it certainly shouldn’t be hyped up for the public sector.

5 PUBLIC SECTOR PENSIONS ARE TOO LOW

This is the message from union leaders, who argue only a small fraction of government spending goes on pensions. They focus on cash figures, rather than lifetime liabilities.”

I don’t think the first part is exactly true. Unions think that public sector pensions are a decent and affordable, after the renegotiated terms that have been agreed over the last few years. It is true that we do argue that it is better to assess affordability by looking at likely cash flows in the years ahead and working out what future commitments will be as a share of GDP (as that determines government income). But we haven’t forgotten the many years that the net cash flow was positive for government ie they got more in contributions than they paid out in benefits.

6 PUBLIC SECTOR PENSIONS ARE TOO HIGH

The TUC claimed the average public sector retirement income was £4,000 to show that in practice payments are low. But union claims of average incomes for retired public sector workers are based on a misunderstanding of the information available. The public sector collects information based on pension pots, not people. Over a career, workers can have several pension pots. Part-time workers are included, dragging down the average. The average is almost certainly higher than the published figures, but we have no means of knowing by how much.”

Not surprisingly we would agree that this is a myth. But the commentary causes problems. I’m not sure that the TUC has ever claimed to know the average retirement income of a retired public sector worker (though perhaps there has been some ambiguous drafting.) And we say that the mean public sector pension is £7,000.

Of course a retired person who gets a public sector pension may get a pension from somewhere else too if they did not work in the public sector all their life. But of course you cannot assume that private sector employment automatically carries a pension. Most private sector employees are not building up an employer supported pension.

The bigger question is what we mean by average. The figures used are means. It is nearly always better practice to use medians to describe income as a a relatively few people with high income will push the mean up. If we used the better median measure, this would depress the average pension in payment. (And why should’nt we include part-timers, don’t they have to survive in retirement too?)

As it happens there is a new report from the Government Actuary’s Department with details of  mean pensions in payment for the unfunded schemes. This is its projected mean pensions for 2007/2008. I’ve calculated the mean across all the unfunded schemes covered in the GAD report. (BUT this excludes the funded local government scheme. This would probably make the average lower.)

NHS civil service Teachers Armed Forces Police all unfunded
number (millions) 0.65 0.58 0.57 0.38 0.1 2.28
total paid (£billion) 4.2 3.4 5.3 2.7 1.2 16.8
average pension £ £6,500 £5,900 £9,200 £7,000 £11,600 £7,368

8 THEY ARE MORE VALUABLE THAN PRIVATE EQUIVALENTS

Most public sector workers are able to claim their pensions at an earlier date than in the private sector, according to the Institute of Fiscal Studies, which found that the accrual of extra pension rights is worth more to public sector workers. Where the average retirement age in private sector final salary schemes is 65, it is 60 for most public sector workers.”

It depends what you mean by equivalent here. Obviously public sector workers get better pensions on average than private sector workers, because most private sector workers don’t get any employer backed pension.

But the answer is to level up, not down. This is why we call for decent pensions for all.

But if you compare public sector pensions with boardrooms, you get a different answer.

I don’t think the last sentence can be accurate either as I don’t believe the average retirement age in private sector schemes is 65 – that a suspiciously round number for an average. It may be the commonest however (though of course DC pensions don’t have a pension age). But new members of public pensions are joining with a pension age of 65, and some existing staff are transferring into the new 65 schemes as for some they have better benefits.

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