Public sector to work longer for worse pensions
The Government's pensions adviser has proposed a massive overhaul of public sector pensions. But do his plans go too far?
Public sector workers face having to work longer for smaller pensions, following a Government report.
Lord Hutton, a former Labour minister, has published his report into public sector pensions, with a number of radical suggestions to ensure they are affordable in the future, the most dramatic being the call for existing final salary pensions to be scrapped.
The changes
It always used to be the case that by taking a job in the public sector, you sacrificed a more competitive wage for the sake of the benefits, of which pensions was a key component. However, as salaries have risen, that argument has become more redundant, hence the difficulties in justifying current public sector pension provision.
Here are the main recommendations Lord Hutton has made following his nine month study.
- Existing final salary schemes should be replaced by new schemes where the pension entitlement is linked to career average earnings.
- Linking normal pension age in public service pension schemes to the State Pension age.
- Members of the ‘uniformed services’ (armed forces, police, firefighters) currently have a normal pension age of less than 60. This should be raised to 60.
- Public service pension schemes should have a ‘clear cost ceiling’ – the proportion of pensionable pay that taxpayers will contribute to employees’ pensions.
- Introducing more independent oversight and stronger governance of pension schemes.
- Overhauling legal framework to make pensions simpler.
An end to final salary schemes
Scrapping final salary schemes will see some lose out. Of course, if your career started with you earning £20,000 a year and you retire with an annual salary of £30,000 a year, then the pain will be fairly small.
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However, if there are large fluctuations in your pay – perhaps you started out for a few years at a basic level before rising up to a senior role on a healthy wage – then the size of your pension pot will be heavily dented. Of course, if you’ve been on such a healthy wage for a while, you can probably afford to pay a little more into your pension anyway.
Working for longer
My wife is a teacher, and I’ve often joked she is my walking pension plan. While that may still be the case, I’ll have to wait a little longer to enjoy the fruits of her labour if this particular recommendation is adopted.
As it stands, for many public sector workers, the ‘normal pension age’ – the age at which they qualify for their pension – is substantially lower than for the rest of us when it comes to claiming State Pension. Lord Hutton thinks that the two ages should be the same. It’s difficult to criticise this idea to be honest.
A ‘normal pension age’
However, when I look at it objectively, I can’t help feeling there’s a good reason for it for certain public sector workers. There’s a reason you don’t have too many 60-year old firefighters – it’s a stressful, physical job that is beyond many by the time they’ve reached that age.
And how many 60-year old bobbies on the beat should there be? Are more elderly coppers the answer to anti-social behaviour? I’m not so sure.
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Of course, roles can be found for some of them away from the front line, but there are only so many office workers you need in a fire station. Making 60-year olds rescue cats from trees seems a touch daft to me.
There’s the argument that they can always find another job, too. Sounds great, but we need to ensure our businesses are willing to take on people aged 50 or over who only have experience as police officers, or firefighters, or in the navy.
A ‘clear cost ceiling’
For me, this is really the crux of the issue. At present, the belief is that ordinary taxpayers like you and me are paying too much towards the pensions of public sector workers, and the balance needs redressing.
That’s fair enough. At present the public sector pension bill costs around £30bn a year, a figure that looks even more unsustainable in the present climate. And ensuring that public sector workers contribute more towards their own pensions is an eminently sensible thing to do. After all, many of us can’t rely on our employers to bump up our salaries.
The table below was put together by Lord Hutton’s Independent Public Services Pension Commission (which is behind the report) and shows average public sector employees’ own contributions, as well as those in private sector schemes.
|
Scheme |
Employee contribution |
Employer contribution |
|
Teachers |
6.4 % |
14.1% |
|
NHS |
5.5%-8.5% |
14% |
|
Civil service |
1.5% or 3.5% |
19% |
|
Police – 1987 scheme |
11% |
24.2% |
|
Police – 2006 scheme |
9.5% |
24.2% |
|
Fire – 1992 scheme |
11% |
26.5% |
|
Fire - 2006 scheme |
8.5% |
14.2% |
|
Armed forces – officers |
0% |
37.3% |
|
Armed forces – others |
0% |
21.4% |
|
Local Government Pension Scheme |
5.5%-7.5% |
14-25% |
|
Average private sector open defined benefit scheme |
5.4% |
14.9% |
|
Average private sector open defined contribution scheme |
3% |
6.4% |
Clearly, in certain sectors, the contributions made by the employer – essentially, you and me – are pretty vast. Ensuring that there is more of a balance to these contributions is a good move.
