Public sector pensions are very much in the news. The government is seeking to revise future entitlements on the basis of John Hutton's report. Some unions are mobilising against these reforms. Others continue to negotiate.
Militant Manager is very interested in the arguments put forward by the unions. The views can be easily gleaned. For example, Mark Serwotka, General Secretary of the Public and Commercial Services Union, has commented in the Guardian. And Jon Restell, Chief Executive of Managers in Partnership, a start-up union set up by Unison and the FDA (formerly the First Division Association - representing the senior civil service), has commented in the HSJ.
The arguments seem confused. I am not talking about John Restell's "six reasons" managers should look at hard reality - which are in fact just one reason: "these reforms are a reduction in entitlements."
I am talking about the central issues that they put forward: pensions are affordable, and public sector pensioners are not fat-cats. The first argument is arguable - and I have not seen a definitive analysis on this. The second is a fallacy.
Affordability
First, the question of affordability. Both Mark Serwotka and Jonn Restell make much of the Hutton Report's (the one on public sector pensions - not the white wash on WMD in Iraq) analysis of the projected benefits to be paid as a percentage of GDP. This chart reproduced from pg 23 of Lord Hutton's report is so central to this point that I reproduce it below, and can be retrieved here.
I am not yet sure what to draw from this chart. The key idea conclusion that the unions have drawn is that public sector pensions will absorb a smaller proportion of GDP, and is therefore affordable. I must admit that the government has handled this argument badly. For me, however, the issue of affordability is not so clear cut.
I need more information than just this to draw any conclusions. First, I want to know what proportion of the population these pensions are supporting. If they are supporting a rapidly reducing share of the population, yet the proportion of GDP is not falling as fast, I may still draw the conclusion that it is unaffordable.
On this question, the data is indicative that the number of people supported by public pensions is falling. I could only find data going to 1992 (on the inpenetrable ONS website) for data on the proportion of the workforce employed in the public sector (this is a useful indicator as given 40 year working lives, this would predict the proportion of new public sector pensioners in 20 years time). Their feature on Public Sector Employment, 2006 shows that in 1992, 23.1% of the employment was in the public sector. Whereas, the same report says that the figure in 2006 was 20.2%. So public sector workforce proportion has fallen from 23.1% to 20.2%, a drop of c. 15%.
This drop of 15% in public sector employment proportion does not seem to be replicated in a commensurate drop in the load on GDP identified above. You only get that sort of drop if you link the 1992 workforce figure with the high load on GDP seen in the 2010-2020 decade above. This may be legitimate if the 1992 workforce figure was also a peak; but if it was not, then you are not comparing apples with apples. In short, I am not convinced on this, and would need somebody from a statistics programme like More or Less to have a look.
I also want to look at other data. For example, what proportion of pensions as a whole (including private and state pensions) are public pensions forecast to take up into the future? And what proportion of government expenditure is it due to absorb. These would also point to the affordability - indicating what proportion of the country's desire to spend on pensions or public expenditure, public pensions absorbs.
Fat cats
The second argument marshalled by the unions is just plain incomplete at best, and wrong at worst. Both leaders make much of the fact that the average public sector pension is very low: Mark Serwotka quotes that average pension "is just £4,200 a year"; Jon Restell states “the ‘gold-plated’ pensions of the public sector are a myth (median women’s NHS pension is about £3,500 a year).”
You do not have to be a genius to see the careful wording, and selectivity, in those quotes. There is no mention of the years contributed for that sort of pension. We need those facts to put it in context. If that is 40 years, then public pensions are indeed not gold plated. But if the years of contribution are 2, then we are at the other extreme.
The other issue is that we are not talking about the individual here. We are talking about the average pension. So if the individual has changed jobs and gone onto another public pension scheme, or indeed a private pension scheme then they may be getting more than one pension.
But the main issue is that the argument is plain wrong in composition. The government has already stated that those on the lowest pay will not get affected. If we are meant to draw the inference that reducing entitlements, will affect these small pensioners – that is the very guarantee that the government has already given will not happen. To hark on is to show that you are not listening.
How to really look at it
So how should we really look at this? My view is that we should look at it in the context of occupational pension schemes – which is what public sector pensions are. In this context, there are two key issues: first, what has been happening to occupational schemes as a whole; and secondly, what has been happening to the employer’s own finances.
In terms of occupational schemes, there has been a secular trend in reducing pension entitlements, and shifting towards defined contribution schemes. This can be seen from the IFS’ Green Budget 2011 report. A chart from that report is reproduced below, which shows private defined benefit schemes dropping dramatically. In this context, public schemes are bucking the trend.
So there is no surprise in public sector pensions feeling the pinch. All occupational schemes have.
The second part is that a generosity of an occupational scheme is related to the success of the employer, and the employer's own finances. If we have not seen it already, the government's finances are in a mess: we were running a structural deficit even before the fracture in the markets since 2008. So, employees of the public sector should expect a smaller pension, rather than jump up and down.
Cheers, Militant Manager. It's not often I'm placed on the same side and in the same sentence as Mark Serwotka. I don't mind, but standby for a complaint from Mark.
ReplyDeleteOn the general charge of moaning, I think the key point for us is process. That is we expect a negotiation that is tough, direct and evidence-based, unloaded with pre-conditions. The usual scenario for a successful negotiation. The government has acted purely politically so far and inevitably it has invited a purely political response from some unions. Worse, it has talked pre-conditions and taken pre-emptive action. Even worse, it has not bothered to grasp the brief. I think your point about making a hash of presentation is fair - I would say that - but it indicates to me that the government is not serious about negotiation. Why bother with the detail, if you have no intention of reaching agreement?
I'll try to come back on your two main arguments more fully some time. In the meantime a quick response - Besides GDP share, which was all I had space for in the article, there are the mechanisms established to value public sector schemes - even where unfunded, which most of them are - and apportion costs between employers and employees. Part of our case (the health unions) is that in the NHS we reformed our scheme substantially in 2005, along lines envisaged by Hutton. These changes included differentiated contributions with higher earners paying more, the introduction of higher retirement age (for new starters) etc. 'Cap and share' critically also provided a mechanism where some or all future costs would be borne by the employees via higher contributions or reduction in the value of benefits. The endless claims of out of control costs are therefore hard to accept. The already 'reformed' state of the NHS pension scheme is our starting point and I believe it is a reasonable one.
On the fat cats, if the point of comparison is the largely pension-free private sector, then anything will look fat. The averages are quoted not to disguise some truth, but to counter the perception that public sector pensions are landing high incomes on everyone. Think the frequent stories about pension pot millionaires. Of course many managers and docs are going to get much more, as a function of high salaries and often long service. And at the end of the day, people rightly believe they are PAYING for the benefits they receive, and that their employer is making a reasonable (if increasingly capped) contribution to those benefits, both sets of contributions based on real world calculations.
For me the scandal has been the collapse of occupational pension provision in the rest of the economy. My wife pays into private plans and we have no idea if she will end up going backwards. With 2 - 3% fees for an annual return of 4% on average it's not hard to see why you might end up with a benefit that is meaningless. The last government mismanaged pension policy and employers have been happy to jump from final salary to nowt. (Why did companies not offer capped contributions to defined contribution schemes, under which they could limit and fix their exposure for ever and a day? Because they could get away with not doing even that.) Earlier this week PWC reported that many final salary schemes in the private sector were perfectly affordable, but most schemes were using excessively conservative funding rules. These are the pensions issues that should attract moaning.
Best wishes, Jon