It may be a quiet news day today, but that does not explain Robert Peston’s curious report, first on the Today programme and now on his blog, on public sector pensions. This claims – based on the work of John Ralfe:
The increase in the normal retirement age from 60 to 67 for public sector workers has not led to significant savings in the cost of public-sector pensions.
The story is odd in a number of ways. We can wonder why the BBC’s Business Editor is reporting on a non-business story in which he has not been much involved before – unlike say John Moylan, their industry correspondent who has covered the story in depth. It is also strange that the BBC is covering research that has not – as far as we can tell – been published. It is certainly not on Mr Ralfe’s website.
Mr Ralfe has been a leading critic of public sector pensions for many years. If a journalist wanted an “unsustainable” quote they knew where to go. His consistent argument has been that the discount rate used to value the cost in today’s money of public sector pension payments in the future is wrong. His preferred figure produces significantly higher costs. They are a great source for those who like big scary numbers to attack future public sector pension costs.
It’s a point of view, but not one that is widely shared beyond the predictable right-wing critics of public sector pensions.
The National Audit Office and the Hutton Report both say that expressing future costs in today’s money is not a helpful way of valuing the cost of pensions. They say the better measure of measuring future commitments is to look at the share of future GDP they will take. The Government’s Actuary Department predicted this to be steady after the deal negotiated with Alan Johnson, and now says it will fall, mainly because of the impact of the change in indexation from RPI to CPI. This approach is also endorsed by the OBR. Government ministers came unstuck on the Today programme on consecutive days when they tried to argue the “unsustainable” line against this analysis.
There has also been a Treasury led review of the discount rate used in pensions. This resulted in a not insignificant change from a member perspective, but Mr Ralfe was disappointed by the review as it rejected his arguments.
As Mr Ralfe has not published his work, we cannot say how much of the argument in Robert Peston’s blog are his and how much Peston’s gloss, but whatever the balance they are misleading and confusing.
They focus on just one change in public sector pensions – and ignore the other two. If Robert Peston had put his claim to the TUC that contribution increases and the switch to CPI indexation:
“were not seen as the major source of acrimony between ministers and trade unions”
we would have laughed (or perhaps more appropriately cried).
Government changes need to be seen as a package. The union complaint is that people are being asked to pay more (ie higher contributions), work longer (ie increase in the normal pension age) and get less (ie the change in indexation to CPI).
In addition there are scheme design issues, such as the move to career average pensions. These flow from the Hutton report. Most of these can be done in ways that are cost neutral. Some may lose and some may gain but the change can be made in ways that do not change the overall cost of pensions.
Mr Ralfe’s figures do not chime with our analysis, nor with Channel Four’s factcheck that found againt the government’s claim that pensions would be just as generous under their proposals. But even if you accept them, it is absurd to ignore all the extra income that will be raised not just from significantly higher contributions – Peston is right about this – but also from the extra years of contributions that will be paid.
Nor is it right to say that the government’s proposals are a straightforward increase in pension age from 60 to 65. Local Government already has a pension age of 65 for all. In other schemes the Johnson changes have meant that new starters have had a pension age of 65 for some years.
But the most misleading argument is the section about accrual rates. As Jon Rogers shows, the statement about existing accrual rates is wrong.
What is worse is that accrual rates in a final salary scheme are compared with those in a career average scheme. A career average scheme needs a significantly higher accrual rate to provide as good a pension as a final salary scheme for the vast majority.
This is because people’s earnings tend to go up over time. If you take a calculation based on a final salary it will therefore be higher than if you use the same factors but start with someone’s (almost inevitably) lower average salary.
It is made even more complicated by how you work out average salary. In any career average calculation you need to uprate past service by inflation to express past earnings in today’s money. This is not straightforward as there are different ways of doing this. The civil service NUVOS scheme, the one existing career average scheme, uses price inflation (which of course has changed from RPI to CPI to the detriment of NUVOS members).
Hutton argued for the increase in average earnings to be used for indexation, rather than prices. As this tends to be higher than prices over time, this produces a higher figure for average salary. To maintain a cost neutral pension package a career average scheme with earnings related indexation would therefore have a somewhat lower accrual rate than one with price indexation.
You do not need to follow all the technicalities of this to see that the generosity of a career average pension depends on three factors: the accrual rate,the normal pension age and the indexation factor, while a final salary pension only depends on the accrual rate and the pension age.
Therefore it is highly misleading to say that:
Before the changes, which were finally agreed before Christmas, public-sector workers accrued pension entitlements at the rate of 1/80 of salary per annum, plus a cash lump sum on retirement of 3/80 of salary, which was equivalent to an accrual rate of 1/70. For teachers the new accrual rate is 1/57 of salary per annum, for healthworkers it is 1/54 and for civil servants it is 1/44 – which is significantly more generous than the old arrangements. (my emphasis.)
Curiously everything else I can find on public sector pensions written by Robert Peston also seems to come from John Ralfe. This is not to say that Mr Ralfe is not a legitimate figure in the pensions debate, but it is odd that such a distinguished journalist should appear to rely on a single source.
I’ve always liked and admired Robert Peston’s work. I’ve not always agreed, but have always respected him as someone who does his homework and knows his subject. His somewhat stumbling piece on the Today programme this morning did not meet this expectation. ‘More in sorrow than in anger’ is probably a bit of a cliche, but it captures my mood rather well in writing this.