New research: Pensions tax grab costs pensioners £225 billion

• Pension funds have lost between £150 billion and £225 billion as a result of the pension tax grab in the 1990s.
• Over 17,000 public sector pensioners now enjoy pension benefits worth a million pounds or more.
• The value of the Basic State Pension is down 20% since 1950.
• MPs and BBC staff pensions are kept secret.

With millions worried about the value of their pensions in the financial crisis, the TaxPayers' Alliance (TPA) today publishes a detailed report investigating the harm done to private pensions by Government tax grabs, the falling value of the basic state pension and the massive benefits enjoyed by thousands of public sector workers. The pension divide between the public and private sectors is growing, as private sector workers lose out and record numbers of their public sector peers now receive pension benefits worth millions of pounds.

The serious problems suffered in the UK pensions system are found to be due to political meddling and managerial incompetence on the part of inexperienced politicians, particularly with regard to decisions made for short-term political gain that have disregarded the long term needs of the pension system. The report recommends urgent reform, including reducing the unsustainable public sector pension scheme to a more manageable level.

The full report can be read here.

Key Findings

• Occupational pension schemes have lost between £150 and £225 billion in growth, at least, as a result of the abolition of ACT relief on pension funds in the 1990s.
• Partly as a result, the number of active members of private sector occupational schemes has fallen by 41 per cent in the past 12 years, with an even greater fall in defined benefit scheme members. Were this trend to continue, there would be no active members of private sector occupational schemes in 12 years’ time.
• The Basic State Pension is down 20 per cent or more from its 1950 level relative to earnings.
• There are now over 17,000 retired public sector employees with retirement benefits worth £1 million each, while unfunded public sector pension liabilities are estimated to exceed £1 trillion, over 70 per cent of GDP.

Shockingly, some public sector organisations, including Parliament and the BBC, refused to release details of how many MP and BBC pensioners have million-pound pension benefits, despite the fact that both organisations are likely to have large numbers of extremely well-rewarded retired staff.

Terry Arthur, author of the report and a Fellow of the Institute of Actuaries, said:

“Political management of the UK pensions system has failed to provide a decent retirement income for many people and has been a painful lesson in the limitations of government. The history of the state pension system has been littered with broken promises, while it is immediately apparent that the proposed NPSS could lead to lawsuits on a massive scale. The possibility that contributions may prove to have been worthless because they end up disqualifying the individual from pension credits or other benefits is just the tip of the iceberg.”

Corin Taylor, Research Director at the TaxPayers’ Alliance, said:

“The infamous tax raid on pension funds has been a major factor in the collapse of occupational pension provision in the private sector, while gold-plated public sector pensions have remained immune from necessary changes. It is not right for taxpayers to be subsidising million pound retirement benefits for the public sector elite while seeing the value of their own pensions plummet, or in many cases not having a pension at all.”

Comments

[Hugh Long]

Attention Corin Taylor
I suspect that you have understated the cost of the loss of the standard rate tax relief to the pension funds.
At the time that the 'Raid' was made in '97 the tax raised was £5bn pa which at 3% yeild was a capital sequestration of £166bn and pensions are paid out of accumulated funds, not just income. These funds should have doubled in value by now, at say 7.5%, so that today's value is £333bn from the raid. Hugh Long 02072670881

[Kath]

It is not the fault of public sector workers that Gordon Brown "raided" private pension schemes. Most public sector workers - nurses, teachers, police, forces staff - are on modest earnings and their pensions are modest. The cost of their pensions has been reduced with entrants having a retirement age of 65 and thousands of civil service jobs being cut. Apart from the "raid", private sector pensions have reduced because of changes to accountancy rules, lower investment returns and companies wanting to save money. Slashing the pensions of nurses etc will not increase the value of pensions paid by private employers or pension companies. It may not save much in taxes as salaries paid to nurses etc would need to increase to attract and retain staff and lower pensions received on retirement could increase benefits eg pension credit paid to them.

[Tom P]

Just at first glance see this from page 5 -

"Most public sector schemes still have a pension age of 60"

Actually the big public sector schemes (NHS, education, civil service) now have a pension age of 65 for new entrants. You can find this information with a simple Google search, or by consulting some genuinely informed commentary.

