Feb 2011 25

Public sector pensions need reforming26

Over the weekend Baroness Eaton, Chair of the LGA said that local government workers may start to opt out of the Local Government Pension Scheme if they had to up their contributions. Of course, the unions chimed in, with GMB saying that 39 per cent of their members would opt out of it.

But there is simply no other option than to ask local government workers to up their contributions. Yes, with inflation and a hike in VAT, along with a rise in fuel duty, the cost of living is higher for everyone now. During the recession, millions of workers in the private sector lost their jobs, or had their wages cut or frozen. The resulting fiscal crisis, exacerbated by years of overspending, means that spending must be brought under control. We recommended £50 billion worth of savings with the IoD in September 2009 and as part of that package, we said that public sector workers should increase their contributions by a third. This is not as arduous as it seems: it would only raise the typical contribution rates from 6 to 8 per cent of salary.

The pensions given out to those working in local government are generous as they are linked to final salaries, something which is all but extinct in the private sector. Is it likely that local government workers would opt out of this deal? The alternatives in the private sector are nowhere near as good, so perhaps this is the LGA and the unions doing what they do best: scaremongering to try and maintain the status quo for their members.

It was once considered a reasonable part of public sector packages to give generous pensions because of either the lower salaries they were on or the reward for public service. In fact, when we’ve released research on the Local Government Pension Scheme, we’re often told how little lollipop ladies actually get, and that we’re campaigning to take their pensions away. Not at all; executives in local government have hijacked antiquated systems, as have Councillors. But the truth is final salary pensions in their entirety have to come to an end as they are just not affordable, even funded schemes like the LGPS. As we recommended to John Hutton’s pension inquiry, schemes should based on defined contributions, as opposed to defined benefits.

There are other elements of local government pensions that need looking at too. Perhaps the thing that taxpayers find most egregious is executives that double dip. We’ve heard the stories: an executive leaves his or her post on full pension, only to walk into another well paid job in the public sector.

Taxpayers are rightly angry when council workers can retire on a full pension at fifty. True, a lot of these schemes have been reformed so that new entrants can’t take advantage of such ridiculous generosity, but there will still be those that benefit as old schemes taper off.  It is one thing to assume that those working in highly active frontline roles in the police or army are no longer able to continue at 50, but it is quite another and frankly scandalous that someone at a desk job is suddenly less able the day after their 50th birthday to carry on with their tasks. How offensive and wasteful.

The pension gap between the public and private sector needs to be narrowed, the current set up is unsustainable and unfair. Resistance and complaining about less generous packages was always expected, especially from well funded unions (86 million of taxpayers’ money was given to unions last year). But this is a ticking time bomb which needs a solution, so a slight increase in contributions is absolutely reasonable.

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  • Peter

    I am a Trustee of a Pension Fund in the Private Sector. As with nearly all such pensions, the Final Salary Scheme has either been drastically altered to reduce Employer Liability and/or closed altogether. In its place we now have a DC Scheme. All employees now only have the option of either being in that scheme or opting out. Not only that, future accruals of the DB Scheme will be ceased soon. Get real Public Sector employees and Unions. We are where we are now because of Gordon Brown’s raid on Pension funds when he became Chancellor, selling Gold near the bottom of the market and the rapid and imprudent expansion of employees in the Public Sector with non-jobs. There has also been a lot of fuss about the scrapping of the EMA for students. It should be remembered that this was a way of keeping young people off the Unemployed Register.

  • Blarg1987

    I agree the gap between public and private sector pensions need to be narrowed this should also include the private sector making up for payments from pension holidays which went into executive pay rather then pension funds, partially people may have to work a little bit longer but why are you interested in brining terms and conditions down to benefit the few rather then improve terms and conditions for the many in both the public and private sector?

    Granted Gordon Browns raid on pension funds did not help but it is a small piece as pension holidays caused the biggest problem which we are now facing.

  • taxpayer20

    In 1997 41% of private sector were in final salary schemes now that figure is less than 11%-and reducing-in defined contribution schemes.Meanwile 92% of public sector are in final salary schemes.To suggest pension holidays are the cause of this is simply not right.If pension funds are in surplus due to prudent management and investment this does not justify Browm’s raid on them.And where did the money go-certainly not to compensate deficit in public sector which has grown every year due to distorted discount rate used by Brown.So sorry but Labour has destroyed private sector pensions and they have lacked the courage-dare I say Balls-to tackle the problem of sustainability in the public sector and passed the problem to future generations.

