Public pensions take a pounding

17th September 2010 at 01:00

"Gold-plated public sector pensions" - the Daily Mail headline has achieved such wide currency that it seems this factor alone accounts for the national debt. For the retired teacher, for whom the average pension is under pound;10,000, the idea of a "gold-plated pension" is hard to accept.

In the run-up to the UK election in May, David Cameron and George Osborne made it clear that the Conservatives believed the country could not afford to maintain public-sector pensions. Indeed, Mr Cameron referred to a "pensions apartheid" between private and public sectors. More recently Nick Clegg, the Lib Dem leader, attacked public-sector pensions as "unreformed and gold-plated", implying that they are funded by taxpayers and not through the contributions of employers and employees.

Lord Hutton, the former Labour Pensions Minister, has been asked by the coalition Government to conduct an independent review into the future of public-sector pensions. In his call for evidence, he says that, after his interim report, he will conduct further evidence-gathering on what alternative pension provision should look like. It appears Lord Hutton has decided the status quo is not an option.

The Government claims that accrued rights are protected. Not so. The annual uprating of pensions through the RPI (retail price index) has been amended to be uprated through CPI (consumer price index). CPI will routinely be lower than RPI and the Public Services Pensioners Council estimates that this may affect a pensioner with a pound;10,000 pension by pound;30,000 over 25 years of retirement.

Most public-sector pension schemes are notional. Some are funded. A notional scheme operates on a pay-as-you-go basis. Contributions made by today's teachers pay for the pensions of those who have retired.

Schemes are subject to periodic valuation, conducted by the Government Actuary's Department. Any trends, such as increased longevity, are flagged up and may lead to revision of contributions. The latest GAD valuation of the Scottish Teachers' Superannuation Scheme (STSS) concluded that, between 1996 and 2001, "taking account of notional investment, returns substantially exceeded expenditure, and so the balance increased significantly".

The majority of public-sector schemes have been reviewed in recent years. Each review was based on the principles agreed between the Government and the Trades Union Congress in 2005, which accepted that "public service pensions are a key benefit of public employment and should be celebrated as such".

The reform of the STSS led to a number of significant reforms. The normal pension age for new entrants was set at 65, and the employees' contribution rate was raised to 6.4 per cent. It was also agreed that future costs should be shared and that the employer's contribution rate would be capped at 14 per cent. The Pension Policy Institute in 2008 concluded that the impact of the reforms reduced the value of benefits from 22 per cent to 19 per cent of salary.

This 2007 agreement was negotiated between teachers' unions across the UK and relevant pension agencies, scrutinised by GAD and approved by the Treasury.

In light of such recent reforms, why have public-sector pensions again become such a major issue? The terms of reference of the Hutton inquiry give away the game. First, Hutton has been asked to have regard to "the growing disparity between public service and private sector pension provision". This includes looking at pensions "as a barrier to greater plurality of provision of public services".

Second, Hutton's interim report, to be delivered by the end of this month, requires the commission to consider delivering savings on pensions within the spending review period "to contribute towards the reduction of the structural deficit".

Pensions are deferred pay. During periods of pay decline in the public sector, politicians claim that pension provision offset the relatively poor wages in the public sector. Now that wages across this sector are on a par with those in the private sector, it seems that our political leaders have concluded that pension provision must be brought into line with inferior private-sector schemes. As the TUC has correctly pointed out, future pension provision appears to be a "race to the bottom".

The impact of poorer occupational pensions in the long term will be to increase the burden on the state pension and put added pressures on the Treasury.

Comparisons between public and private-sector pay need to be treated with caution. For example, while 38 per cent of public-sector workers have a degree or equivalent qualification, only 23 per cent of employees in the private sector have obtained this level of educational attainment.

South of the border, the Government has imposed a pay freeze on the public sector. The situation in Scotland is less clear, but there is little doubt that pay prospects across the public sector are very bleak. The effect of a freeze on salaries is a freeze on pension contributions, and this increases scheme liabilities.

Those who work in the public sector face an unprecedented attack - one in which it is difficult to separate out real budgetary issues from an ideology based on undermining the public sector.

The removal of pension rights potentially condemns public-sector pensioners to straitened finances from retirement to death. Is this the reward society wishes for public servants such as teachers, who have provided selfless service over many years? It is obviously what our politicians wish for.

Drew Morrice is assistant secretary of the Educational Institute of Scotland.

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