Government Wins Right To Cut Public Pensions

"However, it is my view that the government should stand firm on these and other alterations to public-sector pensions. Without such modifications, these largely unfunded pension schemes would become increasingly less sustainable and affordable."

Well that's a pretty amazing statement that left my jaw on the floor. You've just ignored all of the serious research into the sustainability of public sector pensions which says just the opposite. This research proves conclusively that the long term cost of public sector pensions will be the same percentage of GDP as it has always been.

What has changed is that the Government wants to reduce that GDP percentage cost. It has the perfect excuse for doing so under the guise of fairness because private sector final salary based pensions have largely disappeared as a cost saving measure by businesses. If private sector pension provision continues to worsen as seems likely then the Government will return to reduce public sector pensions again. A race to the bottom. In 20 years time people will be scratching their heads asking why we have a got into such a financial mess of so many many pensioners on welfare benefits.

To be a bit controversial the public sector pensions were always good to offset the fact that the salaries were lower than the private sector.
Recent reports now show that in many regions public sector salaries are on average 8% higher than private sector salaries. So you now have lower payed workers subsidising generous pensions for people that are on higher salaries - is this fair?

Well Cliff I think you ended up confirming what I said even though your reference is to a rather superficial and deliberately emotive article.

People don't want to pay for public sector pensions any more, whipped up of course of Government propoganda, which is what I said in my posting above.

The Hutton review was really based on fairness between public sector and private sector provision. Why should the public sector have much better pensions than the private sector (and of course have the privilege of paying for them - your point)? He also thought that the public pension schemes were unfairly structured giving greater overall benefits to high flyers than those who had static careers. One sensed that he really wanted to say that the schemes were unaffordable but was stymied by recent indepth research from the National Audit Office which said that over the long term the schemes were sustainable, and no contrary to your beleifs they were not a glorified Ponzi scheme. Of course Ponzi scheme is emotive language guaranteed to whip up public opinion.

apprenticeDRL - well yes you are right and no you are wrong - averages disguise what is really going on as the Institute of Fiscal Studies has pointed out. In London public sectors workers are in a number of cases underpaid compared to their private sector counterparts but in Wales they are overpaid by around 18% (but I guess not in all cases depending on skills and local demand). Now I'm all in favour in paying the Welsh 20% less and Londoners more. Part of the reason the salaries/ benefits are higher is because of the pension provision which of course the Government is trying to reduce (and had already reduced substantially in 2006 but this is never mentioned).

Silly Me! - I always thought I was funding my own public service pension by forgoing 6% of annual salary for 40 years.If I'd known CunningCliff was going to pay my pension I would have tried to claw the 6% back - Many thanks CC.

P.S Good Posts alsirat

I am unhappy with the word "unfunded' which is being waved about to give an impression that public sector pensions are free gifts to retired staff over and above what they may have earned in their productive years. In fact such pensions have never been free. For decades the workers concerned were told by their employers that their salaries were set below those of he private sector to take account of the future value of their pensions. Moreover, since their pensions were eventually tied to their earnings this had the further effect of reducing their pensions by the notional but unpaid contribution. Conservatihve governments have consistently reneged on these arrangements , justifying tem by a portrayal of the public sector as a kind of underclass that deserves to be kicked and robbed.

For some reason the comment I thought I'd posted has disappeared so at the risk of repetition, here goes again.

Cliff, thanks for giving me the final nudge to do something I've been thinking of doing for a while, namely cancelling my subscription to the Fool. The site long ago lost sight of its stated aims "to educate, amuse and enrich" and has become little more than a platform for the sale of financial products. Throw in a hefty does of right-wing anti-public sector bilge straight out of the Tory press and I've had enough.

Apart from being screwed by the RPI-CPI switch two months after I retired, I've also been hit another way. I bought roughly seven years additional pension at full cost to myself, a financial commitment which at times exceeded my mortgage payments. I did so on the clear understanding that, like the rest of my pension, it would be RPI indexed and the cost was actuarially calculated on that basis. At best I've been the victim of mis-selling although I consider I've been the victim of fraud and theft.

I'm a lawyer to trade and I could have earned twice or even three times my public sector salary if I'd gone to the bar but I suffered from a peculiar condition called public sector ethos and believed that I was performing a worthwhile job for less money but with a decent pension which, legally, is regarded as deferred income. As BarneyCowshed so rightly says, "Silly me".