  • Mel Hunt

    Will someone take a look at the Welcome to Yorkshire 2011/12 £10m spending programme via the Yorkshire Forward RDA please?

  • DJ

    I am a retired police officer and was on the front line. I had to contend with things that joe public would run a mile away from dealing with. In hinsight it was a waste of time being in the police because the powers that be, politicians and courts, had not a thought for victims. All powers to control the unruly were lost as the liberal agenda took a firm grip on society. Anyway returning to the point. When I joined in 1973, at 29 years of age, I paid 7% of my salary in pension contributions, and about 10 years later this went up to 11%. As to people cannot retire on a final salary pension scheme this is an absolute joke. When I retired in 1998, at 55 years of age, my salary was about £ 27,500, Are you seriously telling me that I should have had a half pay pension payable on the basis of a salary of £ 14,000, i.e receive a pension of £ 7000 a year. Taxpayers Alliance and every one else wake up! These pensions were hard fought for by our forefathers. What has been the cause of putting pressure on the nations finances has not been Gordon Brown’s antics, seriously bad as they were. Our political elite, not us on the ground floor, got us into this black hole called the EU, into which we have paid over many, many years, countless billions of pounds, to an organisation that has never been able to audit its accounts! If we got out of the EU today as time went on we would see a dramatic increase in the financial wellbeing of the country and we would have money back in this nation and be able to afford benefits to our own people.

    • John

      umm . . .don’t follow your maths. Maybe I’m being dim. One point I would make is that saving the EU budget (which I’d certainly like us to con sider) wouldn’t release anywhere near enough cash for the general public to have a decent pension. The numbers just don’t stack up – we’d all be a bit better off, but we’re miles away from being able to afford final salary pensions

  • Mucky Mary

    I agree that the gap between public and private sector pensions needs to be closed – So why isn’t the government making the reversal of Brown’s tax raid on private sector pension schemes a priority?

    If this step were taken it would be interesting to see whether final salary schemes were really unaffordable, or whether private sector employers were simply using the tax as an excuse to close down company schemes and divert the money into higher pay and more perks for executives.

  • Foolsgold Gordo

    It wasn’t too long ago that our collective pension pot was being eyed enviously by the rest of Europe. Now, thanks to backfiring legislation and robbery by gordo, the pensions have been destroyed! Fewer and fewer people are bothering with pensions to the detriment of everybody’s future wellbeing. I’ve paid into my public sector pension all my working life and now when I’m about to enjoy it, I’m made to feel guilty as if I’ve stolen it. There is nothing wrong with my pension, except that new people are not allowed to pay into it, it the private sector/stakeholder pension that is wrong. They can be and are being robbed by the financial sector and gordo’s legacy. At least I’ve made some provision for my old age and hopefully will be able to live without being a burden to others. What is going to happen in twenty years when people like me have died out leaving only peoplethat are reliant on the state. You won’t like that will you?
    If all the money that gordo stole was returned, there would not be any problem with pensions, there would be plenty in the pot.

  • Wattsally1

    Why should I pay for someone who is in the Public Sector to have a final salary pension simply because they were funded by the taxpayer. And why should they be able to retire earlier than me and as a result draw their pension for longer? The implication is that Public Sector workers are special and need to be treated as such. My husband works on building sites which are statistically more dangerous places to work than as a’frontline’ policeman. A friend of mine who trained as a teacher (paid for by the taxpayer) and who has worked for just 15 years will be able to retire soon on a full salary pension (currently £65,000). So not only has she had the free training and a generous pay packet, but she will now be able to put her feet up and enjoy an early retirement while we have to continue working for at least another 13 years and in the meantime struggle to pay that pension for her. Time for these Public Sector workers to smell the roses – they cannot be afforded on their current pay packets AND final salary pensions.

    • Mucky Mary

      So why doesn’t your husband get off his backside and ask his employers why they aren’t setting up a company pension scheme?

