From the TUC

Green Party shares right wing view of public sector pensions

06 Nov 2010, by in Politics

The Guardian today reports Green Party research that claims the taxpayer is “subsidising” the pensions of public school teachers. No doubt all left thinking Guardian readers are now suitably outraged.

But there’s a problem. If you think the state is subsidising some members of a pay-as-you-go public sector pension then you have to think that they are subsidising all of them.

This is Taxpayers’ Alliance thinking.

Pay-as-you-go public sector pensions collect contributions from employers and employees and put them into the general Treasury pot. Pensions in turn are also paid out from this. This is why they are called unfunded pensions – not because no-one pays for them, but because they do not have their own funds invested in equities and other assets.

This is good for both  pension scheme members and the state. If the government had to run a pension fund for its employees then it loses in two ways.

  • First it has to pay the costs of running a fund and underwriting its investment risk.
  • Secondly it has to pay employer contributions up front into the investment fund rather than retaining them. If they did not go into the general public spending pot then then the state would either have to raise taxes or borrow more.

Because the state gets the benefit of employer contributions it is only right that it pays a return on them. You can look at unfunded pension schemes as members lending their contributions to government and getting their pension in return years later. Pension contributions are calculated on the same actuarial basis as those in private sector schemes.

For all kinds of reasons sometimes the net flow of contributions into public spending is higher and sometimes lower than the cost of pensions in payment. So some years there is a net cost to government (as there is at the moment) and some years a net benefit (as there has been in the past, and as currently in the NHS scheme).

This does not represent a subsidy, but is simply the way that pay-as-you-go schemes work – as recognised in John Hutton’s report which calls for such schemes to continue.

The Green Party is right to say that it would cost private sector employers more to run such a scheme, but that just shows the advantage of unfunded schemes and why we should retain them in the public sector.

The progressive position should be to argue that this kind of benefit should be extended to more private sector employees. This what SERPS used to do. It could be done today with special bonds for pension schemes.

Of course it is a bit weird that public school staff can take advantage of the efficiency of unfunded pension schemes, and not those who have lost their public sector scheme by being contracted out. And one can ask whether public school employers are paying a proper share of the cost of the administration of the teachers scheme (ie whether all admin costs come out of employer contributions.)

But this is not the issue raised by the founder of the Green Party’s Trade Union Group. Instead he simply echoes the right wing attacks on subsidies in public sector pensions. He may argue that they are justified for state school teachers, but our argument is they are not subsidised.

I’ve got a lot of time for some people in the Green Party, but in attacking public school teacher pensions Noel Lynch unwittingly attacks all teacher pensions.

4 Responses to Green Party shares right wing view of public sector pensions

  1. Tweets that mention Green Party shares right wing view of public sector pensions | ToUChstone blog: A public policy blog from the TUC —
    Nov 6th 2010, 1:50 pm

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  3. Noel Lynch
    Nov 6th 2010, 11:19 pm

    Dear Nigel,

    I think your post on the Guardian report about my research on public schools’ pension arrangements is unfair. The Green party is a strong defender of public sector pension schemes and public servants’ terms and conditions in general. For example Caroline Lucas, our leader and sole MP, has been one of the most vocal parliamentary critics of government attempts to attack civil service redundancy benefits just before tens of thousands of workers are forced out.

    I personally have a very strong commitment to trade union issues and have always worked closely with trade unions (including, as your post pointed out, founding the trade union group within the Green party).

    It is simply incorrect to state that I am attacking all teachers’ pension arrangements. I fully support the current contribution and benefit structure of this scheme and believe that the “cap and share” mechanism adopted in this (and other public sector schemes) has put provision on a sound, sustainable footing for the future.

    Neither is it correct to infer from our press release (or the Guardian report) that I think that public sector pension schemes are subsidised. I do not. They are simply balance of cost schemes. Members make their contributions and their employer, rightly, pays the remainder of the cost of providing the pension. This is not a subsidy, it is deferred pay.

    However the situation is different for public schools such as Eton and Harrow. Here there are three parties involved. Members make their contributions as per state colleagues. But their employers do not pay the balance of costs. Their employers pay a fixed cost (as if they operated a defined contribution scheme). It is the government that pays the balance of costs on top of the member and employer contribution. It is this government / taxpayer contribution I am objecting to as I believe it is a direct (and unjustifiable) state subsidy to the fees of some of the most elite schools in the world. I have no problem with any teacher being in the teachers’ pension schemes. I am just calling for their employers to pay a more appropriate contribution towards the cost of this. This would end the subsidy and I am sure the extra funds could be more usefully spent elsewhere in the education budget.

    I hope I have explained my thinking a little better to you and that, whether you agree with my argument on the subsidy or not, you at least agree that I dont have a right-wing view of public sector pensions or think like the taxpayers’ alliance (I have been accused of many things in the past but I must say that was a new one!).


    Noel Lynch
    Chair, London Green Party

  4. Nigel Stanley

    Nigel Stanley
    Nov 7th 2010, 1:18 pm

    Thanks for replying Noel. I linked to your blog to give you that opportunity.

    I’m not down on the Green Party and have lots of time for Caroline Lucas (and some disagreements too). Nor do I doubt that you think that public servants should get a decent pension. That’s why I was careful to say “unwittingly”.

    But your understanding of how PAYG public sector pensions works is remarkably similar to right wing analyses.

    They are not simple balance of cost schemes, if by this you mean that contributions in should equal contributions out.

    This misses the return the state pays on contributions before they are paid back as pensions – and that contributions are set using actuarial calculations and therefore may well change after periodic valuations, rather than being “fixed” as you say.

    The tax payer makes a contribution in return for having the benefit of employer and employee contributions for many years ago before they are paid back as pensions within the risk sharing framework of a DB scheme.

    This is what the TPA and others call a subsidy.

    Your argument would only be correct if public school employers kept the employer and employee contributions rather than hand them over to the state or if they paid different employer contributions to public sector employers.

    If you want to look at unfair advantages for public schools, you would be on much stronger grounds asking why they don’t have to charge VAT on school fees.