FEfocus Editorial - Gold-plated pension needs a bit of a buff

18th February 2011 at 00:00

With the University and College Union and Government preparing for a showdown over pensions (page 1), it is worth noting that there is one respect in which teachers' pensions in colleges and schools are worse than everyone else's.

Any suggestion along these lines goes against the received wisdom of "gold-plated" public sector pensions, although it is worth observing that what was once solid gold is already plate, and even that is starting to tarnish.

But the advantage that the private pension has over the public sector one is that at least in handing your money over to the financial sector, you know how you are going to be screwed. You can, if you wish, follow the whole process in annual statements.

The public sector pension replaces financial risk with the only thing more impenetrable and baffling: political risk.

While generally it is safer to bet on Governments than financial institutions (countries like Ireland groan under unfeasible deficits rather than default on their debts) the calculation with pensions is different. It is more like a bet on what future politicians will do given the choice between preserving retirement benefits for a few and raising taxes for everyone.

It is especially vulnerable to fiscal crises, because the Government does not put away anything for a rainy day except imaginary money.

"From 1 April 2001, the Account has been credited with a real rate of return (in excess of price increases and currently set at 3.5%), which is equivalent to assuming that the balance in the Account is invested in notional investments that produce that real rate of return," says an official departmental notice on pensions. What this appears to mean is that somewhere in Whitehall is a big stack of IOUs in a drawer marked "teachers' pensions".

What actually happens to the cash from employer contributions is that it comes out of Government funds, and is then recycled straight back into public spending in a way which might appear to the untrained onlooker like a street-corner game with three cups and a pea. That feeling is only reinforced when the Government comes back later showing an empty cup and pleading for more money.

Government is supposed to be kept on the straight and narrow by actuaries calculating the future cost of retirement benefits. So when it announced that contributions were heading for an increase last month before the men with the calculators and life expectancy tables have done their work, it was almost inevitable that unions would cry foul. Perhaps unwittingly, the Government fuelled the doubtless unfounded suspicion that the system is a swindle, and that pension benefits are downgraded, based not on cost but political expediency.

It is reasonable to expect teachers to cover the costs of their pensions, and so they will almost certainly have to pay more. If you punch the proposed higher contributions into a respectable private pension calculator, it is hard to match a final salary or even average salary scheme: the gold-plating has not entirely worn off yet.

But if they face similar pressures to pay as the private sector, teachers deserve similar transparency. Anything less is not just a PR disaster but a provocation, as the growing ranks of discontented unions demonstrate.

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