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Public sector pensions – McPhail and Unison go head to head

Hargreaves Lansdown’s Tom McPhail and Unison’s Dave Prentis offer opposing views on the Government’s public sector pension plans, in a head to head written for our retirement planning supplement earlier this month.

Dave Prentis
Dave Prentis General secretary Unison

“Ministers have relied on the myth that public sector pensions need drastic change to make them affordable but major reforms made less than five years ago mean that the the cost of pensions as a proportion of GDP will fall”

Scorecard for the Government on public sector pensions – one out of 10. A late entry score of one is awarded for Danny Alexander’s recent statement in Parliament but the Government gets a poor score overall due to the lack of progress made in eight months of talks – which have so far produced no firm offer. The damaging tactic of negotiating via the media and peddling myths also earn Government ministers a zero score.

At points throughout the talks, public sector workers have woken up to the sound of Government ministers taking to the airwaves announcing their retirement plans were being ripped up. In June, as talks were continuing, Alexander made head-lines by announcing a hike in the retirement age to 68. Not only do these grand announcements shock public sector workers, they also threaten to undermine talks.

What is the point if, on major issues, the Government has already made up its mind? How can public sector workers feel confident that the Government is genuinely interested in negotiating if it breaks ranks and sets out red lines in the press?

The right wing myths peddled about public sector pensions are endless – but even Government ministers have waded in to fuel the debate. In early June, Communities and Local Government Secretary Eric Pickles wrongly claimed that the local government pension scheme cost every house-hold more than £300 each every year. In reality, it costs the average house-hold £67 a year, or 5p in every £1 paid in council tax.

After more than a year in office, you would have thought he would have grasped the basics of local government finances. His £300 a year claim wrongly assumed council tax was the only source of local government funding. Back in reality, 75 per cent comes from other sources, including business rates, fees, charges, and central government funding.

And as there are more than 7,000 employers in the LGPS – including private sector companies providing local public services, not all of the money in the employers’ ledger comes from councils.

Throughout the talks, Government ministers have relied on peddling the myth that that public sector pensions need drastic change to make them affordable and sustainable. But they already are – major reforms made less than five years ago mean that the cost of pensions as a proportion of GDP will fall.

These reforms have ensured that the schemes are in good shape – both the local government and health schemes have billions of pounds more coming in than is paid out in pensions every year.

These facts would get in the way of Government ministers’ plans to pay down the deficit through imposing a special tax on public sector workers – not a penny raised by the changes will go towards pensions.

No real progress in eight months of talks – but a late reprieve from a zero score due to Alexander’s statement in Parliament.

The score could have been higher if this statement had been made earlier, allowing time for negotiations to drill down a firm offer. As things stand, all we have is a statement in Parliament. That needs to be translated into offers in the scheme specific talks so that we have something firm to put to our members.

As always, the devil is in the detail and for our members, it is a case of once bitten twice shy. Public sector workers have already been stung by promises made in Parliament that were never delivered.

In his first Emergency Budget, George Osborne promised public sector workers earning less than £21,000 a £250 pay boost – exempting them from the pay freeze. But for low-paid local government workers, this money has never materialised.

They have been stuck on a pay freeze for two years, which could stretch to three at a time when inflation has just kept on rising.
Unison has said from the start that we want to reach a negotiated deal. The majority of our members are low- paid women working in the caring professions and they do not take action lightly.

But their strength of feeling over the detrimental changes to pensions was made obvious by the decisive yes vote for action. And as we still do not have any real offer we can put to our members, we have no choice but to carry on with preparations for November 30.

We are thoroughly committed to negotiating on this framework but the Government showing its hand so late means time to avoid action is running out.

Tom McPhail
Tom McPhail Head of pensions research Hargreaves Lansdown

“Pension provision in this country is going through a painful readjustment. Everyone has to get used to paying more, working longer and receiving less. This applies to both the public and the private sector”

Reform of public sector pensions is long overdue. Not only are public sector pensions unsustainable in their present form, they are also increasingly out of kilter with the pension provision enjoyed by the rest of the population and as such they are increasingly unfair.

The previous government failed to grasp the nettle, having stared the unions in eye over the changes and then blinked, with the result that many public sector employees today will still be able to draw their full pensions at age 60. In the context of a state pension age which is already heading rapidly up to 66 and will no doubt be pushed up to 68 by around 2030, this is grossly unfair.

Lord Hutton’s proposals were balanced and reasonable. He advocated preserving existing accrued benefits – an important issue not just in maintaining trust in the system but also to in persuading the scheme members that the Government was playing fair with them. His proposals on moving to career average make absolute sense in terms of spreading the state funded pension provision for the members more equitably across the membership. The linking of retirement age to the state pension age makes absolute sense for the majority of public sector workers, most of whom work in white-collar occupations, where it is not unreasonable to expect them to hang on until a higher retirement age. Again, to his credit, Hutton proposed less draconian changes for the uniformed services.

