It is hard to open some newspapers without reading yet another attack on the unaffordable, unsustainable platinum-encrusted pensions that keep everyone who has worked for more than five minutes in the public sector in the lap of luxury throughout their retirement.
One key skill that every conjuror learns is diversion. They get the audience to look at something else when their attention should be focussed on what the conjuror is actually doing.
This is what is going on here. The real pensions scandal is the great private sector pensions disappearing act.
In 1966, 8 million private sector employees were saving in a private sector pension. That has now fallen to just 3.6 million, even though the workforce is now much bigger. The big picture in the private sector is not the switch from defined benefit to defined contribution, but the employer retreat from pensions. In just eight years the proportion of private sector workers not saving in an employer backed pension has risen from 55% to 63% – nearly two out of three.
No wonder bodies such as the Institute of Directors want to divert attention to the public sector.
But it does not follow from the growing gap between public and private sector pension provision that we now need a race to the bottom so that public sector pensions are as rare and mean as in the private sector.
The truth is that public sector pensions are sustainable, affordable and do not come coated in any precious metal. A new report from the National Audit Office gives an accurate overview of what is happening in at least the four big pay-as-you-go schemes – NHS, teachers, civil service and armed forces.
Here are some key findings:
- Employee contributions to these schemes have increased faster (56%) than pension payments (38%) since 2000
- There has only been a 2% real-terms increase in the average pension in payment since 2000 – indeed the average teachers' pension has fallen by 4% over that period and the NHS average pension is unchanged
- The vast majority of pensions in payment are modest. NAO charts show that most pensions paid in both the NHS and civil service are below £110 a week – and a quarter of NHS pensions are less than £40 a week and a quarter of civil service pensions are less than £60 a week
- Fewer than 0.2% of teacher pensioners, 1.8% of civil service pensioners and 2.5% of NHS pensioners get pensions of more than £40,000 a year
- Future projections show that the cost of pensions in payment will rise by just 0.2% of GDP to peak at 1.9% in 2018. They then level out at that figure for some decades before falling again to their current level by 2059. Importantly these figures do not take into account employee contributions – and are simply the cost of writing pension cheques (not that it is done by cheque any more of course).
Most critics of public sector pensions have a wider agenda. They are mainly the remnants and reinvention of the small-state Thatcherite Right that says private good and public bad.
Stirring up pensions envy among those who have lost theirs in the private sector retreat is effective politics for this normally unpopular rump. But given how few people really understand how pensions work and the plethora of big scary numbers that can be easily manipulated to make X- rated headlines remarkably easy to do.
But the NAO report carefully nails two of these scare tactics.
First they say it is entirely justified for the Treasury to contribute extra funds above employee and employer contributions to meet the cost of pensions in payment. This is because the Treasury has had the benefit of all the pension contributions made in the past – that in a funded acheme would have been invested. As the report says: 'In pay-as-you-go schemes, Treasury payments reflect the benefit of past alternative use of pension contributions to fund government activities without additional taxation or borrowing.'
The second common scare tactic is to present an estimate of all future pensions liabilities as if they were a sum that has to be met today rather than over 50 years or so that they will be payable.
Measuring future liabilities is part of the mechanism for determining the right contribution levels but how you measure it depends on a set of assumptions such as the discount rate (the interest rate you use to express future liabilities in today's money). But, as the NAO say: 'Changes in the discount rate lead to large fluctuations in liabilities, but have no effect on projected pension payments.'
This report show that public sector pensions are affordable, sustainable and far from gold-plated. The real pension problem in the UK is in the private sector where employers have retreated from providing pensions to almost two out of three of their staff, while hanging on to executive schemes in the boardroom. The real scandal for taxpayers is that we are now picking up the costs of this retreat through higher bills for means-tested benefits for pensioners.
The pension reform we need is compulsory employer contributions to pensions for all staff. This will start with auto-enrolment in 2012 thanks to the government implementing the Turner Commission's report. It is the crucial first step towards winning decent pensions for all.
Brendan Barber is general secretary of the Trades Union Congress