From the Pensions Policy Institute:

"The Government announced reform of the public sector pension schemes in 2002. Most contentiously, the final set of reforms include an increase in the Normal Pension Age (NPA) from 60 to 65 for new entrants to the NHS, Civil Service and Teachers’ schemes. Existing members of the schemes have retained an NPA of 60."

http://www.pensionspolicyinstitute.org.uk/uploadeddocuments/PPI_public_sector_pensions_16_Oct_2008.pdf

So either the TPA research is simply poor, or they deliberately conflate the NPA of current and future members, and ignore the fact that NPA is 65 for new entrants.

[Steve Robson]

The TPA remember have no interest in facts, just propaganda. Facts they'd rather ignore:

The "raid" also affected funded public sector schemes, like the local government scheme, so their linking of the raid with so called gold plated public sector schemes is nonsense (but good propaganda).

The FUNDED local government scheme now has a retirement age of 65 for all employees, including those who started CONTRIBUTING 20+ years ago on the basis of retirement at 60.

In any case, how can they argue that people shouldn't get a pension that they have contributed to, just because they think everyone in the public sector is useless (unlike their mates in the banks and other examples of effective private sector organisations).

There is however no doubt that it is tragic that that lots of people in the private and public sectors will get smaller pensions, primarily because the TPA's mates in the oh so efficient private sector have failed to invest the money effectively (that's propaganda by me by the way - unlike the TPA I recognise that I'm stretching the truth!). However, attacking public sector pensions that people have earned is not the answer - isn't that levelling down and the politics of envy that the TPA decry.

[Darren]

I think that if you apply the maths to this to this issue you can see why public sector pensions need to be reformed urgently, and should directly affect people who are already claiming theie pensions, and not just the new entrants to the scheme.

Example: If someone retired before 2006, and achieved a salery of 60K per year (Not out of the realms of possibility, when you see the director of parks and gardens being advertised at 68k per year!). They have worked all their life from the age of 16, meaning that they could invoke the 85 year rule at just 51 years old (51 + 34 years in the job). This was known as the 85 year rule, where if the number of years worked plus your age is greater than 85, you are allowed to retire.

Now this person would have a pension of 40K per year, index linked for the rest of their life.

If this person lives to 100 years old, then their pension will be paid out for 49 years, even though they only worked for 35. Thst equates to a pay out excluding 1.96 million pounds (excluding the inflation linked aspect)

My solution:

The two thirds index linked component of the pension is only ever paid for 10 years after retirment. This will give the retiree the ability to finish paying the mortage, have a few good holidays, and get their finances in order. After the 10 years they revert to 25% of salery, because at the moment, unless they have a serious spending problem, most of the money is just going to stack up in the bank ready to pay out to the ungrateful offspring.

Something has to be done, otherwise all of the available resources will be given to a load of people who have never had to face the harsh reality of the real world job market!

[Steve Robson]

That proposal would certainly make for an interesting European Court case. Its one thing to take away future benefits, quite another to take away those already earned, contributed to and contractual. Still I suppose public sector workers aren't human so they have no human rights, after all they haven't been in the real job market. they've just done useless jobs like running parks, which add no value to people's lives.

By the way stupid, the 85 year rule has now gone and could never be "invoked" without employer permission plus your example is ridiculously extreme so all in all its wrong on three counts.

[Peter Phillips]

Tom P says:

“… Actually the big public sector schemes (NHS, education, civil service) now have a pension age of 65 for new entrants. You can find this information with a simple Google search …”

Well why should it only apply to new entrants? That’s unfair to the new entrants. It effectively means they are earning a lower salary for doing the same work alongside their older colleagues.

Steve Robson says:

“… attacking public sector pensions that people have earned is not the answer…”

But they haven’t earned it, not all of it anyway. Local government schemes will once again become underfunded as the value of equities fall, as they did in the early 2000s. And what did local government do then? Why, make good the deficit by increasing council taxes and taking out their pension whack before distributing what’s left for the (declining) public services. And they’ll do it again. You see.

Steve Robson goes on to say:

“… The funded local government scheme now has a retirement age of 65 for ALL employees….”

I’m glad to learn that. But added to the still unfair scheme compared to private sector workers, is the spectacular salary increases that have been awarded to senior staff over recent years. Not infrequently they have enjoyed sudden 30% increases when their job descriptions were changed as a result of reorganisations. And who organised the re-organisations and recommended the new pay scales to gullible councillors? Why senior officers of course, who justified them on the grounds that they are the ‘going rates’ that are necessary to attract and retain the best staff. But these jobs are rarely advertised outside local government circles, nor are they genuinely open to people from the private sector. And everyone knows that those who have been in the public sector for more than a few years wouldn’t survive for five minutes in the private sector, so this mythical ‘going rate’ is just that – a myth. These gross salaries require urgent and substantial reassessment, downwards.