Just one-third of private sector workers enjoy any form of workplace pension provision and only 11 per cent are still building defined benefits. For them, a career average scheme payable at state pension age would look like a very attractive deal.

The change from RPI inflation proofing to CPI will result in a reduction in the value of the pensions and this has caused understandable dismay. It is instructive to look at the levels of inflation proofing in private sector pensions, where even CPI protection would be welcome. Eighty per cent of annuities are bought on a level basis. The PPF has no inflation proofing on pre-97 benefits, many occupational schemes only inflate benefits by the lower of CPI and 2.5 per cent.

The unions argue that pensions should not become a race to the bottom. Only a public sector worker could come up with such an argument. Employers in the private sector have a finite sum of money with which to reward employees. The same is ultimately true in the public sector too. The difference here is that the money has to be drawn from future taxpayers but it will still have to be found. Theoretically, just about any level of pension could be afforded although it might mean scrapping the odd hospital here and there. The question is what is sustainable in terms of the absolute share of GDP expended on public sector pensions, the level of pensions provided to public sector workers and how this compares with others in the wider workforce.

It has been suggested that more generous public sector pensions are compensation for lower wages. This may have been true once upon a time but now average earnings in the public sector are higher than the private sector, taking account of disparities in qualifications, age and so on. By this measure, public sector pensions should now be lower than their private sector equivalent.

I suspect that if it were not for the Government’s wider agenda of spending cuts and the demand that public sector employees pay more for their pensions, this deal would probably have gone through without too much shouting.

It has been suggested that these changes to the pensions constitute a breach of contract. All existing pension rights have been preserved. Salaries are renegotiated all the time, generally on a yearly basis and generally upwards, but this is not some immutable law. If employers need to renegotiate the terms of their workplace pension provision, then they have to be able to do that.

Pension provision in this country is going through a painful readjustment. Everyone has to get used to paying more, working longer and receiving less. This applies to all, both in the public sector and the private sector.

The Government has conceded important ground already. It has carved out a very generous exemption for those within 10 years of retirement. It has also improved the pension accrual rate, moving the career average schemes from 65ths to 60ths. To do more would be a betrayal of future generations. The Government should stick to its guns and make no further concessions.


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There are 16 comments at the moment, we would love to hear your opinion too.

  1. Has there been a costing of limiting DB schemes to a maximum pension of say 2 times the national average earnings? Based on a pension of 50% of earnings this would imply a “pension earnings cap” of 4 times NAE. Anyone earning more than this could surely afford to save some of their disposable income on some type of retirement income savings. Remove the limits on pension contributions and fund size and let individuals decide what they want to do with their money, whether it is earned, inherited or won from the Lottery. Admittedly, greater freedom for individuals will come at the cost of fewer state employees to monitor us, but hey, maybe that’s a way of achieving the outrageous “take” the State imposes on all of us. Why shouldn’t half of what we earn be an absolute maximum for the State to charge us for living here?

  2. Maybe future accrual in DB schemes should be scrapped altogether – for everyone. Close every scheme and switch to an affordable DC now – Honestly – doesn’t this country enough debt already????. The public sector and their unions really are in a self indulgent cloud cuckoo land if they believe they should continue to benefit from a pension basis which has been largely stripped from the private sector over the last couple of decades.

    Perhaps workers from the private sector should go on strike because they don’t agree with the significantly unfair distribution of tax-payers money needed to keep public sector workers in a good pension.

    Darwin said survival is ability to adapt – well I think that’s the case here – The government should strap a pair on a do the right thing for everyone.

  3. You just have to look at the language the Unison clown uses to know he either doesn’t care about the financial numbers behind this, or who has to pay for it. To him it’s all a nasty ‘right wing’ plot.

    How and more importantly why should, for example, a GP be able to retire on £50K+ at 60 with average lifespans over 80 and heading upwards. How on earth is that sustainable or fair?

    I had some goodwill towards public sector workers and the unions before all this. No more. These people are just unreasonable and mad. The only positive is that even on this issue turnout numbers are pathetic.

    Bring on pensions reform and bring on a change in strike legislation too.

  4. “a finite sum of money with which to reward employees”. Well yes, although maybe sacrificing a bit of profit might help.
    “It might mean scrapping the odd hospital”. Typical scaremongering. What about scrapping the odd ministerial limo, the odd foreign junket (Could Cameron & Merkel not used videoconference?) or the odd second home?

  5. Anonymous | 18 Nov 2011 2:27 pm

    I guess you work in the public sector – funny how these sort of comments are always made anonymously……

  6. One has to ask why Tom McPhail appears so determined to run down public sector pensions. The answer is of course that it is in his interest to do so in the hope that workers will abandon their pension schemes and invest in a SIPP through his company.

    I am a member of a public sector pension scheme and as the pension from this will be pretty poor I also make payments into a SIPP administered by Hargreves Lansdown. I WILL NOW MOVE MY SIPP AND ISA ELSEWHERE and this company will not get another penny from me.

