Salocin

Private Sector Pensions

I was reading the polarised views on the BBC News discussion forum regarding the pensions strike currently in effect across the UK. The more I read, the more I couldn't help feeling that most people are deliberately missing the point.

In summary, Local Government workers are facing the removal of a rule that allows them to retire on full pensions at 60.

The arguments can be summed up as follows - note that they are paraphrased from the BBC News website, they are not necessarily my opinion! :

In favour of striking

• LG workers have been underpaid for years. The argument goes that in effect, this was compensated for by a good pension, and this is why they put up with it, so worsening the pension conditions is unfair because it was the only worthwhile part of their package.
• The pension is part of a contract. You can't change a contract, it's just wrong.
• LG workers are being unfairly discriminated against. Doctors, police, MPs and other public workers aren't facing such changes to their pensions.

Against striking

• Nobody in the private sector gets to retire that early, why should the public sector?
• Public sector workers have jobs for life. Private sector workers face having to perform every day to keep their jobs - and their pensions.
• This will be paid for through council tax rises. Why should private sector taxes pay for public sector pension terms that private sector workers could never hope to receive?
• Public sector services suck.

I think the above largely misses the point of why this rule has been changed, and why I think this strike will probably fail.

Everyone thinks about pensions from their own point of view, here's what I think the government's point of view is. In June 2005, public sector employment was 5,846,000 people, and continues to grow rapidly. Currently, 1 person in 5 in the UK works in the public sector. According to the TWGU, the average public sector pension is £3800. I think this sounds low, and expect that they have selected their statistical methodology in a way that favours their argument, but let's use this number for the purpose of a little calculation. We'll also use a conservative number for the public sector, also from the TWGU - they tell us that 2.7 million local government employees are on the public pension scheme - so we'll ignore the rest of the public sector for now.

2.7 million x £3800 = £10.26 billion per year. Given that this is a five year difference, the total saving to the government is £51.3 billion for the current population of pensionable local government workers.

This analysis is incredibly simple, and arguments can be made regarding the fact that the payments are in the future, and therefore subject to discounting at the rate of interest, that not everyone will live to pensionable age, and so on. Arguments in the opposite direction are that public sector wages increase, usually by more than the rate of inflation, and that at the current rate of inflation of 2%, an additional year adds another £20.5 million pounds to the £10.26 mentioned above. What I'm saying is that while the above may not be accurate, it is of the right order of magnitude.

How could the number be so big? Well the government probably didn't properly consider the secondary effects of reducing unemployment by hiring 1,241,000 people into the public sector between June 1998 and June 2005 on a final salary pension scheme. Especially when this was combined with an ageing population that means these payments will not be evenly spread out, and increased life spans, which means that the government will be paying out for much longer than the original pension planners who set up the scheme predicted.

The problem here isn't about promises broken or about what's fair and what's not. The simple fact of the matter is that paying for the pensions is impossible without very significant increases in taxes (the kind that get governments kicked out of power, and are counterproductive anyway because they encourage a black market) or a way of reducing the cost. The incredibly intractable nature of this issue is why they call it a pensions crisis, rather than "a little pensions problem".

There are a few differences with the private sector that bear exploring...

• Public pensions of this kind are still average-salary or final-salary based. Very few private pension schemes still work on an average- or final-salary basis, and most private pension schemes that did use this methodology forced their members to accept a change in return for nothing. There is a reason for this...
• A private pension scheme isn't the government, and so when there isn't enough money to pay for the pensions, there simply isn't enough money, and there's nothing anyone can do about it - the parent company goes bankrupt, and everyone in the pension scheme gets a pro-rated amount based on what they were owed and what the fund can afford. When it comes the to the government, there's this faulty axiom that it has bottomless pockets.

As a private sector employee, it's at this point that I start to realise that when the government puts it's hand in its pocket, my wallet suddenly feels lighter. You see, it's pocket is our collective pocket, and when the entire private sector world has had to suck it up and accept massive downgrades to their pensions, including all the privately employed garbage collectors, teachers, cleaners, waiters, sewer-maintenance workers (i.e. they're not all bankers and CEOs), there's a sense that the public sector shouldn't be protected by increasing taxes across the board.

But in reality, an increase in taxes isn't feasible on this scale - not without disturbances much worse than those currently happening around the UK. In reality, the money would have to be transferred from elsewhere, and that's no easy thing, because any shift in spending on this scale is going to have very wide ramifications for the economy, no matter how you do it, or where you transfer the money from.

The current strikes amount to wishful thinking. Everyone wishes the purse were bigger than it is. Everyone wishes the demographics weren't the way they are. This is merely the latest instalment of an evolving pensions crisis that is far more powerful than a strike, a union, or the wishful thinking of a government looking for options.

Posted by nlvp at March 28, 2006 05:38 PM