“A fair and lasting settlement”; public sector pensions

Paul Johnson and the Institute of Fiscal Studies have done the numbers and, to nobody’s surprise, have concluded that the long-term cost of  public sector pensions in terms of “pensions out” will be about the same under the new regime as the old.

This discounts the impact of the switch from CPI to RPI (huge) and the fact that “money in” will be much higher from the prospective pensioners and lower from the Treasury (eg the general taxpayer). We the tax-payers will be paying less overall, a point the IFS are making (though this is not being widely reported).

What I like about the settlement is that it looks fair and lasting. The switch from final salary to career average pension will redistribute pension from the Sir Humphreys to the ordinary public sector worker. It will also close the loopholes that allowed senior staff to be pensioned off with massive increases in their final salaries in the years preceding retirement. This practice was costing us a small fortune and is thankfully going to be a thing of the past.

The business of Government is about balancing the short-term impact on spending (cashflow) with the long-term impact on liabilities (long-term Government Debt). The public sector pension debate has demonstrated a number of important things

  1. Established using the same methodology as the private sector use – mark to market accounting using private sector discount rates, public sector pensions looked unaffordable
  2. Based on the different dynamics of public sector finances, public sector pensions were affordable but deeply divisive (unfair on the private sector)
  3. By increasing the contribution rate, the Government has made public sector pensions more affordable and more valuable
  4. By redistributing the benefits of public sector pensions from high earners towards medium earners, public sector pensions are fairer for public sector workers.

All this will seem pretty thin gruel to the likes of Tom McPhail (Pensions Monkey) whose frustration on Radio 5 live was ill-disguised. Many in the private sector will quite rightly point out that there is still a balance in terms of total reward (and employment risk) in favour of the public sector employee and I would agree.

However, the levers to adjust this imbalance are back in the Treasury’s hands. Continued negative rates of real wage inflation in the public sector coupled with a strong recovery in the private sector may lead to a return to a balance within the next ten years. We should remember that back for much of the last thirty years the private sector has generated the wealth and the public sector has lagged. The politics of envy get us nowhere over several economic cycles. If we believe in market forces, they will prevail (even if it is frustrating right now Tom).

Right, that’s enough sermonizing from me for one morning! I remain optimistic, I remain a fan of the coalition’s approach to the public sector problem (despite a few outbursts of irrational exuberance from Danny Alexander). I am also extremely impressed (in the main) by the way the unions are playing their cards on behalf of the members.

At last we are getting a proper debate on public sector pensions and , for the most part, I expect we will get a proper settlement!

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to “A fair and lasting settlement”; public sector pensions

  1. Pingback: ?A fair and lasting settlement?; public sector pensions | Pensions Advisory Service Information

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