Alex Brummer spent many years at the Guardian before moving to become city editor of the Daily Mail. He often writes good sense in a paper where I do not always look for it. His latest column for the New Statesman has some insight but is mainly pure essence of Daily Mail - perhaps not surprisingly as it is about pensions, and public sector pensions in particular.
The initial scene-setting is wrong. He says:
But as we saw with Gordon Brown’s dividend-tax raid on private pension funds in 1997, such measures can have hugely damaging effects.
I do not know any real pensions expert who think this made the decisive -or even very much – difference to private sector pension provision. The move away from defined benefit pensions predates this, and has many more causes. I would single out:
- the increase in cost caused by people living longer;
- the rise of the cult of short-term shareholder-value which resulted in City pressure to close schemes;
- the change in the culture of increasingly globalised companies that no longer felt they had any paternalistic responsibility to provide a good DB pension;
- the accounting standards that put volatile scheme deficits into company accounts and made finance directors want to get rid of the risks that go with DB pensions; and
- the failure of staff to properly value and defend their pensions (though you can’t blame them, as behavioural economics tells us this is pretty universal).
It’s strange the way that people who like to say things should be left to the market want to blame the government when market forces produce undesirable results - but entirely predictable that companies who close schemes should want to find a scapegoat for their decisions.
Next we do get some valuable insight. Brummer is right about the rows in government, at least according to my sources. There were rows between Blair and Brown about the Turner Commission and its conclusions. And Yvette Cooper and Angela Eagle had to make a spirited defence of the new settlement on the eve of the pre-budget report, to stop the Treasury postponing the whole 2012 reform package – which in my view could have been a fatal blow. HMT were on the wrong side throughout.
But Brummer gets the 2012 reform in a twist:
All private-sector workers would be automatically enrolled in a new, government-organised scheme of “personal accounts” (just renamed the National Employment Savings Trust), similar to others in Australia and Sweden. This should have been operational in 2012.
This is not true. What will happen is that all workers (at least those who earn above a threshold) will need to be enrolled in a pension scheme provided by their employer. NEST is one choice that can be made by an employer, and is the default if they do not make a positive choice of another scheme. Its schemes (and there will be a limited choice) are particularly designed to meet the needs of low to medium earners. It will be the pensions provider with a public service obligation to serve every employer. (disclosure: I’m on its consumer panel).
It will be operational in 2012. It has never been the case that every employer would start on the same day – that’s a recipe for organisational chaos. What the pre-budget report did do (disappointingly) was extend the phasing-in of contributions and staged entry of employers into the scheme from 2015 to 2016. By keeping contributions lower than they would have been during 2015, this saves the Treasury a significant amount in tax relief (though nothing like the amount paid to rich savers who don’t need it.)
Now Brummer gets his time-scales confused. Like all the small-state critics of public sector pensions he likes to quote figures for scheme deficits and future liabilities. But while these figures are not entirely meaningless, they do not provide any guide to how they will impact on the deficit in the next few years. These pension commitments extend decades and decades into the future – that is how pensions work after all. The figures for the unfunded public sector schemes are particularly notional as the deficit calculations depend in part on estimates of future investment performance - yet they do not have investments.
Public sector pensions do not fit neatly into deficit calculations. If a future government were to freeze all public sector pay, this would have an immediate effect on the size of the current public sector deficit. But it would make pension scheme deficits worse because contributions into the scheme (set as a percentage of pay) would also be frozen.
Now we have a succession of statements that don’t stand up.
“many are in non-contributory plans that pay out inflation-proofed pensions at the age of 60.”
Well the armed forces scheme is non-contributory, but I can’t think of any others. Nor can the Pensions Policy Institute if you look at page 12 of their authoritative report. I look forward to the Daily Mail campaign to make our boys pay for their pensions.
“However, during the recession, average pay in the state sector has caught up with pay by private companies”
This is of course the Sunday Times’ contribution to nonsense about the public sector – the inaccurate assertion that average public sector pay was recently lower than that in the private sector but has now overtaken it. See here, here and Ben Goldacre to find out why this isn’t true.
Lastly we learn that:
“a bolder solution would be to bring future public-sector employees under the umbrella of the ‘personal account’ system, if it gets off the ground.”
It would certainly be a bonkers solution.
Firstly personal accounts are designed for low to medium earners. There is an upper limit on contributions secured by insurance industry lobbying to ensure that they did not face competition from a new low-cost provider. Even if we exclude anyone the Daily Mail would call a fat-cat (I suspect a tougher test in the public sector than the private), there are many public sector workers who earn more than median full time pay of around £23,000. Personal Accounts will make a useful if inadequate contribution to the pensions of the low paid, they have not been designed to suit all staff (though I wish they had).
Secondly I don’t think tax payers would be too keen on this approach. At the moment the vast bulk of (unfunded) public sector pensions in payment are paid for by current contributions. (Historically the state has made a profit on this but now also has to contribute.) But if contributions are diverted to a DC pension this would mean the tax payer is paying twice. First taxpayers would have to take up funding all pensions currently in payment, and secondly they would need to make the employer contributions into the personal account DC fund that will provide future pensions.
It’s a shame that someone who has real insight into the way the City works (and doesn’t) should dash-off this rather thin piece on pensions.