      Robbing thousands of public sector workers of their pension pots won’t make your retirement any easier.

      • John

        Mucky Mary, whilst I agree that ‘two wrongs don’t make a right’, the reality is that the public sector pensions you seek to protect are paid for by ordinary workers, just like you, who happen to be unlucky enough to be on the wrong side of the fence. Your suggestion that private sector workers are too lazy to ask their employers for some magic moneypot is simply offensive.

        Wattsally’s point is perfectly valid. Senior police officers are retiring in their 50s on the sort of money she describes – not so many of them, but it happens.

      • John

        Mucky Mary, whilst I agree that ‘two wrongs don’t make a right’, the reality is that the public sector pensions you seek to protect are paid for by ordinary workers, just like you, who happen to be unlucky enough to be on the wrong side of the fence. Your suggestion that private sector workers are too lazy to ask their employers for some magic moneypot is simply offensive.

        Wattsally’s point is perfectly valid. Senior police officers are retiring in their 50s on the sort of money she describes – not so many of them, but it happens.

    • KBlank

      Your friend will not have accrued a pension in the teacher’s pension scheme of £65,000 for 15 years service. Even if she was on £250,000 a year she will only have accrued £46,875 and retirement grant of £140,625.

      By the way teaching is a very difficult job – it’s no walk in the park – fairly well remunerated admittedly but not to the level you have stated. maybe you meant she has accrued a pension of £6,500 – thats a little more realistic.

    • Foolsgold Gordo

      For somebody to rise to a £130k salaried teaching job in fifteen years is fantastic, they obviously have talent so why is the school letting them go? I think that the pension pot is £65k (paying out £2k/year at best) and not the payable pension. You are not paying for somebody to retire early on a fat pension, that person has paid into his/her pension for some considerable time and will have accrued a pension pot. The trouble is that nobody is joining the pension scheme now and the government has already spent the money that they have ‘saved’. That is why there is a shortfall! We are already going down the road of nobody having a pension and why should you, the returns on any money you put away for your old age is very poor and plundered at every stage by greedy financial specialists and governments. You might as well spend every penny and have a good life while you can rather than hope to have a comfortable retirement.

  • KBlank

    An increase in contributions is wholly reasonable for Local Government Pensions (LGPS), however a rise of 3.2 % over 3 years is hasty and ill conceived. LGPS is a funded scheme with enough assets held to pay out all liabilities for over 25 years without any further income. There needs to be a rebalancing of employers to employees contributions over time but there is no quick fix. The rebalancing could be done by changing the benefit structure to make pensions less generous and increasing the retirement age in the scheme as well as a contribution increase.

    When pay awards come back (if they ever do – last 3 years 2.75%, 1%, 0% and 0% this year) a hike in contributions will be sustainable, now it will prove too much of a squeeze on middle earners who don’t have the luxury of 40% tax relief on their contributions. In fact many authorities are considering pay cuts (as has happened in some of the private sector) making a rise in contributions even tougher. Opt outs will be high. In addition the Hutton report seems to lean towards either a career average or collective defined contribution scheme – what justification is there for a tiered contribution system in these scenarios. When you think of a top civil servant on 100k paying 1.5% to rise to 4.5% and someone on 25k with conts going up from 6.5% to 9.8% a major disparity is shown.

    LGPS members cannot retire until they are 60, and then with a reduction – normal retirement age is 65. No LG worker can retire at age 50 (except on permanent ill health) – this has already been reformed for all members (unlike the civil service scheme).

    Private sector pension provision needs to be improved, not public sector pension provision driven down. 2/3s of private sector workers have no pension provision, and therefore will end up claiming state benefits, paid for by the taxpayer, and not paying tax in retirement – now that is a ticking timebomb.

  • lastofthecheesemongers

    Like many other articles posted on this website, there is a distinct lack of facts. Indeed many of the ‘facts’ that have been presented (e.g. council workers can retire on a full pension at fifty) are just downright not true! If indeed the LGPS is in deficit, wouldn’t it have been good journalism to give all the facts and figures as a justification to why contributions should increase?

    The LGPS is a ‘funded scheme’, very different from other public sector schemes such as the Teachers Pension Scheme or that for the Armed Forces (in which NO contributions are paid at all, the entire onus is on the taxpayer) which are unfunded schemes.

