The Observer should do better on public sector pensions
This week both coalition parties broke a pre-election promise not to reduce the accrued benefits built up by public sector pensioners. By linking future increases in public sector pensions to CPI rather than RPI they are ensuring that pensions will go up on average about 1 per cent less than they would once have done.
Yet the Observer chooses to lead its business section with a standard attack on “gold-plated” pensions, with not even any balancing comment or perspective.
This boils down to a weary accountancy point about how best you measure payments that are made in many year’s time in today’s money – it’s a special kind of interest rate known as the discount rate.
This is a dry argument because no-one is suggesting that we actually put money aside now to pay a 25 year old nurse’s pension in 50 year’s time. Instead we keep the pensions contributions inside the public finances to reduce government borrowing.
The anti-public sector pensions lobby argue that the government accounts should measure these future pensions liabilities in the same way a private sector pension scheme would. The Treasury would argue back that the state can finance things much cheaper than the private sector, and that the national accounts should reflect this.
If you believe that this figure is useful then you should be spending this weekend revising your scary numbers downwards, because linking future pensions to CPI rather than RPI will make a significant difference to these figures.
But it’s still a pointless argument. You would expect the Observer’s Business Editor to be aware of the recent National Audit Office report that says:
Changes in the discount rate lead to large fluctuations in the size of pension liabilities, but have no effect on projected pension payments. For example, the discount rate increased by 0.7 per cent in the year to 31 March 2009 for the four largest schemes. There were no other changes that year to key financial assumptions underlying liabilities, but the discount rate change alone reduced the total liability across all four schemes (teachers, health, civil service, armed forces) by approximately £73 billion.”
This is why the NAO – and even the OBR – endorse the Treasury’s preferred method of looking at future public sector pensions. This is to look at what their cost will be as a future share of GDP. Unfortunately for the public sector pensions critics this shows that this cost is the only age related area of spending that does not increase. The NAO again:
This report focuses on cash payments because:
- projected cash payments are considered by the government to be the most relevant measure of the cost of UK public sector pay-as-you-go pension schemes over the next fifty years;
- projected annual cash payments can be related to estimated annual Gross Domestic Product as a measure of the country’s ability to pay;
- cash projections include pensions expected to be earned in the future, and are useful for decision-making about changes to schemes, whereas liabilities represent only pensions already earned that would be unaffected by scheme changes; and
- liability calculations can fluctuate substantially because of changes in one significant assumption, the discount rate, which does not affect cash payment projections.”
Not only does the article fail to reflect this, it builds up the Institute of Directors’ forthcoming report as being independent. The vast majority of its members are however on record as vitriolic opponents of public sector pensions before it started its work. Indeed it was the IoD who popularised the nauseating phrase ‘pensions apartheid’. I’m quite prepared to admit that there is a debate to be had about public sector pensions, and that there is an unfair gap between public and private sector pensions since employers started to walk away from what they once saw as a responsibility to provide a decent pension scheme. What I don’t think is sane is to compare this to the suffering and oppression experienced by the majority population of South Africa under the apartheid regime.
And how’s this for some standard right wing newspaper non-sequitur:
The government’s efforts to slash “gold-plated” public sector pensions are likely to drive it into conflict with the unions. Hundreds of thousands of French workers have been taking to the streets to protest about plans there to raise the retirement age from 60 to 62.
What the heck has France got to do with it? It’s a different issue and a different political culture.