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Acting the goat

One of the most intriguing features of the Tory conference last week was the new egalitarianism suddenly discovered by its most senior party figures. A classic example came in a speech delivered by Shadow Chancellor George Osborne to the party faithful.

Mr Osborne told his audience, both in the conference hall and at home, there was no escape from the brutal reality that everyone would have to make sacrifices to get Britain’s finances back in order. He repeatedly used the phrase “We are all in this together” as he outlined a set of proposals that include a public sector pay freeze for 2011, capping taxpayer-funded public sector pension schemes to £50,000 and raising the retirement age to 66.

Using sub-Churchillian prose is all well and good. It allows Mr Osborne to appear statesmanlike, elevating him above the grimy reality of party politics while appealing to a sense of wartime sacrifice to get us over the current financial problems.

The issue I have is in trying to work out exactly who should be making the sacrifices Mr Osborne wants to see. I worry we are increasingly scapegoating particular groups in society, in this case public sector workers.

Evidence of this can be seen in a wider range of pronouncements of recent months, from Liberal Democrat Treasury spokesman Vince Cable, who wants to see the pensions of public sector fat cats and BBC bosses cut to shreds, to Paul McMillan, editor of this esteemed newspaper.

Last week, Paul quoted a recent YouGov/Money Marketing poll of IFAs which found 85 per cent believe there needs to be a funda-mental reform of public sector pensions. “At a time when the Government is calling on private sector employees to contribute more towards their own retirement, it is surely wrong for the taxpayer to continue to fund many public sector pensions without serious questions being raised,” he wrote.

I have no quarrel with such a sentiment. Clearly, there are issues to discuss about the public sector and claims about their alleged generosity to debunk – for example, claims by the Taxpayer’s Alliance to the effect that “state workers now earn an average of £62 a week more than their private sector counterparts” and that: “We cannot pay these enormous bills for people who are not creating wealth.”

Quite apart from the bizarre wealth-creation claim – should a nurse, teacher or policeman be paid less because they are not “wealth creators”? – the reason why average wages in the private sector are less is that there are five times more unskilled workers working in it than in the public sector.

The Office of National Statistics’ most recent workforce survey shows that only 8.6 per cent of people in the private sector are in professional grades compared with the 24.5 per cent of public sector staff. And the private sector still earns less, according to research from Income Data Services, the well-respected pay and conditions monitoring firm, all the way up the scale, managers, professionals and skilled trades are taking a 70p an hour pay cut, on average, by working for the state.

Of course, everyone has the right to say that public sector pensions should join the race to the bottom to chase the private sector employers who have cut or closed them. The reality is, however, that pretending you can save large amounts of money by cutting public sector ‘fat-cat’ pensions is a delusion.

Even if you think of senior civil servants and local council executives as fat cats – and Cabinet Office figures for senior civil servants show they get between 22 per cent and 64 per cent less, at permanent secretary level or just below, than an equivalent manager in the private sector – cutting their pay and pensions is hardly likely to balance the Budget.

Indeed, the only way to harvest a substantial amount of cash from public sector pensions is by cutting those of middling and low-paid public servants such as teachers, nurses and the majority of civil servants. But how do you do it without cutting the entitlements of existing pensioners?

After all, the cost of unfunded public sector pensions is precisely the entitlements of existing pensioners. You can change the entitlements for future pensions that staff build up while in work – and indeed there have been negotiated changes in all the public sector schemes – but it will take years before that achieves significant changes to public sector pensions payouts.

Moreover, some of Mr Osborne’s figures do not add up. Pensions expert Ros Altmann calculates, for example, that the proposal to raise the pension age to 66 by 2016 could actually end up costing more and not less. If men aged 65 in 2016 are unable to find work, they may end up on pension credit worth £130 a week while a full basic state pension is £95.30 per week.

The truth is that glib statements about fat cats are not the answer. If there is a debate to be had about public sector pensions, then IFAs – supposedly the experts in this matter – need to make sure it is an informed one.

Otherwise, all we do is create a few pointless scapegoats while the UK pension system collapses further into a mire, aided and abetted by both major political parties.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. lot of words to show cleverness it appears..irrational conclusions…it is this type of people in power…that exist that we DO NOT NEED…THEY KNOW WHAT WHAT IS…BUT IT BENEFITS THE FEW AT THE TOP…AND THAT IS TO BE OK? public servants need to think and behave and talk ans SERVANTS OF PUBLIC…and be paid as such and not be seen or be financially enriched fro position of service….better than the public they serve…right!

  2. We can’t afford them Nic, it is simple economics and as you have always implied, I am simple.

  3. Nic Cicutti makes a living playing agent provocateur and I’m not at all sure he actually believes half of the nonsense he spouts out! The Pensions Secretary, says that to resolve the pensions crisis we need people “to take responsibility for themselves” Those of us in the private sector need to ask ourselves: Why should we save for two pensions, our own and his, when he is perfectly capable of taking ownership and personal responsibility for his own pension?

    Actuaries Hymans Robertson, calculate some 26 per cent of council tax receipts now goes towards public sector pensions, and there’s every possibility this figure will rise over the next five years, as age-related costs continue to feed in.

    I object to the Government acknowledging the demise of the Defined Benefit Pension Scheme in the private sector, then telling those workers we all need to save more and not to expect to retire before the age of 70, while at the same time the Government and public sector unions expect private sector workers to pay taxes to fund public sector pensions so that they can retire well before 70 on a guaranteed index linked scheme for life. How fair is that?

    Perhaps Mr Cicutti own public sector background has a liitle to do with his bias?

  4. The issue is very simple, it’s the solution that’s tricky.

    The issue
    We can’t afford the sheer number of public sector workers on unfunded pensions, mostly paid for by folk who can’t afford to pay enough into their own private sector pensions to eat as well as heat themselves in later life.

    Is there is also the moral issue here, why should those in the private sector pay others to have better benefits than they have when they have stopped being useful to others ?

    Perhaps we need to think about the whole issue in terms of what can be done, not pretend the problem doesn’t exist Nic.

    The solution
    How about:-

    1. Close the current DB scheme for MPs and instead link them to a DC scheme that’s based on the “UK average” pension a person retiring in the same year as they are would have, subject to a total cap of that provided by the PPF they created (currently of £31,396.32). Overnight I suspect “pensions” would be treated as the serious subject it is rather than a merry-go-round for Pensions Ministers on copper bottomed schemes which remove them from the reality of the pension experience the public face.

    2. Give the public sector workers (excluding front line emergency and education staff who touch the public daily) a choice:-

    (a) Have their pay increases frozen/reduced for a period to be debated and special emphasis on the period running up to retirement. This will reduce the pensions liability payable.

    OR

    (b) Continue with the current pay system but increase the levy paid by non-front line (defined above) staff to cross subsidise the other public sector workers to the extent it funds an agreed proportion of the unfunded liability.

    OR

    (C) Close DB schemes to all new entrants (excluding front line – defined above) AND introduce options (a) or (b) above.

    None of the above may be perfect, but if things don’t change they stay the same.. better to discuss solutions then pretend there isn’t a problem, in my view.

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