There is some suggestion from the comments, that the average public sector pension is a vast sum. My public sector pension is less than my state pension. Public sector wages like all others are subject to market forces, at present in some instances they may be higher than private sector. I remember when public sector needed 36 technical officers. Only one person applied and didn't take the job offered because the private sector terms at that time were more attractive.

freshfieldmjg,

You are right - the Local Government Pension Scheme (in particular) IS fully funded. In this respect, it is different from the Principal Civil Service Pension Scheme. The PCPS is not 'funded', but its members (and their employers) still pay contributions. Where does this money go? Into general Government spending.

Anyway, why would any sane Government choose to lock money up in a pension scheme? I am sure that the Chancellor has lots of good uses for capital reserves other than lining the pockets of bankers (Oh! I forgot, he does that as well!). John Hutton covered this point in his report on public-sector pensions.

A couple of questions about pensions and the private sector:

John Lewis gives its workers - sorry, partners - final salary pensions.
Why can't other companies do the same?

Fred the Shred and Adam Applegarth both get 6-figure pensions, apparently well before the ordinary retiring age.
If this is affordable, how come they can't pay decent pensions to ordinary workers?

One of the reasons private sector pensions became unaffordable was because Gordon Brown removed dividend tax credits - a tax grab to fund increases in public spending, like extra money for the NHS, which showed some increase in output but dramatic year-on-year falls in productivity per worker. Labour threw money at the NHS and it produced some benefits but overall a very poor return on investment.

Another reason for the death of final salary private pensions was the insistence, again introduced by Labour, that so many of the assets had to be held in the form of bonds to pay current pensioners. The result is a strong imbalance between the interests of current pensioners and those of current contributors, who want to see growth and more growth, not be dragged down by the poor returns and high risks of overpriced bonds (see http://www.fool.co.uk/news/investing/2012/03/20/how-buffett-sees-the-world.aspx). This isn't an issue for public sector workers, because their pensions are funded by all that lovely free money from taxes, paid by everyone else.

The responses by people above defending public sector pensions are really disappointing for someone like me who's self-employed or has worked in the private sector. I'm afraid public sector workers tend to have a massive defensive chip on the shoulder about how worthy they are and how "underpaid" they are. In reality they are often paid more for the same job, their high-paid workers get much more generous pensions that they deserve (here I agree with Hutton that lower-paid public sector workers do not get a good deal), they take much more sick leave, and have low productivity, dragged down by all the incompetent workers that can't be fired due to overprotective unions that always criticse management and never their own members. My wife works in the NHS and it is just extraordinary the amount of waste that goes on in procurement and the uselessness of too many staff, who are basically exploiting a cushy number and do not pull their weight, take a never-ending series of "sick" days and flatly refuse to do any work that lies outside what they are used to doing (i.e. the minimum possible).

Predictably, public-sector workers and pensioners are quick to castigate me for stating these three truths:

1) Most, but not all, public-sector pensions schemes are either funded or unfunded. Few are fully funded or in surplus -- and these are outweighed by the large number of public-sector schemes with 'black hole' shortfalls.

2) The contributions paid by public-sector workers are only a small fraction of those actually needed to provide final-salary pension schemes. To fully cost these schemes costs 20% to 30% of salary and not the single-digit percentages that state workers actually pay (such as BarneyCowshed's "6% a year for 40 years").

3) Thus, taxpayers contribute excessively to these schemes and, as a taxpayer, I have an absolute right to question their present and future funding.

Also, any scheme which is unfunded or under-funded and faces ever-larger claims on its capital is closer to a Ponzi scheme than a properly managed pension or insurance fund. The sole reason these deficit schemes don't collapse is they are supported by taxpayer largesse, with 24m private-sector workers paying for 5m public-sector employees to enjoy their defined-benefit schemes.

Finally, productivity in the public sector has been falling or static for years, yet government spending climbs ever higher. Thus, taxpayers should question the staffing levels, pay and performance of the public sector, too!

Cliff

Well Cliff I don't think I can be accused of giving you anecdotal evidence although I didn't think much of the evidence you produced to support your case. I do think you have been influenced by Government propoganda which has been targeted at undermining public sector pensions. This is rather different from saying you are a Conservative voter. But as a LibDem you are definitely in the Government camp.

Quite a few of the big schemes as you say are unfunded with no investment to support them even though employees and employers contribute to these schemes. Pensions contributions (employer and employee) are salary sacrifice. The Government uses the contributions to pay current pensioners and if there is a surplus as there has been in all of the schemes in the past the Government trousers the money. Today's controversy has occurred because the years of trousering the surpluses is disappearing and the Government through taxation has to make up the difference. This does not mean that public sector workers are under contributing today because you have to take into account the years of surplus and how that money might have been invested. I hope you are with me so far.

