From the TUC

Vince Cable on public sector pensions

29 Jun 2009, by in Pensions & Investment, Politics

Vince Cable had a superb article on banking regulation in the New Statesman last week. It’s a pity that he has followed this up with such a poor one about public sector pensions in the Mail on Sunday. Of course he has every right to say that public sector pensions should join the race to the bottom to chase the private sector employers who have cut or closed them. But it’s disappointing to see so many disingenuous arguments – especially from someone who even when you disagree with him, normally adds light to whatever he is writing or talking about.

The basic problem is a pretence that you can save big amounts of  public spending by cutting public sector ‘fat-cat’ pensions. You can’t,  even if you include Jonathan Ross, who Vince says has a public sector pension. He may well be overpaid but is a not a salaried BBC employee, and is not a current member of the BBC pension scheme.

There are two problems with thinking you can save money in this way. First, however you define fat cat, there are not that many  in the public sector. Even if you think of head teachers as fat cats, (though they would be seen as positively malnourished in the City), there aren’t that many of them and they don’t earn the squillions paid in boardrooms. The only way to harvest a substantial amount of cash from public sector pensions is by cutting those of middling and low paid public servants – such as teachers, nurses and the majority of civil servants.

Secondly, it’s unclear how you can cut the costs of public sector pensions if you also say – as Vince does:

There must be no question of cutting the entitlements of existing pensioners. Most have modest pensions earned after a career teaching, nursing or in poorly paid manual jobs.

But the cost of unfunded public sector pensions is precisely “the entitlements of existing pensioners”. Most public sector pensions are unfunded – i.e. they are paid out of the general tax pool, just as today’s staff and public sector employers.  (I did my best to explain the unfunded model in an earlier post). You can change the entitlements for future pensions that staff build up while they still work – and indeed there have been negotiated changes in all the public sector schemes – but it takes some time before that makes significant changes to pensions in payment.

Vince then says:

There are, of course, fat-cat salaries, bonuses and pensions in the private sector – some extraordinarily generous. But the taxpayer doesn’t have to foot the bill. Indeed, many executives are paying the price of excess in the cold reality of recession-hit markets, and shareholders are starting to crack down on their greed.

But the one difference between well-paid public sector pensions and boardroom pensions is that they are overwhelmingly members of the same pension schemes as other staff in that bit of the public sector. Top civil servants get paid well, but get a good pension because they are paid well, not because they have a special gold-plated boardroom pension. You can argue that there’s too big a gap between top pay and ordinary pay in the UK, but that gap is undeniably smaller in the public sector than the private sector.

Nor are private sector fat cat pensions nothing to do with the tax-payer. They are. This is because they get tax relief  on their pension contributions. The government has rightly limited this – though it could go further as I have heard Vince on another occasion argue. By the way, isn’t it odd the way that many people who attack the government for limiting this tax break for the pensions of the super- rich are also so keen to cut the pensions of school meals assistants?

Vince next says:

Behind the fat-cat culture in the public sector is a wish to enjoy the rewards available in the private sector without the risks.

Top pay has probably gone up in some parts of the public sector, though not as fast as top pay in the private sector, but it is still generally well below top private sector rewards – and my impression is that more very top public sector contracts are short term. There is undoubtedly too much inequality in the UK, but it is much more of a private sector problem than a public sector one.

But the truth is that many of those senior civil servants, parliamentarians, local government bosses and others who feel underpaid on their generous packages would sink without trace if they had to manage a business through the recession.

Just as many business people would sink without trace if put in front of a class in a deprived inner city area, asked to solve a murder or help an anorexic teenager start to eat properly. Society needs all those skills.

He concludes:

The system has to be reformed and there are various options including shifting to an average salary basis and raising employee contributions which must now be pursued.

But the system has been reformed. Every part of the public sector has changed its pension arrangements. This includes a move to an average salary pension in the civil service. These reforms won’t make rapid changes in the pensions that are paid, because just as in the private sector, pensions are based on accrued benefits built up over a working lifetime.

While Vince Cable says that won’t cut pensions in payment, he does not rule out refusing to honour accrued benefits – which at least the Conservatives have done. For the only way to rapidly bring down the cost of public sector pensions without cutting pensions in payment would be to refuse to honour pensions promises made to staff as they retire in future. This would inevitably be contested in court.

I would be very surprised if that were Lib Dem policy. But if it isn’t, they then do not have a policy that could use public sector pension cuts to make any significant difference to the public finances in the short term.

3 Responses to Vince Cable on public sector pensions

  1. links for 2009-07-02 « Embololalia
    Jul 2nd 2009, 7:08 pm

    […] Vince Cable on public sector pensions | ToUChstone blog: A public policy blog from the TUC The basic problem is a pretence that you can save big amounts of public spending by cutting public sector ‘fat-cat’ pensions. You can’t, even if you include Jonathan Ross, who Vince says has a public sector pension. He may well be overpaid but is a not a salaried BBC employee, and is not a current member of the BBC pension scheme. (tags: libdems scapegoats pensions uk fiscalpolicy economics) Possibly related posts: (automatically generated)A peek inside my head…My Experiences…Babes’ Blog, Week 41: Oh DaddyOil Under Pressure […]

  2. Clifford Singer
    Jul 6th 2009, 4:12 pm

    Nigel, this is an excellent critique – I’ve added a link to the Other TaxPayers’ Alliance website:

  3. Living longer, working longer? | ToUChstone blog: A public policy blog from the TUC
    Jul 27th 2009, 6:35 pm

    […] longer, working longer? Posted at 6:34 pm on 27 Jul 09 by Nigel Stanley I wasn’t very impressed with Vince Cable’s recent Mail on Sunday piece on public sector pensions. Yesterday’s […]