As a compromise, all the public sector schemes should at least perhaps be changed to AVERAGE salary schemes from the final ones they are now, and perhaps on a sliding scale so that lower paid workers aren’t unreasonably disadvantaged. And it should apply to all staff, both new and existing. They would all still be better off than those in the private sector because they would still have some measure of protection from falling equities.

Nothing less than measures such as these, or those suggested by ‘Darren’, above, will achieve the sort of savings that are needed to stop the unfairness of present public sector pensions compared to the private sector, and from the public finances spiralling into complete chaos in the coming years.

Finally, we learn that hundreds of thousands of public sector workers are going to go on strike for more pay, at a time when less fortunate private sector workers are being laid off in increasing numbers. Well, let’s make enduring these strikes worthwhile, by instigating much needed reforms of their pension schemes at the same time as resisting these unjustifiable and unaffordable pay demands.

[mr w grist]

I suggest you get your facts right when moaning about public sector workers pensions. this pension is not gold plated, not free. and the retirement age is from 60 years on I have been a member for 25 years and have paid in to my pension an estimated £30,000. I have no doubt that your members have been grateful at some time in the past that there are people like myself who work in the public sector for less than we could earn in the private sector

[Peter Phillips]

mr w grist says:

“… this pension is not gold plated,..”

It is, or to be more correct, they all are (because there are different schemes for different public sector workers), because they are all protected from the vagaries of equity values on which all the funds are based – at least those that are nominally funded, and not all are.

mr w grist continues:

“… I have been a member for 25 years and have paid in to my pension an estimated £30,000 …”

I’m no pensions expert but I believe a couple of years ago that would have bought you about a £2,000 a year pension on a private sector scheme, yes that’s £2,000 not £20,000, and probably a lot less now. I bet mr w grist will get a lot more than that after 25 years in the public sector!

And mr grist adds:

“…there are people like myself who work in the public sector for less than we could earn in the private sector.”

If that is the case then it is time it was changed, pay was equalised and so were pensions. Where is the real evidence that this is true though? Nevertheless we would at least then have transparency and, probably more importantly, we might have much needed greater movement of people, particularly senior people, between the public and private sectors. At the moment public sector pensions are like golden handcuffs keeping local government and the civil service isolated and insular from the real world outside.

[Steve Robson]

It is a shame that Peter Phillips more reasonable comments are spoit by his stupid, ill informed and typically prejudicial view that everyone knows that those who have been ibn the public sector for more than a few years wouldn't survive five minutes in the private sector. I know many who have.

In fact its the other way round that the problem usually arises. At senior management levels, private sector people don't survive long because they can't deal with the political complexities and apparantly sometimes also because they cannot cope with the frequent evening meetings, poor dears.

The main reason however is that people who deal with equivalent jobs (budget, staff numbers etc) are paid four or five times more in the private sector, so just wouldn't move to the public sector and most of those who do are either very inexperienced or useless private sector rejects. Of course you will deny the pay gap, but its obvious if you for example compare the Accounts of a company turning over £1billion and a London Borough for example. Of course you'll also come up with that old chestnut about the need to keep customers and higher risks in the private sector, but people with open minds and half a brain realise the complexity is as much, if not more in the public sector and that there is actually lots of people who lose their jobs at senior levels in local government too (and without million pound plus payoffs). The fact that the right wing people who post to this website can't grasp that complexity is probably why they would fail horribly in senior public sector jobs.

Anyway today is a great day for progressive politics, so I shan't spoil it by spending it arguing with reactionaries!! We won, you lost!!!!!

[Peter Phillips]

When Steve Robinson says:

"... today is a great day for progressive politics, so I shan't spoil it by spending it arguing with reactionaries!! We won, you lost!!!!!"

that just about sums up the substance, what there was of it, of Mr Robinson's arguments, and only goes to demonstrate the isolation of many of those in local government, of which I presume he is one.

[Steve Robson]

I suppose that is an easier answer than actually addressing the substance that you presumably don't understand.

Why do I get involved with all the bitter, twisted Daily Mail readers on this site. I just hope when you people have finished there are some public services left to provide you with health care, educate your children, provide roads etc. I just wish you'd listen.

I don't feel very isolated. America has just elected its most liberal ever President with over 52% of the vote and I believe from polling evidence (a word you don't understand) that he'd have got 80% of a vote in this country. I somehow doubt he'd join the TPA!