    The opting out of staff in unfunded schemes should be of greater concern to the taxpayer and government. In an unfunded scheme, people currently working pay in contributions which are then used to pay the pensions of those retired. If a lot of people opt out, this would leave the government picking up the shortfall and thus a potentially enormous bill to the taxpayer. Increasing contributions too much and many people might feel the pension was poor value for money and opt to invest their 6, 8, 10% of salary elsewhere.

    Be careful what you wish for!

  • John

    Understandable that this topic excites some passion – must be one of the best responded-to topics on TPA website.

    Public sector pensions do indeed need reform. Quick thought-experiment : add up all the contributions from a member, and imagine investing them in a well-performing pension scheme at the time. For example, somebody retiring today at 50 (yes, it happens) with 30 years’ contributions. We’ll keep it simple and ignore additional ‘years’ which are often provided to tempt people to leave public sector jobs. Suppose those contributions had been paid into decent funds over the past 30 years – how much would the person be entitled to? This is the key question, because final salary schemes were invented on 2 false premises – that the market would continuously grow at a rapid pace, and that people would have the decency to die shortly after retiring. Neither premise turned out to be valid.

    My formula for reform is simple : just bring in differential tax rates on occupational pensions according to age and cash value. If you are lucky enough to have a juice pension at age 50, expect to be heavily taxed. Part of my rationale is that we should incentivise work, not idleness – and retiring young is idleness (sorry). The other rationale is one which has been raised by other contributors – it is neither fair nor reasonable for private sector workers to subsidise pensions for public sector workers when they can’t afford pensions for themselves.

  • Robotwelder

    Baroness Eaton’s argument (that members will drop out of local government schemes if their contributions are raised) is flawed. It amount to saying ‘we been giving you a fabulously generous gift all these years and now we’re going to give you a gift that is a bit less generous – do you still want it – or would you prefer nothing at all?’

    Figures quoted for public sector pensions are also a blatant attempt to deceive taxpayers. Of course the ‘average’ pension is relatively low – almost everybody who’s ever done a short stint in a council job will get some sort of pension from it and even if the amount is small, the rate of return on the contributions is enormous.

    • Blarg1987

      By that type of logic does that mean a salary is classed as a gernerous gift? Granted people in the public sector get a better pension but they have a lower salary, now then if the goverment gave people the choice of having a higher salary or continued pensions that would be a fair choice.

      Before people say that the public sector gets paid more then the private sector please look at like for like jobs such as a nurse working in a private hospital or agency and cimpare it to NHS and include qualifications etc and teachers, DO NOt say a nurse is better paid then a person who work sin a care hom as there roles / qualifications are normnally different etc.

  • Jerrywr

    The local government pensions are only a SMALL PART OF THE PROBLEM!!!! The biggest problem is that UK taxpayers will have to pay for and support up to 100 MILLION EU PENSIONERS in the foreseeable future.

    • Blarg1987

      How does that work out if you dont mind me asking?

      • Foolsgold Gordo

        As you may have seen in the news, from May, all the EU immigrants can claim £250 a week benefits legally. That is while my mother only gets £57.50 a week pension. Somebody who has worked and brought up a family in this country! Wouldn’t be so bad if the EU stumped up the cash for the, at least 100, 000 potential claimants (£25 mill a week mininmum).

        • Blarg1987

          I read about that, there are strict guidelines and wont be an auto matic right, as they will be unable to automatically be able to claim benefits, on a side note does that now torpedo the myth of immigrates in eastern europe comming here for benefits. I still don’t see the correlation between that and paying for 100 million EU pensioners :s.

    • Blarg1987

      How does that work out if you dont mind me asking?

  • Foolsgold Gordo

    The word is out then, whether the government take any of it on board. Work longer, pay more and get less. Don’t bother then, that’s the best bet, sod the pension. work as long as you want to and then sponge off the state, shimple.

  • Foolsgold Gordo

    The word is out then, whether the government take any of it on board. Work longer, pay more and get less. Don’t bother then, that’s the best bet, sod the pension. work as long as you want to and then sponge off the state, shimple.