Misplaced outrage over ‘gold-plated’ public sector pensions
First Nick Clegg and now today’s papers have launched a fresh onslaught on ‘gold-plated’ public sector pensions on the back of yesterdays’ Office of Budget Responsibility report even though the OBR small print shows that the forward costs of public sector pensions are sustainable.
The focus of today’s attacks are the “pay-as-you-go” public sector pensions run by central government (and not the Local Government scheme).
PAYG pensions do not have a pension fund invested in shares and other assets as private sector schemes do. Instead employee and employer pension contributions are kept by the Treasury and pensions are similarly paid out of current public spending.
But in other ways they are run like a private sector scheme. There is a notional pension fund for each scheme within the public accounts. It is valued on the same basis, and the contributions that employees and employers have to make are calculated by actuaries in a similar way to those in other schemes.
Much of today’s outrage is about a figure called the ‘net cost’ of public sector pensions. This is the difference each year between the cost of pensions in payment and the income from contributions. There is no reason however why in any one year these should balance.
Contributions are paid by staff and their employer to fund their pension when they retire, while pensions in payment have been funded by previous contributions.
There is also a contribution from the Treasury because the tax-payer has enjoyed the benefit of earlier contributions. If public sector pensions were funded in the same way as the private sector, contributions would have been put in a separate fund and invested. Instead these public sector contributions are kept by the Treasury and provide funds that would otherwise need to have been raised through tax or borrowing. It is only right that pension savers should receive some return on their savings in return.
Of course both pensions in payment and contributions are both very big numbers, so a small change in either can make a big difference in the net cost figure from year to year.
This is what the government has done by freezing public sector pay – and cutting future public servant numbers. The income from contributions depends on the numbers of public sector staff, their pay levels and contribution rates. Cuts to the public sector therefore hav the effect of reducing future pension contributions as fewer people will get smaller salaries.
This has the perverse effect of increasing the figure for the net cost of public sector pensions. Spending stays the same but income goes down – even though the state is spending less on the public sector workforce.
On the other hand if the pay of every public servant was to go up by 10%, there would be a big fall in the net cost of pensions as contributions would increase even though the wages bill would have grown dramatically.
So how can you accurately measure the cost of public sector pensions into the future?
The Treasury, the National Audit Office and even the OBR report agree that the most useful figure is the proportion of GDP expected to be taken by pension payments.
The OBR have a new projection of the future cost of public sector pensions on this basis, which has been ignored today. Here are its projected figures taken from para 5.26 of the costs of paying public sector pensions (ignoring contributions) as a % of GDP. This figure looks to me as if it has been has been revised downwards from previous HMT estimates.
|% of GDP||2010||2020||2030||2040||2050|
|Public service pensions||1.8||1.9||1.9||1.8||1.7|
This is of course only the latest onslaught on public sector pensions. There have been many in the past yet as the NAO report shows public sector pensions are modest and affordable:
- Employee contributions to these schemes have increased faster (56%) than pension payments (38%) since 2000.
- There has only been a 2% real terms increase in the average pension in payment since 2000 – the average teachers’ pension has actually fallen by 4% over that period and the NHS average pension is unchanged.
- The vast majority of pensions in payment are modest. Most pensions paid in both the NHS and civil service are below £110 a week – and a quarter of NHS pensions are less than £40 a week and a quarter of civil service pensions are less than £60 a week. The biggest number of both NHS and civil service schemes is between £1,000 and £2,000. 14% of NHS pensions lie in this range. These pensions then drop away from this early peak.
- Fewer than 0.2% of teacher pensioners, 1.8% of civil service pensioners and 2.5% of NHS pensioners get pensions of more than £40,000.