Editorial - Pensions pain is a problem you can't ignore

2nd October 2009 at 01:00
The profession cannot pretend the recession will not damage its retirement plans

When J.K. Galbraith tried to explain a particularly arcane piece of economic theory to Lyndon B. Johnson, the president interrupted his adviser with an astute observation of his own: "Did you ever think that making a speech on economics is like pissing down your own leg? It seems hot to you, but never does to anyone else."

Many people feel the same way about pensions as the president did about economics - they can appreciate the proposition but want to be spared the detail. Unfortunately for them, the recession has made discussion of public sector pensions - and their cost - unavoidable (TES Magazine, page 10). The Teachers' Pension Scheme (TPS) has an estimated deficit of #163;1.2 billion, which is likely to rise as life expectancy increases and the rate of return on government bonds, on which the fund's liabilities are calculated, declines.

As it stands, that shortfall will have to be met by the taxpayer. Given that a private-sector worker with a salary equal to that of his public sector counterpart can look forward to a pension worth considerably less than half, the problem is not so much acute as toxic. Why should teachers receive an index-linked, final-salary pension? Why should they not share in the pain?

Teachers are understandably annoyed by such griping. They have contributed in good faith over decades to the TPS in the expectation that they will receive a guaranteed sum on retirement. They may have put up with modest pay and a highly stressful job in the knowledge that they could retire relatively early. That was the agreement made with the state when they joined; it is surely unethical of the state to break it now. To have teachers' "gold-plated" pensions mislabelled as some kind of perk and to be asked to pay for the stupidity of bankers is doubly insulting.

All of which is true and none of which alters the arithmetic.

However besieged the public sector feels, however unfair the options forced upon it seem, that sea of red ink isn't going to evaporate any time soon. Some experts have likened the public pension funds to "giant Ponzi schemes", which suck in gullible punters with the promise of fabulous returns one day in exchange for hard cash now. Except in this case the schmucks are our children, who will be saddled with debt because we couldn't control our spendthrift ways.

To preserve their final-salary scheme the health unions recently agreed that employers' contributions would be capped at 14 per cent with any additional costs borne by employees. At some point the teaching unions will have to make a similar compromise. Either contributions will rise or the retirement age will retreat. The pill would be easier to swallow if pension tax relief was scrapped for higher rate taxpayers - which accounts for an unjustifiable 60 per cent of the #163;37 billion total. But pretending we can go on as if nothing has happened is not an option. The "honourable settlement" negotiated with the unions in 2005 cannot survive. The world has changed.

Gerard Kelly, Editor E gerard.kelly@tes.co.uk.

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