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Johnson hits back as Hutton claims funded pensions are ‘ideological’

Centre for Policy Studies research fellow Michael Johnson has hit back after Lord John Hutton suggested his calls for public sector pension schemes to be fully funded are “ideological”.

Last week, the Independent Public Service Pensions Commission, chaired by Hutton, recommended public sector pensions switch from final-salary to career-average provision. Hutton resisted Johnson’s suggestion that public sector pensions should be fully funded.

In an interview with Money Marketing, Hutton said: “The argument about whether public sector pensions should be funded comes across as an ideological one. I am much more interested in efficiency and effective use of public resource and with the reforms I am proposing we can continue to provide really good pensions at an efficient level of cost.”

In a letter to Money Marketing, Johnson says a funded framework would enhance the transparency of the system, force policymakers to address intergenerational inequalities, help stimulate a savings culture and reduce the cost of pension provision.

He says: “Pay-as-you-go enables employers to not be held directly responsible, let alone accountable, for the accumulation of pension promises, which is a serious governance failure. With most schemes being unfunded, employers never have to contemplate, let alone execute, a deficit recovery plan.”

In a report submitted to Hutton’s commission in February, titled Self-sufficiency is the Key: Addressing the Public Sector Pensions Challenge, Johnson urged the Government to set out its intention to move to defined-contribution provision by 2020.

He suggested the Government could “seed” unfunded public sector schemes with tradable securities issued by the Treasury to make public sector pensions more transparent and make the amount the Government owes explicit. He also said public sector workers should be automatically enrolled into the national employment savings trust.

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. This is probably one of the most important government policies and decision in nearly 30 years, as in reality this will cost or save the taxpayer many billions of pounds. If we get retirement planning wrong then ultimately, we will put our whole economy into a state of depression for generations just like Japan.

    The British economy is very much like a ticking time bomb with increased elderly population and rising levels of youth unemployment. What is required is a simplified system that everybody can understand, whether that is a pension in the private sector or public sector. The problem with pension planning at present is at it is too complicated and simply unaffordable for the many.

    We also have to change our culture of debt, particularly in the area of mortgage debt, where we have many people on interest only with no hope of repaying their mortgages before retirement.

  2. Steven Farrall (Adviser Alliance) 25th March 2011 at 9:49 am

    Johnson is right. Hutton is wrong. Pensions are deferred pay. Citizens are encouraged by the deferrment of taxation to accumulate savings to draw on when they can no longer compete in the workplace. Saving is always virtuous. If this is made clear citizens become responsible and seek to save. On the other hand unfunded entitlements are destabilizing. State employees have no connection at all with the economic success or otherwise of the UK. They know that whatever happens to wealth creation they will still get their pensions. This is disgraceful as it encourages a habit of dependency and dependency engenders irresponsibility.

  3. The other problem with the final salary solution for government employees is that these employees used to be underpaid compared with the private sector and the pension provided was a compensation for that underpayment. This is no longer true as we now have Doctors, Head Teachers, high-ranking police officers and many other people in the public sector earning vast salaries, which are linked to their pensions. The ultimate price for this is saddled with the private sector that is funding all of this through taxation. This clearly is unfair and needs radical change as without a healthy private sector economy will just grind to a halt.

    By the way I am not a Tory but I do believe in fairness!

  4. Incompetent Regulators Awards Team 25th March 2011 at 10:35 am

    Well said Steve Farrell. Public sector pensioners should all be taxed higher than normal tax bands. Private sector pensions have been raided by gvts so why should public sector ones be ignored. After all we’re all in this mess together aren’t we Gordon Brown?

  5. It may be closing the stable door after the horse has bolted, but doing something positive now is better than doing nothing or taking half measures. All pensions both state and private should be funded and contributions should be made compulsory at an appropriate level. It is absolutely ludicrous that people reaching retirement do not have the means to support themselves and that the current generation of workers be expected to fund an ever increasing population in retirement.

  6. I think you will find that the public sector pensions’ pot has a long history of being raided by successive governments.

  7. Anonymous 12:25pm: The ‘public sector pensions pot’ is also known as ‘private wealth’. If this ‘raiding’ led to lower benefits for the political classes you would have a point, but all it means is that the mugs in the productive classes will have to be raided to a greater degree later on to top the pension fund back up again.

    By contrast, when it raids private pensions there is no intention whatsoever to replenish them.

    Incidentally, when did ‘ideological’ become the political insult du jour? I’m no Randite, but it seems directly equivalent to the use of the word ‘impractical’ in “Atlas Shrugged”, i.e. as an insulting synonym for ‘principled’ and/or ‘libertarian’.

  8. ” State employees have no connection at all with the economic success or otherwise of the UK” :- Unless UK workers need health care, police, tax collection, law courts, education, transport by maintained rail and road systems plus many, many other things. We really are all in this together but some people dont realise that this statement also means that the private sector actually needs the public so that both can thrive. What have the Romans ever done for us!!!

  9. The first question shouldn’t be funded or unfunded but design and level of benefits, with a subset question of who shares what risk

    There is no doubt that a DB scheme which is final salary related and promises a % based on years of service is challenging.

    DC is also challenging as it creates volatile outcomes, where the tax man cannot tax enough of those who have good outcomes for the Treasury/DWP to fund the poor outcomes (via income support)

    Answer is a Career Average Revalued DB lump sum benefit of say 20% per year of service.

    So over a career of 40 years someone would get a lump sum of 8x their career average salary

    The risk is then longevity and interest rates for the individual and long term funding for the governement.

    Governement can even provide the annuities should they wish to avoid cashflow problems.

    Then look at funding

  10. Incompetent Regulators Awards Team 28th March 2011 at 3:43 pm

    No, private sector DOES NOT NEED public sector to the tune of 1 in 5 employees. Parasitic social engineering is now ruining everything. Thnaks to useless politicians.

    How can one justify tax office getting bonuses, whitehall staff etc. Big brother is what it is now.

  11. Incompetent Regulators Awards Team | 28 Mar 2011 3:43 pm

    No, private sector DOES NOT NEED public sector to the tune of 1 in 5 employees. Parasitic social engineering is now ruining everything. Thnaks to useless politicians.
    —————

    Actually it is more like 2 in 5

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