The CBI on public sector pensions (3)
In this final (and shorter) post on the CBI’s public sector pensions report I look at one or two points and what they say should happen in the future.
The CBI say:
Traditionally, unions have argued that public sector pensions are generous to make up for lower levels of salary. Analysis shows that in recent years this argument is no longer valid … it is clear that the pay gap – except at the very highest levels of earnings – no longer exists.
I have seen some arguments that overstate the union case, but the CBI go too far in the opposite direction.
The truth is that lower skilled and lower paid jobs are better paid in the public sector, while higher paid, higher skilled jobs are paid better in the private sector. As the CBI say, direct comparison is hard (as jobs differ and the public sector workforce is much more skilled) but we can look at earnings by skill levels as I do in detail here. In summary:
- Public sector graduates are paid 3.4 per cent less than in the private sector
- Public sector workers with higher ed short of a degree are paid 6.2 per cent less than in the private sector
- Public sector workers with A levels are paid the same
- Public sector workers with lower skills get paid more than in the private sector.
They also confuse pension age and retirement age in their section on retirement, but lots of other people do too so let’s move on.
But what about their alternative?
The CBI advocates a notional DC scheme – essentially replacing unfunded DB schemes with unfunded DC schemes based on Swedish practice. (For pensions anoraks it works something like a cash-balance scheme.)
This at least understands that you cannot replace unfunded DB schemes with traditional private sector DC schemes as the tax payer would have to pay both pensions that have already been built up on the unfunded model and contributions to fund tomorrow’s pensions at the same time.
Of course any pension scheme can deliver a good pension if the contributions and terms are generous – you can have a mean DB scheme and a generous DC scheme, but I do not think the CBI proposal is designed to improve current pensions.
There are three observations I would make about this kind of approach.
First, its main advantage to the employer is that it transfers longevity risk to the employee. This is because it makes scheme members buy an annuity when they retire. Annuity rates decline as longevity increases.
But the one risk that the public sector pensions have already shared with their members is longevity. This is what the cap-and-share elements of public sector pension reform were designed to achieve. If longevity is better than expected the extra costs are first shared betwen employer and employee and then capped so that the employees bear all the extra costs.
Secondly, a notional DC scheme replicates a feature of notional DB schemes that the CBI say they oppose. Under such a scheme employee and employer contributions are paid into a notional pot (ie it doesn’t really exist but is mixed up with public finances as now). Each member gets a notional account and this grows each year with a rate of return set by the scheme probably based on some economic indicator such as wage or price rises.
But this return is exactly the kind of taxpayer “subsidy” that the CBI object to under the current arrangements, which I analysed in my previous post.
Thirdly, the UK is not like Sweden. Occupational pensions can be much less generous there because the state provides a much more generous basic retirement pension. Naomi tells me that the median state pension in Sweden amounts to 51% of the working population’s income compared with 27% in the UK . As ever if you want to adopt Swedish institutions you need to start by replicating the prosperity and much reduced inequality that the Nordic model creates.
But while it is important to get into the detail of these technical arguments, they should not obscure what is a fairly simple point.
The projections show that the cost of pensions in payment (even before contributions are taken into account) are eminently affordable and increase less than other aspects of the bill for an ageing society.
Those who want to reduce public sector pensions almost always turn out to have another agenda of undermining public services or transferring them to the public sector.
While the CBI report is more measured and avoids the over-the-top hyperbole of most of the attacks on public sector pensions, its aim is still to shrink the state and reduce the retirement living standards of public sector staff.