Pensions: who loses, who gains?

Submitted by martin on 27 June, 2011 - 5:11
Cuts

Who loses, who gains?

Almost all workers and pensioners lose. Employers and the Government gain.

The Government plans to save £2.8 billion a year immediately by levying bigger pension contributions from public sector workers from April 2012.

Already the Government has changed inflation-uprating for pensions from one price index, RPI, to another, CPI, which on average is about 0.8% lower each year. That's an accumulated cut of 15% in your pension after 20 years of retirement. Or if, say, you work as a teacher for 20 years, then do other work for another 20 years, then the value of the pension you claim from your teaching work will have been cut by 15% even before you retire.

The RPI-to-CPI change applies to all pensions: public-sector, state, and private-sector schemes too (unless their terms state explicitly that inflation-uprating means RPI: the Government talks of legislation to override the terms for those schemes).

The Government estimates that the change means a cut of £83 billion in pension liabilities (i.e. in the sum required today to cover future pension payments).

The Government is also increasing the age at which the state pension and public-sector pensions can be claimed. Last October, the Government announced that it would speed up the increase in women's pension age, so that it will reach 65 by November 2018. The state pension age will then increase to 66 for both men and women from December 2018 to April 2020. Chancellor George Osborne has talked of further increases in state pension age which could push it up to 70 before the middle of the century.

The Government plans to change the "accrual rates" for public sector pensions (from 1/60 to 1/80 or 1/100); and to change public-sector pensions from "final salary" to "career average".

If the Government gains, that means the taxpayer gains?

Some taxpayers, maybe. The Thatcher government after 1979 made much noise about cutting taxes, and did cut taxes for companies and for the rich. But for the average working-class household it raised taxes, mostly by shifting the tax burden from visible progressive taxes like income tax to less-visible regressive taxes like VAT.

The top one thousand people alone in the UK have wealth totalling £396 billion, according to the Sunday Times Rich List. If those top thousand were reduced to £1 million each (to routine luxury, rather than ultra-riches) then that would yield £395 billion. The total liabilities of the public sector pension schemes, for all the millions of workers they cover, are only £770 billion. Seriously taxing the rich could easily solve any pension-funding problems.

Something has to be done to limit pension costs. People are living longer, and claiming pensions for longer.

The Government's own Hutton Report shows that existing public sector pension schemes can balance their books up to about 2060, which is as far ahead as anyone can see.

The schemes vary. The Local Government Pension Scheme is a fund, invested in the stock market, from which pensions are paid. In 2007 its liabilities, at £159 billion, slightly exceeded its assets, at £132 billion. Such comparisons fluctuate from year to year depending, for example, on the state of the stock market.

The NHS, teachers', and civil service schemes are not funds. The Government collects the contributions as current revenue, and pays the pensions out of current revenue. Currently payments into the NHS scheme, for example, far exceed payments out.

The extent of "living longer" varies enormously with social class. Men in the Parkhead district of Glasgow have a life expectancy of 59, so they will be lucky to claim a pension at all. In well-off Kensington men's life expectancy is 84.

In any case, economic output generally rises over the decades, so a greater share can be allocated to pensioners without having to cut down standards for working-age people or children.

The problem is not that economic output is insufficient in general. It is that over recent decades private employers have almost entirely opted out of contributing to pensions.

In years of stock-market boom they took "contribution holidays", saying that their pension funds were flush so didn't need contributions. Then when harder times came they shut down the schemes.

Compulsory private-employer contribution to pensions - in one way or another, perhaps to pension funds controlled by workers - is the answer.

Public-sector workers get much better pensions than private-sector workers. They can't expect that to continue.

The average pension payouts are £4,000 for the Local Government Pension Scheme, £7,000 for the NHS Pension Scheme, £10,000 for the Teachers' Pension Scheme, and £6,200 for the civil service schemes.

Even those low figures are better than for most private-sector workers. That is because private-sector pensions have been trashed, and, according to the Financial Times, the Government's planned changes in state pension provision will now push the "diminishing rump" of private-sector employers with decent pension plans to scrap them.

The answer is compulsion on private-sector bosses to contribute to decent pensions for their workers.