[mr w grist]

I joined the armed services from leaving school, served 11 years. on leaving the forces i tried working in the private sector, but found employers were only ever interested in the god profit, and were quite willing to cut every corner often at the expence of the customer, but, always to the cost of the employee to gain money, so i decided to work for the NHS a good employer who worked for the good of its user. i admit the terms and conditions are good although the pay is far less than in private industry. what really annoys me is those who think all public employees are scroungers who prefer public service to "real work" and who will be given vast sums of money when they retire at a very early age.

[Low paid Public Employee]

Steve Robson,
What a bitter and twisted boring person you are, get a job rather than spreading your bile on here.

Extremist Muslims kill in the name of religion by choosing the parts that suit their twisted personal beliefs, time to look in the mirror.

Private pensions are in a state because private companies dont give a hoot about their employees, its all about the people at the top and their share options, bonuses, health cover etc etc etc.

Dont think too many private sector de-regulated bankers were bothered about public sector pensions when they were destroying the country for four, five, six figure bonuses, now thats what you call gold plated isn't it?

If its so good in the public sector stop crying, act like an adult and apply for a job. The retirement age has been raised as you wished which should give you time to build a nice nest egg of at least 2/3 an average salary less tax till pop your clogs.

[mr w grist]

well said, low paid public employee

[Steve Robson]

I'm a bit unclear whose side low paid public employee and Mr W Grist are on as they seem to be attacking me for supporting the public sector and public sector pensions.

Does that mean you are actually TPA supporters who work in the public sector. Its very confusing.

I have a job thanks, and a pension. And what have Muslims got to do with anything. Are the TPA against them too?

[Call me Dave]

The highly respected IEA did a research paper on the true cost of public sector pensions. Makes for enlightening reading and I would urge those with limited understanding of the challenge we face to read it.
The following are examples of what percentage of salary ANNUALY a private sector employee would have to invest into a money purchase scheme (or defined contribution scheme - same thing) in order to amass the same pension for any given defined benefit (or "final salary") scheme, which as we know over 90% of the public sector enjoy compared to only 15% of the private sector.
Civil servants contribute 3.5% of salary but the actual cost is 42.35% (60th's final salary accrual rate)
NHS contribute 6% but true cost is 31.8%.
Police contribute 11% (must feel hard done by!!) but true annual cost is 76.1% of salary.
The plight of private sector employed prison officers is also a very interesting comparison. He is paid approx £5k per annum less than his public sector colleague who does EXACTLY the SAME JOB. The public sector prison officer can also look forward to a gauranteed generous pension based on his final salary. His private sector counterpart WILL retire on means tested benefits (unless he can afford to set aside around 40% of his salary and live under a park bench)
Those trying to defend the status quo only demonstrate their ignorance of the subject.

[Call me Dave]

http://www.iea.org.uk/record.jsp?ID=99&type=release

Above is the link to the facts. Download the pdf and the info your looking for is tabled on page 44.

It is no coincidence that Labour are planning to boost backbenchers salary by £13,700 to serve on regional quangos. Many have accrued 20+ years pensionable service and are fully aware they will be forced to "retire" at the next election holding what were normally "safe" seats. Serving for a year or so on a quango will funnily enough also boost their pension by circa £7k - index linked of course!!

Good news is David Cameron has already commited himself to ending the ludicrous MP's final salary pension arrangement. A prerequisite to wider public sector reform.

[Call me Dave]

David Cameronsays;
" I think that if MPs want to look other state sector employees in the eye, and say we really do need to look at and reform pension arrangements to make them affordable, we have to look at our own arrangements and recognise that a very generous final salary scheme going into the future is not appropriate."

http://www.ipe.com/news/MP_seeks_closure_on_pensions_apartheid__26690.php

[Steve Robson]

easy to say when your as rich as "Dave Cameron".

[Call me Dave]

Steve, quote your own words whilst looking in your mirror;

"I suppose that is an easier answer than actually addressing the substance that you presumably don't understand."

Couldn't agree with you more Steve. Or try repeating another well thought out phrase of yours;

"What a bitter and twisted boring person you are, get a job rather than spreading your bile on here."

or indeed the one I consider most appropriate in your particular case;

"The TPA remember have no interest in facts, just propaganda. Facts they'd rather ignore"

The only problem with that quote as if it isn't obvious to everyone else is your own willingness to ignore the facts not the TPA. Educated thinkers cannot have a meaningful debate with individuals who ignore the facts.