A parliament of discontent
Unsurprisingly, the unions are already up in arms about these plans, warning that strikes are inevitable. Given that elements of these recommendations would take years to implement, strike action would likely be prolonged across the length of this parliament.
When you consider the numerous other strikes and protests the Government has been on the receiving end of already, then there’s a good chance this will be seen as a parliament of discontent, no matter how sensible some of the changes may be.
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Comments
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If you wanted any greater measure of the "ignorance" about public sector pensions I referred to in my previous postings, I need only refer you to the posting proffered by 'matchmade' below. To generalise to the extent that MM does is frankly value-judgmental at its worst and profoundly disrespectful. To label a majority low-paid staff who are being forced to work harder and contribute more for less and having their pensions rights frittered away as "moaning minnies" is disgraceful. To generalise that the "scheme was too generous in the first place" reveals a lack of insight; LGPS staff do not, despite what you might have heard, get a pension for nothing, we pay into our pensions schemes/our pension scheme is not financially destitute, its actually in the black/ we do not receive a two-thirds of final salary pension (actually 50%)/I can't see any evdience of the alleged profusion of skivers in my place of work (employs in excess of 2000 staff) we have a strict absence management policy that positively deters "sickness" absences. I acknowledge that many people employed in the private sector look at public sector pensions with envious eyes, but a lot of this envy is based far too readily on a misguided belief propagated within the pages of the Daily Mail - low pensions entitlements in parts of the private sector do not legitimise or justify attacks on public sector pensions; I wouldn't have the gall to label private sector employees who voiced concern over their pensions as "moaning minnies" or attempt to back a central theme by labelling people as "skivers" - thats just disrespectful in the extreme. On the issue of salary levels, again, MM displays an astounding level of subjective ignorance; in my sector (higher education) the previous government commissioned an independent (BETT) report into higher education salaries; surprise surprise, the report concluded that salary levels in higher education were actually 20-30% lower than those avilable in the private sector - so that's another load of nonsense assigned to the dustbin of ignorance.
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I've had 3 civil service jobs in the public sector since I left University. Who paid me and added to my pension? You the tax payer. I left a couple of years ago for a higher paid job in the private industy. Who pays me and adds to my pension now? You the consumer. Get rid of the civil service workers and you'll still have to pay, either in unemployment benefits or inflated bills. My job is easier, has more "perks", I get bonuses and I don't have to put up with Daily Mail types moaning about "human parasites" when they really don't have a clue what goes on. (Believe me you all buy the product my industry produces and are paying far too much for it)
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I'm sorry for all these moaning minnies in the public sector, but frankly, it's about time their pensions adjusted to reality. So what if they thought they had an agreement? The scheme was too generous in the first place and ignored economic realities, and did not cater for the huge increase in life expectancies that is now occurring. In addition, public sector wages are now, on average, higher than in the private sector, which squashes the idea that their pensions are somehow a compensation for low wages. Many private-sector people have barely any pension at all nowadays, and I see no one rushing to the defence of the self-employed, who get an appalling deal in return for their income and NI taxes. Yes, there are plenty of good, hard-working people working in the public sector, but there are also many, many skivvers: look at the statistics on absenteeism, on "sickness" absences, and on productivity, which has been falling for years. The private sector improves productivity by innovation, by growing their businesses, by firing people if necessary. Public sector workers have no incentive to become more productive: all they ever do is bleat that they are underfunded, instead of looking at ways they can do more with less, as everyone else has to do. Actually, though, the Hutton review looks like it will be good for most public sector workers: under the existing scheme people on very high wages are disproportionately rewarded when they retire, whereas people on lower wages or with only a few years service get relatively little. Under Hutton's scheme, most people will do better, not worse. Why are all these public sector workers defending the existing scheme, when it gives so much preference to their bosses?
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18 March 2011