Public service pensions myth and reality
Today seems like a good day to debunk some public service pension myths…
Myth 1: Public service pensions are gold-plated
The Commission firmly rejected the claim that current public service pensions are ‘gold plated.’
Final Hutton Report (p26).
Half of public sector pensions in payment are less than £5,600 a year. In local government half of pensioners get less than £3,000.
A YouGov poll of 2,500 people in February 2011 asked what the average public sector pension should be. The average across all responses was £17,088. Forty-four per cent said it should be more than £15,000. Almost half (49%) of respondents believed the average public sector pension is more than £10,000, and only 23% believe it is less than £10,000.
To see some solid gold pensions, take a look at some of the top private sector boardroom pensions. The TUC’s annual PensionsWatch survey looks at the pensions of top directors in the UK’s biggest companies. Last year’s study found that the top directors had pension pots that would pay out an average of almost £300,000 per year. Directors in the private sector often have separate, more generous pension arrangements than their staff. In the public sector senior managers are in the same schemes as the rest of the workforce
Myth 2: Public service pensions are unreformed
Two major changes have been made to public sector pensions – one by negotiation and one imposed by the Government. Together they reduced the value of public service pensions by around 25 per cent even before the current negotiations started.
Negotiations with the previous Labour government led to changes to the public service pension schemes that reduced the value of pensions to members by around 10 per cent, according to the interim Hutton report (page 9), and the future costs by around 14% according to the National Audit Office (p.5). Changes included increasing the normal pension age for new members in most of the schemes (and for all members in local government), and in the civil service a new ‘career average’ pension scheme was set up. An important part of the package of changes was ‘cap and share’ arrangements. These meant that the cost of unexpected increases in life expectancy would only be borne by employers up to a certain cap. After this cap, members would bear the full cost of future increases. Back in 2009 the Treasury estimated that cap and share would save £1 billion a year through increased contributions from next year onwards.
In June 2010 the Chancellor announced without warning that public service pensions would be uprated according to the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI). The switch to linking the indexation of pensions in payment to the CPI measure reduces the value of pensions by a further 15%. A number of unions are currently taking legal action to challenge the decision to cut the value of pensions in this way.
Myth 3: Public sector pensions are unsustainable
How best to measure the costs of commitments that go a long way into the future is controversial. Those who want to claim public sector pensions are unsustainable try to express all these future commitments as if they were a bill that had to be paid today. This produces some scary numbers but is a completely inappropriate measure given the long term nature of pensions.
The NAO and the Hutton Commission both rejected this approach and said that the test of the long term affordability of public sector pensions is what proportion of GDP future payments will require.
The NAO found that even before the switch to CPI indexation the cost was sustainable:
Government projections suggest that the 2007-08 changes are likely to reduce costs to taxpayers of the pension schemes by £67 billion over 50 years, with costs stabilising at around 1% of Gross Domestic Product (GDP) or 2% of public expenditure. This would be a significant achievement.
Public Accounts Committee, The impact of the 2007-8 changes to public service pensions
Once CPI indexation is taken into account the proportion falls clearly. The Hutton report (chart 1.B) shows that the central projection of future costs (before any further changes) falls from 1.9% of GDP to 1.4% by 2060.
Myth 4: The government is protecting the low-paid
In Danny Alexander’s speech on 17 June, he said that the government was proposing to limit the contribution increase to those earning more than £15,000, and to cap the increase paid by those on £15,000 to £18,000 a year at 1.5%. So the Government argues that according to their proposals only those earning over £18,000 will bear the full brunt of the increase and those earning under £15,000 won’t pay any of the increase. But in the briefing issued ahead of the the speech is was clear that these figures were based on ‘full time equivalent’ salaries.
The ‘full time equivalent’ point is important because many low-paid staff in the public sector would earn over the £15,000 threshold if they worked full time, but they have low take home pay because they work part-time. So someone who works in a job which if full-time meant they would earn £16,000 a year, but actually works half-time and thus earns £8,000 will not be protected from the increase. We estimate that this could affect over a million part time workers, the vast majority of them women. Nicola and Channel 4’s Fact Check both have more on this.