    I have carefully planned for my retirement and for the government to move the goal posts is simply unfair. I will now have to work for a further 8 years, pay more contributions each month for 8 years longer to get a smaller pension which will be increased each year by less than I had previously been told.

  7. Public Sector Worker 19th November 2011 at 10:50 pm

    Attilla – I notice you are keeping anonymous too. Glass houses and all that. My identity will too remain anonymous.
    The thing is, Hutton and the Office for Budgetary Responsibility ‘Fiscal Sustainability’ report both show pensions already becoming more sustainable by 2050 (to 1% of GDP from near 2% now). This is due to 3 things: pay freezes, job losses, and the switch to CPI. Neither report assumes increases in contributions. So just because private sector pensions are worse, why should public sector pensions be made worse to match. If the state can afford it without increasing contributions, and people are contributing to the affordability by having pay freezes and getting less out at the end (CPI switch) then why should we also have to pay more? This would be similar to if your private pension fund provider said to you: the forecast based on current performance is that your pension will still get you what you thought originally. However we now need to increase your regular payments in order that we can pay some debt we were left with due to some greedy bankers. You wouldn’t be too happy would you?

  8. I wonder why anyone in this day and age thinks that they don’t have to work longer, pay more and get less all fairly obvious really.

  9. Public Sector worker. Referring to your last couple of lines. This has already been done, by Mr. Brown raiding pension funds by removing tax benefits in 1997 by 5.5 billion a year, totalling at least 77 billion pounds and also because of the economy, pension funds have not performed as projected and annuity rates for pensions have come down from approx 12% to 5%. So Public sector workers are no different, being advised that they may have to cough up more or work longer for their benefits.

  10. Hi Public Sector Worker

    You say “This would be similar to if your private pension fund provider said to you: the forecast based on current performance is that your pension will still get you what you thought originally. However we now need to increase your regular payments in order that we can pay some debt we were left with due to some greedy bankers. You wouldn’t be too happy would you?”

    This is exactly what has happened to every member of a defined contribution scheme. The stockmarket has fallen because of the mistakes of the banks AND THE POLITICIANS (I have no love of banks but lets be clear where the blame really lies – with the people in charge who allowed it to happen).

    So, in response to your question I ask you – Why should public sector workers be sheltered from the economic realities that affect everyone else in this country?

  11. Whilst I’m on my favourite subject I’d like to point out why only 11% of private sector workers have DB schemes – Government (mainly treasury civil service) interference.

    It started with an innocent sounding piece of legislation called the Social Security Act 1990. This act had lots of pension nasties in it but the key one stopped employers running surpluses in their pension funds. Previously these had been used as a tax management tool – in the good years the companies would stuff their profit tax free into the pension fund and in the bad years they took contribution holidays.

    I worked as a pension consultant for Norwich Union in the early 90’s and spent my time closing our portfolio of good DB schemes and switching them to DC. Employers foresaw that these schemes were going to become a significant liability in the bad times with no way of accruing tax efficient funding in the good times.

    Civil Servants – you messed up private sector pensions – shoe is on the other foot now isn’t it. I think your schemes should be scrapped and replaced with the NEST scheme that you deem appropriate for everyone else.

  12. Right to strike – human right – fact. Whether its right to strike now, different matter. Don’t confuse the 2.

  13. Anon @ 3.36pm

    Irrelevant comment – you’re forgetting that financial advisers don’t have human rights and have no recourse to the rule of law when dealing with our regulator, FSCS and ombudsman, which in turn, is above parliament.

    It’s astonishing to type that but sadly true.

  14. Public Sector worker

    2050 is a long way off and we all know how many long-term predictions work out. Will you still be quoting the OBR when their figures don’t back up your arguments? They have already revised their figures for the worse.£113bn-more-than-expected/1042437.article

  15. Much as I value the work of public sector workers and especially our armed forces (who WILL be getting a raw deal, but the changes to the Armed Forces Pension is another matter I am trying to commisison a report on as our service peopel need to be forwarned)… I do think that large numbers of public sector workers just don’t realise what is happening in the private sector. There is NO government funding of anything, it all comes from the private sector in one shape, form or another and with the amount we haeomorage to the EU, there is not a lot left for the private sector after all that.
    If you look at the criticism from Dave Prentis of Mr Pickles (I’ve always loved the name, although I am not keen on the man) where he states “you’ll see the local government pension scheme cost every house-hold more than £300 each every year.” Mr Prentis replies “In reality, it costs the average house-hold £67 a year, or 5p in every £1 paid in council tax.” basically because it doesn’t come from council tax, it comes from other taxes.
    According to my view of logic, it doesn’t matter which tax it comes from, it still costs the average household £300 per annum.
    Has anyone else come to a different conclusion?

    If you’ve come to a different conclusion, please provide the maths for that….

  16. crownbenefits 9th May 2012 at 11:16 am

    Thank you for sharing superb informations.
    Thanks for the update. I really appreciate the efforts you have made for this blog.Pension TPA

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