Don't bury the pension

22nd April 2005 at 01:00
In recent weeks, the general election has skirted over various issues, but all parties have stayed clear of public-sector pensions, despite clear evidence that current promises are unaffordable in future without corrective action.

Proposals to make it more difficult for administrative staff in the public sector to retire before the age of 65 were deferred in March - to avoid strikes. Decisions on wider changes to public-sector pension schemes will come after the election. The whole issue of how the country will pay for retirement in future has been parked with a Pensions Commission which started its work in 2003 and will not finish until autumn 2005.

The commission did publish a progress report two months ago. This summarised a problem that will grow over the next 20 years. Between now and 2025, there will be a sharp increase in the ratio of pensioners to workers.

Even a significant increase in immigration or in the birth rate would make little difference to the demographics. Migrant workers get old themselves.

It takes 20 years for more births to translate into more workers. The population issue creates a clear set of choices for society. Either pensioners will become relatively poorer or retirement ages will need to increase. Taxes must rise or savings and contributions to pension funds must increase. A combination of options will be necessary, but the progress report makes a convincing case that there is no escape from these alternatives.

Pensions may be a secondary issue for politicians but it is growing in importance for colleges. An immediate issue has been the increase in costs, which hit college budgets this month. The employer contribution to support staff pensions is increasing in almost all colleges by anything from 2 per cent to 10 per cent. The annual cost to the sector is about pound;30 million and would be more if fund managers had not taken a relaxed approach to closing deficits. Nationally, there is a pound;30 billion deficit on these pension funds according to the recent valuations. Probably pound;1bn or so relates to colleges but the funds will recover this money over 20 years or so. Higher contributions have been averted by mortgaging the costs into the future. Moving forward, colleges will start recording the pension deficit in their accounts for the year 2005-6.

The figures used will be calculated in a different way, and costs will take years, if not decades, to fall due. Nevertheless the accounts of some colleges look a bit sickly.

It will be vital for finance directors and others to make it clear that these paper losses record a future problem, which poses no immediate threat to the solvency either of the college or to the payment of pensions. It may be necessary to explain the benefit of public-sector pension schemes, which spread costs and risks among a large number of people.

The problem for their employer - the college - is not only that the pension cost is rising but that governors and managers have almost no control over the budget. The division of deficits and costs between different colleges de-pends on luck, history and the mysteries of actuarial science.

The colleges with the largest pensions bills may be paying for the golden retirement of some long-forgotten senior admin officer, but they may equally be paying the price of a hidden blunder made by an unknown professional.

One point that may get lost is the fact that these costs and deficits relate to the minority of college staff who cannot join the teachers'

pension scheme. The teachers' scheme works in different ways which make it impossible to identify the share for each college. This is good news for the faint-hearted. If this division could be made, the college pension deficit would be many times greater.

The underlying issue is the gap between promises made and the money set aside to pay for them. There have been some proposals to address the problem but action is deferred. The Government has tabled various proposals to change both schemes affecting colleges.

There is a proposal to increase the average retirement age of teachers and, more controversially, a suggestion that support staff should pay an added 1 per cent in employee contributions. This plan has an added twist, suggesting better-off staff pay more. This reflects the probability that the richer you are, the longer you live and the more you will get out of a pension scheme.

Possibly true in the past and looking at averages. No comfort to the chain-smoking personnel manager with a dodgy heart. Nine per cent of your salary on a pension is poor value if you are dead by 65. All pensions everywhere are lotteries in which the funds bank on death. The good news is we are all living longer. The bad news is that it could cost us more and, furthermore, there will not be many adult education classes around to ease the pain. Which brings me back to another issue buried in this election campaign.

Julian Gravatt is director of funding and development at the Association of Colleges

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