From the TUC

Some more of Andrew Lansley’s letter

27 Jul 2011, by in Pensions & Investment, Public services

Someone has now sent me some more of the leaked Andrew Lansley letter on pensions that I dissected on Monday. Thank you. You know who you are, even if I don’t.

It’s even more interesting than the original leaks suggest!

We also now know that it was written in late May. So to be fair I should note that the government’s position has shifted a little since then, but not by a huge amount or in ways that deal with the points raised in the letter.

So here’s a bit more from it with some further analysis. (My words are not indented or in italics.)

I believe we need to particularly consider the following key issues:

  • whether to agree the recommendation of all staff moving to a normal pension age linked to the state pension age, with career average accrual.
  • the cost envelope for scheme changes: will it be based around maintaining the current level of employer contributions, or do we intend to reduce employer contributions and reduce the accrual rate available further.

This is a particularly crucial, if opaque, sentence. As I said in my previous post, as the government has reduced the value of pensions by switching indexation to CPI, the total contributions required to fund them falls. Changing employer contributions has no impact on current spending (and thus the deficit) as in pay-as-you-do schemes without funds under investment they are simply money that goes out of the Treasury through one door and back in another . But they are important in working out the level of pension because of their impact on the cost envelope.

This is an important concept in public sector pensions. It is simply a bit of jargon for the funds that will be needed to pay the expected future cost of pensions. You can cut this in different ways between pensioners. For example a change between career average or final salary pensions will produce winners and losers and an increase in the pension age can mean higher pensions but for a shorter retirement period.  All these different design features however must produce a bill in line with the cost envelope.

  • for the NHS, the issue of access is critical.  I believe that the Hutton recommendation on restricting access to public sector employees only is both inappropriate in the context of our market changes and would lead to substantial reductions in receipts to HMT as 15% of the value of the NHS Scheme is already in the non-public sector through general practice and direction bodies.

Again we see the difference between the short-term and the long-term. Restricting membership of pay-as-you-go schemes now reduces costs when these people retire but until then it simply stops employee contributions going into the Treasury and make the deficit worse.

  • how we explain the rationale for all schemes having the same increase in employee contribution rates when the current employee contribution levels in relation to the value of benefits are very different.  I remain concerned that we will face considerable resistance from NHS staff who will be paying significantly higher levels of contributions than some other schemes.

This needs no comment!

We also need to decide whether our aim is to achieve a negotiated agreement with the Trade Unions or whether we intend to impose unnegotiable changes with the impact on industrial relations that will surely follow.

This is another significant sentence as it questions the seriousness of the negotiations. Although there have been some serious negotiations, doubts remain about this.

The paper you tabled with the Trade Unions modelled career average accrual rates of 1/100th, 1.90th and 1/80th and suggested that 1/100th would be sufficient to meet Turner replacement rates.  If it is our intention to introduce career average accrual rates at these levels, then it is difficult to see how a negotiated agreement could be reached with the Trade Unions.   These accrual rates imply a significant reduction in the employer contribution rate.  This would result in a further substantial reduction in the value of the public sector reward package on top of the increase in employee contributions, to move to CPI and the previous Government’s changes.  All the accrual rates modelled would result in lower employer contributions if employee contributions remained at the level set out in our plans.

I dealt with this in my earlier post

The paper also assumes that public sector workers, many of whom are women, will work a 48 year career to achieve Turner income replacement rates in retirement.  In the NHS currently, the average full time career for those taking a pension is only 18 years and it seems unrealistic to suggest that pension scheme design should be based on the assumption that a predominantly female workforce will need to work full time 48 year careers in future to receive a full pension.  It is also difficult to see how this meets our commitment to maintain gold standard pensions.

The NHS is engaged in a major programme of public service reform.  Other departments have similar ambitions.  We are doing this against a background of a two year pay freeze and job cuts as well as the pension changes.  The combined effect of the CPI changes and the previous Government’s reforms has been to reduce the value of public service pensions by 25% for new starters since 2008 and by  half that for existing members.  Members contributions will go up by about half as a result of the CSR announcement.

Contribution rates in the NHS are already among the highest in the public sector, in relation to the level of benefits provided.  We have to have a strong narrative; explaining why it is fair that staff should pick up a greater share of the cost of providing benefits, show staff the real value of their pension, that they remain very good value for money and that differential contribution rates between different schemes are justified in terms of the overall reward package.

We face a real risk, if we push too hard, of industrial action involving staff groups delivering key public services.  There is also the risk that lower paid staff in particular will simply opt out, leaving HMT with reduced receipts in the short term while still having to pay for past pension promises.  In the NHS, if it appears that we intend to significantly reduce the value of future accruals we also face the risk of opt out from  higher paid groups as well as the lower paid.  GPs for instance pay both employer and employee contributions and can choose to invest them elsewhere or take them as pay.  This would create a significant fiscal pressure in the short to medium term and in respect of lower paid staff who opt out would increase pressure on the social security budget in the longer term.

Again these paragraphs speak for themselves.

What strikes me is that it is becoming more clear that the government went into this issue with a very incoherent agenda.

They are unclear whether their priority is reducing the long-term cost of public service pensions (which the switch to CPI indexation did at a stroke), whether they are interested in the detailed design of schemes such as career average rather than final salary or whether they simply want public sector workers to suffer not just the real terms pay cut that a pay freeze achieves but a cash reduction in take home pay through increased contributions.

This confusion is one reason why they have come unstuck on long-term affordability so badly, as this is clearly not out of control.

Unions know that pension schemes change from time to time when factors such as unexpected increases in longevity occur.

How you share out pensions through scheme design elements such as career average or final salary can be debated. If you keep the same cost envelope, then some lose and some benefit – and the arguments can vary from scheme to scheme and workforce to workforce.

But mixing all these issues up at the same time is simply a recipe for confusion, especially when ministers raise doubts about the seriousness of the negotiating process.

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