The grievous inequality in pensions is between top managers and officials and the rest of us. Network Rail boss Iain Coucher has just retired from the job, after only three years, with a lump-sum of £1.6 million and a pension of £214,000 a year.

Hundreds of thousands of other well-off people retire relatively early, in relatively good health, with pensions not at Coucher's level but better than the highest wages most people can aspire to. For example, a university professor can retire on a pension of £40,000.

If these people have paid off their mortgages, as often they have, they are very well-off in retirement. Routine workers retire on much lower pensions and claim them for fewer years.

People have to work longer with the increase in life expectancy

More people still feeling youthful at 60 or 65 will work longer. That's fine. But what about the people whose jobs leave them worn out at 60? There are still plenty of jobs that do that.

Meanwhile the Government is forcing many people much younger than 60 out of the workforce, by cutting public-service jobs and deliberately sustaining mass unemployment as a bludgeon to force down pay and conditions. Lose your job at 50-plus these days, and however hard you try to find a new job, there's a good chance that you'll get nothing except perhaps scraps of casual work.

When the economy is run so that everyone young or middle-aged, and in passable health, has a decent job open to them, then perhaps we can start listening to what the Government says about more over-60s or over-65s working.

What do "accrual rates" mean?

In the private sector, "defined contribution" schemes are now common. You pay a fixed amount into a fund (and, with luck, your employer pays too), and at retirement you get a lump sum depending on how the fund has prospered. You can then trade in that lump sum for an annuity (a regular yearly payment until you die).

You take the risk. If there is a stock-market crash, your pension goes down with it.

The public-sector schemes are "defined-benefit", which means that whatever the stock market you are promised a pension related either to your "final salary" or your "career average".

Most people do not work in the same job, or even in the same sector, all their life. If you work as a teacher for 20 years, for example, then you "accrue" 20/60 (one-third) of "final salary" as your pension. You may also accrue other pension rights from other jobs.

Part of the Government's plan is to reduce "accrual rates" from 1/60 (the usual rate now in the public sector) to 1/80 or 1/100. With a 1/80 accrual rate, you have to work 40 years in the same sector to get 40/80 (one-half) of your "final salary", or "career average", as a pension. This move obviously goes together with the Government's plan to raise the age at which you can claim your pension.

What's the difference between "final salary" and "career average"?

Most public-sector pension schemes promise a pension linked to "final salary". (That may mean not literally your pay in the last year before retirement, but, say, the average of the best three years in your last ten years before retirement). The Nuvos pension scheme in the civil service (for everyone joining the civil service since 2007) is "career average". The Government wants to change all schemes to "career average".

There are advantages to "career average". Managers and the like usually get many promotions in their working life, and end up on much higher pay than routine workers, and so inequality during working lives is preserved and magnified in retirement under "final salary" schemes.

There is a very big hitch. A calculation of your "career average" pay depends on the inflation-uprating applied to the pay you got 30 or 20 years ago. If the inflation-uprating is at a low rate, and if the "accruals" rate is not improved (since, even for the less-promoted, "career average" will still be less than "final salary"), then a "career average" scheme ends up much worse than "final salary".

The Government is willing to negotiate, isn't it? Shouldn't the unions explore that before striking?

The Government is happy to negotiate on details. It is rigid about demanding an extra 3%-plus of workers' pay in pension contributions, overall, but happy to talk to the unions about whether Jack should pay 6% extra and Jill 0% extra, or both 3%, or Jill 6% and Jack 0%.

It has already implemented the RPI-to-CPI change. It is rigid on all the main principles of its plan.

Union leaders may win some concessions on the details of the plan. Mainstream experts have warned that the Government's plans risk "crashing" the public-sector pension schemes by prompting so many workers to opt out that there aren't enough current workers paying in to cover the pay-outs to pensioners. The Local Government Pension Scheme already has over 25% of workers opting out, and about 10% of new teachers now opt out of the Teachers' Pension Scheme.

The union leaders could then present small concessions as grounds for calling off action. But unless the basics of the Government's plan are defeated, working-class pensioners across the board will lose billions.

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