So why does the Government do things in this way? Well in the early years of the schemes it was a very tempting proposition financially. But also when people gave it a serious look they decided investing the surpluses would not be an efficient use of resources for the Government and by implication the taxpayer. There are though notional funds for each scheme which pretend the surplus money was invested and which are used as the basis for actuarially valuing each scheme every 5 years to determine whether the surpluses/ investment returns are sufficient to meet liabilities ie current and future pensions.

It is interesting to look at what those notional funds are invested in as prescribed by HM Treasury. Would you believe Government gilts! - notionally of course. So if the schemes were actually invested HM Treasury would require that they are invested in Government gilts ie we are back where we started but with a lot of paper and administration in between.

Now you may say why invest in Government gilts. Why indeed. But public sector workers and pensioners covered by these schemes do not make the rules - the Government does. Perhaps you should write to Vince Cable. But then could you ever believe what a LibDem tells you - Student loans, VAT rises etc etc.

Cliff you seem to ignore every thing I say. Looking back at my posts I have never said you are Conservative with a capital "C". I have talked about Government propoganda which is a bit different giving we have a Coalition. So I don't know what you are reading.

I am sorry but you can't ignore the past. People have paid for their pensions through salary sacrifice. The fact that the Government has trousered their contributions is not really their fault. They have paid for something and not unsurprisingly they want what they have bought. If one day you give your hard earned cash to buy an annuity and after taking the money the insurance company says sorry but we don't want to pay you what we agreed then you may be a tad upset.

As to paying for the pension liabilities going forward. There has been a great deal of research as to the affordability of the schemes given they are on a pay as you go basis. The research shows that the only reliable measure of affordability is the percentage of GDP they will cost in the future compared with the present day and past years. The analysis shows that we have a blip at present but the long term cost of the pension liabilities will be the same as they have always been - they will take the same percentage of GDP as they did 40 years ago, 30 years ago, 20 years ago, 10 years when they were considered affordable. You and others including the Government are not happy with this and want to reduce the long term GDP percentage cost for these pension liabilities. Fair enough but this is not a sustainability issue as your opening post says nor an issue about the schemes being Ponzi schemes as your later posts claim. These are personal prejudices fed by Government propoganda with no evidence base - a little surprising for Motley Fool.

As you probably realise the National Insurance Fund is set up on a Pay As You Go basis - there is no fund. The NI Fund pays out State Pensions. Presumably you want to do away with those as well. Well done for you giving up your State Pension which you have paid for from your NI contributions over the decades.

Cliff,

Your argument could equally well be used to challenge underfunded defined benefit pension schemes at any company in which you hold shares, along the lines of I invested in this stock to fund my retirement. Those who work there should have made comparable provisions of their own. How dare the company pay pensions that they didn't collect enough contributions to cover in preference to paying higher dividends.

Now, I can believe that many Fools, with concerns about excessive pension liabilities, would like to see that attitude taken. However, I doubt they would express it that way, as it would suggest that it is desirable, right and proper to make employees lose part of their contractual entitlement due to an error on the part of management.

Jimi97 has quite rightly pointed out that the Ponzi approach is, in this context, to the common good - to put it another way, if a government can't generate more revenue by spending money within the economy than by investing it privately, it has no business being in government.

Increasing lifespans do lead to a need for reform, but the Government is trying to reduce costs on three fronts when one would suffice and justify on grounds of fairness a reduction in the benefits of those who were told (perhaps inaccurately) that they were underpaid but with much greater security and pension provision than anyone else.

From a purely selfish point of view, also, as a private sector worker, I don't want to see the spending power of pensioners (present and future) reduced, as keeping people able to afford to spend (when they don't have the opportunity to earn more) helps keep the economy going.

fartarse2: "Oh look. The comment I wrote yesterday has been deleted on the grounds that what I mentioned had nothing to do with what was in the article... I'm sure my comment was relevant when I wrote it.

Is it me or is this article a lot shorter than it was when I read it yesterday evening? Has the article been edited?"

1) Your comment was removed because it attributed a comment to me which I did not make. Another Fool had commented on the wage gap between private and public sectors, but I did not.

2) My article has not been edited since its initial publication, so it is unchanged.

3) Is your username really appropriate for the Fool? I think not!

Cliff

Cliff to sign off on this exchange. I wasn't trying to win a battle or even change your own personal view as I know that people particularly in the private sector and especially journalists have strongly held positions. It is such a complicated subject that I try wherever possible in such a small space to put a counter view for others. My spelling/ grammar for some reason always goes haywire in these small boxes and when the posts pop up on screen the errors are all too obvious.

Public sector workers are on wages commensurate with the private sector even although very few if any of them could ever get a job in the private sector, let alone paying them the same salary so I think that taxpayers are entitled to expect them to save a bit for their retirement instead of depending on a pension paid for by them!