The latest discussions about how we will manage the nation’s finances are focussing on public sector pay.Nick Clegg tells us that his party will make sure
wages would rise in real terms for two years from 2016, and then above inflation once the deficit has been dealt with
What is not being said is that real rises in pay trigger rises in pensions as pensions are linked to pay by a tax-payer guarantee.
So of course are the pension contributions that private sector employers make, but these bosses are only obliged to pay a commensurate increase in contributions. The impact of an above average pay rise to a public sector worker will still be felt in up to 50 years time.
Because public sector organisations like the Civil Service, the Fire and Police Services , Local Government, our teachers and NHS staff so not have balance sheets open to scrutiny like public companies. the cost of these pensions can be hidden. But there are calls for this debt to be part of the political debate, most notably from Nigel Wilson, CEO of Legal & General who estimates that we owe our pubic sector pensions £1,300,000,000,000 in future pension contributions (that I hope is £1.3tr!).
Nigel argues that by parking this debt off the National balance sheet, we are fooling ourselves (and in the short-term the markets) of our indebtedness.
Michael Johnson has cogently argued against what he calls a “pension apartheid” with one set of rules for the public and one for the private sector.
I’d argue that we need to base arguments in common sense. As Jonathan Guthrie pithily puts it in the FT
The Treasury airily excludes pensions for public servants from net debt on the basis that they are “contingent” liabilities. This is a half-truth: the notional cost will bounce up and down with discount rates, but beneficiaries are unlikely to waive their entitlements when they retire.
I guess that’s like shoving the tax-bill under the carpet.
I don’t want to do public servants out of pay rises but I’m reluctant to have a debate about their pay, without having a debate about the pensions liabilities that pay rises trigger. Which is me saying at an individual level, what Nigel Wilson is saying at a national level.
The reluctance of politicians to discuss the total pay of public servants (that is salary +pension) is understandable. We have fudged this issue to death over the past twenty years and there are no votes in fudge.
Earlier in the year, I wrote a couple of articles about the state of Dorset’s roads, in particular the closure of a link road between Shaftesbury and Blandford. The closure is a result of a failure to build the by-pass promised to the villagers of Melbury Abbess for the past twenty years. Put simply, there is no money in the County coffers, that money has gone into funding Dorset County Council’s pension liabilities.
Putting aside any arguments about how that scheme is run, the fact is that things are bad in and around Melbury, old people have trouble getting out of the village, local lanes are congested and there is no end in sight.
Dorset may not have a visible balance sheet as Centrica or Unilever, but it is just as constrained by pensions. I choose Centrica and Unilever because they are two (of many) private sector organisations that have managed their pensions – with the consent of their staff – so that they are able to make the investments they need to keep people in good jobs.
We need to de-link public sector pay from the ruinously expensive pension liabilities that they trigger. This cannot be achieved without the consent of public servants themselves. With the help of excellent unions such as Unite and Unison, we can and should have a proper conversation about pensions. The consequences of pensions on current pay levels need to make clear, far from pensions creating freedom, they are holding the public sector back and creating deep societal problems
A blog is not the place for that conversation. It’s saddening to me (and Nigel Wilson) that we are not brave enough to include this conversation in the debate we are having on who runs the country and how.