The fact is the public sector pension arrangements are socially divisive and are already creating a 2 teir society. Any attempt at defending the status quo is as I said earlier indicative of ones ignorance on the subject - not to mention futile. In the process one will only make a fool of oneself. But feel free, in for a penny.....

[Steve Robson]

if you look more carefully you'll see the second quote wasn't mine, but some lunatic called "Low Paid Public Employee", who was attacking me despite us being on the same side. He hadn't read what I said and appeared to think I was against the public sector for some reason. In his case, the withdrawal of public sector pensions is probably therefore justified.

That was humour by the way. Often in short supply on this site - is that a Tory thing?

I don't disagree that public sector pensions need reform, though mainly because of longevity, not Gordon Brown. I just defend the rights that people have built to date. People in the public sector have traditionally been paid less and the Pension is a benefit that makes up for that. We now need a compromise that is more affordable, but contrary to what you all think many public employees are really low paid (care workers, refuse collectors teaching assistants etc) and don't actually get much pension in terms of real hard cash. And even the highest paid public employees earn next to nothing compared to the top people in the private sector. Bob Diamond earns £26million pa for Gods sake. Thats a lot even if he is worth it to Barclays.

In this context, my jibe at Mr C was actually addressing the substance because it is easy for him to say. He very clearly is not a typical public sector worker, nor even a typical MP, but a rich bloke. I'm quite happy to acknowledge that some of his wealth is due to his talent (he's certainly doing a better job as Tory leader than his three predecessors), but he still is far from typical.

Do note that I've been civil to you (if not to Low Paid bloke who was pretty horrible to me despite us being on the same side).

[mr w grist]

maybe all public sector employees,like me, should work for minimum wage no paid holidays and give up our pensions. then perhaps those jealous persons who worked in the private sector for wages far above we have ever enjoyed will be happy

[Peter Phillips]

When Steve Robson says:
... contrary to what you all think, many public employees are really low paid...

and mr grist says:
... those jealous persons who worked in the private sector for wages far above we have ever enjoyed...

it demonstrates two myths - that public sector workers are low paid and private sector workers are highly paid. The truth is there are very highly paid and very lowly paid people in both sectors. That the pay gap in Britain is unacceptably wider than most western economies except for the USA, particularly successful ones like Germany and Japan, ought to be a major issue, but it is still separate from the pension issue because low wage for low wage or high salary for high salary the public sector have unaffordable final salary pensions which by and large the private sector doesn't. And yet the private sector contributes to the former through taxation. That is what is indefensible and which, in the rapidly worsening economic climate in Britain (which I believe is going to be severe and long term), is unaffordable.

And while we're having a go at senior public sector executives needing to be paid exceptionally high salaries to (supposedly) compete with the private sector, many senior executives in the private sector a grossly overpaid, and, like ex chief constable Ian Blair, often outrageously compensated for failure! That this is still happening indicates just how much of a pre-collapse fantasy we are still living in in Britain at the moment. In the greedy debt-ridden excess of the last 10 years no doubt they could get away with it - but we simply can't afford it any more. A change in business law is needed to give much more power to shareholders to put a stop to this often destructive excess.

[Peter Phillips]

When Steve Robson says:
... contrary to what you all think, many public employees are really low paid...

and mr grist says:
... those jealous persons who worked in the private sector for wages far above we have ever enjoyed...

it demonstrates two myths - that public sector workers are low paid and private sector workers are highly paid. The truth is there are very highly paid and very lowly paid people in both sectors. That the pay gap in Britain is unacceptably wider than most western economies except for the USA, particularly successful ones like Germany and Japan, ought to be a major issue, but it is still separate from the pension issue because low wage for low wage or high salary for high salary the public sector have unaffordable final salary pensions which by and large the private sector doesn't. And yet the private sector contributes to the former through taxation. That is what is indefensible and which, in the rapidly worsening economic climate in Britain (which I believe is going to be severe and long term), is unaffordable.

And while we're having a go at senior public sector executives needing to be paid exceptionally high salaries to (supposedly) compete with the private sector, many senior executives in the private sector a grossly overpaid, and, like ex chief constable Ian Blair, often outrageously compensated for failure! That this is still happening indicates just how much of a pre-collapse fantasy we are still living in in Britain at the moment. In the greedy debt-ridden excess of the last 10 years no doubt they could get away with it - but we simply can't afford it any more. A change in business law is needed to give much more power to shareholders to put a stop to this often destructive excess.