Derek Scott
Neil Walsh
Thoughts on the sustainability of public pensions
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1 Response to Thoughts on the sustainability of public pensions
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I probably shouldn’t have a second word, when I’ve already had one.
But my beef isn’t with Neil and his Prospect colleagues.
It’s with the OBR, which by its own admission says that its medium-term economic forecasts, particularly regarding productivity and GDP growth, have tended to be overly optimistic since 2010.
One of its Forecast Evaluation Report noted this “near-term pessimism and medium-term optimism” has led to consistent underestimations of government borrowing.
I’m not sure if I even agree with their near-term pessimism if their recent inflation forecasts are to be believed, which I don’t. Just as I don’t believe that unfunded public sector pensions are sustainable if it’s on the OBR’s say-so.
I’m afraid I don’t buy into the idea that the OBR and HM Treasury contain some our finest minds.
When as a young CFO I was reporting monthly to banks and later on updating equity analysts on current and future prospects, it would simply not have been acceptable to be “optimistic”.
As for HM Treasury, I did mention to your brother, Henry, when Rupert was driving us around the East Neuk on Tuesday – you were probably on your phone at the time – my feelings about the wrong calls they made in the 1970s and 1980s when our oil & gas windfall first appeared, and about the now infamous McCrone Report.
We had BNOC, partly hived off into Britoil and then sold to BP by 1988, while the Norwegians had their Statoil, today’s Equinor, two-thirds of which is still owned by the state and transitioning “sustainably” towards renewables.
Thus Norwegians have their trillions-plus Petroleum Fund, while we have none of that, apart from envying Shetland Islands Council’s local wisdom to set up a Charitable Trust which today still has about £450m to share around.
The 1974 McCrone Report, authored by Scottish Office economist Gavin McCrone, was a confidential memo for Downing Street and Treasury eyes only, highlighting that Scotland could have experienced a “chronic surplus” and a “hardest in Europe” currency due to North Sea oil and gas. It was kept secret for 30 years and made public only in 2005.
So you wonder why I have little respect for Treasury “mandarins” and OBR “experts”?
I was with the union view until I read the part that says “The Office for Budget Responsibility has been clear that public sector pensions are not a risk to our fiscal sustainability …”
A personal view, but I feel that OBR assertion is too complacent and likely wrong in the longer run, because it confuses “not an immediate cash crisis” with “no fiscal risk”.
The OBR’s recent sustainability analysis points to long-term pressures from state pensions, ageing, and the triple lock that can materially worsen the public finances.
Public sector pensions are often described as “manageable” only because many are unfunded and spread across future tax receipts rather than showing up as a short-term and/or medium-term market funding problem.
That does not make them irrelevant to fiscal sustainability; it just means the obligation cost impact is delayed, not eliminated.
The OBR’s statement seems to imply a binary distinction between “risk” and “not a risk,” when the real issues are one of degree and timing.
Even if public sector schemes are not the dominant near-term threat, they still add to longer-run spending commitments in central and local government budgets already under pressure from demographics, health costs, and debt servicing.
In a high-debt, ageing society like ours, “manageable for now” is not the same as “no sustainability risk”.
The Prospect Pension Officer’s private view
Neil Walsh (at roughly the same time)
(Just to start off by declaring an interest – I’m Prospect’s Pension Officer.)
The wording could perhaps be a bit clearer – the OBR didn’t assert that these schemes were not a fiscal risk. That was our interpretation of the OBR’s forecasts showing that they were projected to cost much less in the future (as a percentage of GDP) than they do today.
Maybe something like “The OBR is clear that the cost of these schemes is projected to become increasingly affordable over time, so they do not represent a risk to our fiscal sustainability.” would have been even tighter / clearer.
But I don’t think either way if putting it is wrong.
Lord Davies of Brixton’s space to respond
Bryn Davies
A third view is needed , that of Bryn Davies, the peer whose thinking has guided unions for fifty years now
We have heard him speak in Pension PlayPen coffee mornings for the need to respect the decisions that have been taken and enacted and that to unwind what has been resolved would be needlessly costly with no surety of impovement.
We have a system of deferred pay that works for public sector workers and though it is at a cost, we could lose much more than the notional gains. That’s what I’ve taken from the great man’s views but I invite him to comment and whatever he comments will replace or amend my views.