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Dangerous U-turn

Will taxpayers have to bear the consequences of the Govt’s retreat on pensions?

Last week, the Government announced that the normal pension age for existing public-sector employees will not after all rise from 60 to 65. This is a U-turn from earlier statements, which suggested that the normal pension age in the non-uniformed categories would increase to 65 from 2013.

Apparently, local government workers are not included in the announcement, so we will have to wait and see what will happen to them. Details are also still to be announced regarding other proposed changes to public-sector schemes, for example, career-average salary pensions instead of final salary.

I am concerned about this U-turn for two reasons. My first concern is whether it is fair. Even before the U-turn, public-sector employees were on track to have pensions typically worth an extra 3 to 18 per cent of salary compared with private-sector pensions. Now they appear to be on track for even higher pension differentials over the private sector. More details can be found in the Pensions Policy Institute report, Occupational pension provision in the public sec- tor, available on its website.

The PPI report suggests that, contrary to popular belief, public-sector workers do not generally receive poorer pay and other benefits because of their better pensions although that may not be so at higher earnings levels.

The other reason I am concerned about the U-turn is the possibility that it will actually worsen the plight of the private sector. This would happen if the U-turn had to be paid for through higher taxes than would otherwise have been needed.

Apparently, the deal which the public-sector unions have signed up to requires the cost of the latest U-turn for existing members to be found within the cost parameters of the Government’s previous proposals. This might, for example, require higher employee contributions for existing members who keep a normal pension age of 60 or a worsening in other terms and conditions.

I will be watching very closely to see whether the cost limits which the unions signed up to will be met in the negotiations. There is a long history of fudging in public-sector pensions, to the benefit of the public-sector employees concerned and to the consequent cost of taxpayers generally.

Never forget that the Government has no money of its own. It only ever has taxpayers’ money. Some recent examples of costly fudges include further improvement to an already generous MPs’ pension scheme, the exemption of judges’ pensions from the lifetime allowance and – perhaps the most blatant of all – the grotesque ill-health early retirement practices.

I remember a Scottish policewoman in her early 30s who suffered such stress in the workplace that she had to get an ill-health early retirement pension. In the fire service between 1995 and 2000, no fewer than 68 per cent of retirements were by reason of ill-health and in the police it was 49 per cent over the same period.

I dare say a significant proportion of these were genuine but 68 per cent of firemen and 49 per cent of police? I don’t think so.

I am told that the worst excesses of ill-health early retirement in the public sector are being tackled but I will believe it when I see the proportion drop below 20 per cent, as it is in the private sector.

Public-sector pensions are even more valuable than they appear in comparison with private-sector pensions because of the explicit or implicit taxpayers’ guarantee. Also, when deciding what the country can afford for state pensions, the long-term costs of public-sector pensions must be added in. After all, they are all to be paid for out of tax and National Insurance contributions.

The fundamental problem which I see in public-sector pensions is – literally – accountability. You will not see a pension deficiency of 690bn on the balance sheet of UK plc but that is the size of the public-sector pension black hole when measured on the Government’s normal long-term discount rate for non-pension liabilities. Our public servants will not volunteer to account in this way because taxpayers might then notice and demand change. This, of course, is precisely why this accounting change should be made.

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