Public service pensions: sustainable and affordable
Today the TUC published our response to the first phase of the Independent Public Service Pensions Commission, arguing that public service pensions are affordable and sustainable, contrary to the scaremongering of some commentators. Former Labour Business Secretary John Hutton has been appointed to head up a one-man Commission (no relation to the IoD’s so-called Independent Commission, whose arguments Nigel has thoroughly dismantled). The Hutton Commission has a punishing timescale to investigate the issues and make recommendations, with an initial report in September followed by a final report in March 2011.
In the TUC submission (and a number of excellent submissions with more detail on the individual schemes put forward by the relevant unions) we set out the case that public service pensions are affordable and sustainable. Of course, circumstances can change and when they do, all pension schemes whether private or public need to be ready to adapt. If this is the case then changes need to be negotiated and agreed with the relevant unions. But over recent years public service unions have been busy doing exactly that.
An extensive series of changes to public service schemes have been introduced since 2005 to secure their affordability for the future. The changes negotiated included raising pension ages, changing early retirement provisions and introducing arrangements to ‘cap and share’ the costs of increased life expectancy. These changes have the effect of limiting the volatility and overall level of future costs to the employer and the taxpayer. In addition, the controversial change in indexing from RPI to CPI announced in June will significantly reduce the cost of future provision – and the benefits pensioners receive.
The TUCs response challenges the “big scary numbers” put forward by certain groups and commentators, which have driven and distorted much of the media debate about public service pensions. For instance, adding up estimates of public service pension costs for decades to come and presenting them as a lump sum in comparison to today’s GDP makes about as much sense as comparing your entire mortgage debt to your weekly wage: scary, yes, but also meaningless. The TUC submission recommends that the Treasury should publish an annual report including all the key data to provide a clear and genuine picture of the figures and avoid their exploitation by those with a political axe to grind.
It also mounts a robust defence of the use of a 3.5 per cent discount rate the Government uses to value the future cost of pensions. As Bryn has explained and as the submission sets out, it makes no sense to treat public service pensions in the same way as private sector schemes, given the strength of the employer covenant – pensions jargon for the employer’s ability to meet their legal obligation to the scheme. In addition, this discount rate is used for other purposes than valuing pensions and a change would hit other long term planning, such as for spending on capital investment in infrastructure.
Perhaps one of the most immediately worrying aspects of the Commission’s terms of reference is that it has been asked to look at the potential for savings within the spending review period. Given the obligation to protect pension rights already accrued, pretty much the only possible savings within the spending review period would involve increasing member contributions (leaving aside the RPI/CPI switch – see the submission for more detail on this). The first series of pension scheme valuations under the ‘cap and share’ system will be considered shortly and it is possible that member contributions will rise under these arrangements. But unions will be adamantly opposed to increases outside these arrangements : at a time when pay has been frozen and inflation is rising this would mean a significant cut in take-home pay for many public servants. It might also lead to more people might exercise their right to leave the scheme, leaving them without a pension for the future.
Private sector employees have certainly been hit hard by the employer retreat from decent pensions. There is a gap between public and private provision. There is also an important gap within the private sector, between the genuinely gold-plated pensions many company directors still receive despite provision for their workers being slashed. The answer is not attacking public service pensions in an attempt to cut provision in the areas where it is still adequate, but rebuilding decent private sector provision.