Public sector pensions: unfunded or not, it’s their money

I agree wholeheartedly!

And part of the contract is the rate of indexation applied to pensions. The proposal to change the basis of indexation on pension entitlements already accrued from RPI to CPI will, since RPI can be expected to continue to exceed CPI, have the effect of progressively reducing the value of pensions in payment, very likely by ± 20% over 20 years. This strikes at the heart of the logic of compulsory participation in occupational pensions, and is especially hard on those who paid additional voluntary contributions (which were not matched by employer contributions). NB that this change is proposed not only for 'unfunded' schemes, but for other, fully-funded schemes such as that for universities (USS), whose conditions mimic those of 'official' pensions.

It is one thing to propose new rules for people entering pension schemes, or even for future contributions, but it is quite iniquitous to change the rules retrospectively for people who are trapped in existing schemes, and particularly for those within 5 years off retirement who have no time to make alternative arragements that might bridge the gap between what was promised and what is now proposed.

At last, some sense!!

And don't forget that many of these Public Sector pensions are contributory - we have had superannuation contributions deducted throughout our working lives of 7 or 8 percent. This money has been used by the treasury to subsidise the exchequer.

"It's their money"?

As in GUARANTEED? I don't think so!

Does this apply to all those in DB and DC schemes where the benefits are changed later on? Where the tax regime has robbed the members/policyholders? Where the life office (Steve worked for one) has pilfered the pot?

If public sector pensions are not affordable now then in reality they never were, simples.

"7 or 8 percent"?

Get a grip!

That is cheap! The rest of us have to pay whatever it takes to pay your benefits even if you live until you are 150 years old! God forbid....

It is not that long ago when teacher's were paying more into the scheme than was paid out in pensions. Had the difference been invested then, perhaps we wouldn't have the current problems.

stan

I was in the public sector for the first five yeras of my working life. I chose to strike out into the real world, despite the "prize" of a good pension in forty-odd years time. Weighed up against the lower (then!) salaries in public service, it seemed a good swap. Many friends chose the safer option and stayed. What HAS happened is that public "service" salaries rose inexorably and careers seemed safe as well - let's not forget that in the private sector, when you lose your job there is VERY little chance of re-starting elsewhere at the same money. So "differentials" became eroded. Eventually, public sector, time-servers had significantly better salaries AND good pensions.

I'm not complaining here, you should understand - I don't grudge anyone their money. In my case, I did rather well in the private sector and wouldn't have lasted behind a desk for fifty years without throwing myself out the nearest window (hopefully, a high one) It was my choice - and many people HAD the choice of public sector versus private, but we should't criticise them for making their choice to stay in the public servive arena.

Events seem to have proved that it might have been a good idea to stick with the Council job. Senior positions in the public service field are even more starkly out-of-kilter. Wasn't it said (at one time) that THEY (public servants) were rewarded with OBE's and other baubles in return for a lifetime's service bereft of the substantial private sector rewards. With top level clerks and pen-pushers in Local and Central government NOWADAYS earnings serious dosh for just doing their job (or NOT doing their job as the HMRC man wasn't) and not even accepting responsibilities in jobs where you can't fail - their salaries & pensions start looking decidedly unfair.

As I understand it, pensions accrued in respect of past service cannot be taken away - but future accrual - including the inflation added to pensions for past service - can be managed alongside pensions for future service. The use of unfunded schemes is very attractive to short-term focused politicians because it defers costs to their successors and leaves them with more cash now. This is already a part of the inter-generational transfer of costs that is now taking place, impoverishing future generations and it has to stop.

Mr Bee is right that pensions are (in law) part of pay - but an invisible part that is not properly covered by equal-pay legislation. Most of my career in DC schemes has been spent alongside colleagues who still had DB schemes funded at perhaps 3 x the contribution I was getting. Hardly fair, and the prevalence of DB schemes in public service gives the lie to many public servants claiming to be underpaid against private sector equivalents. DB schemes are dying rapidly in the private sector because of their high costs, and it can only ne a matter of time before they are withdrawn for public servants too (for future service only of course).

AND their pensions should be reduced by the equivalent of the affect of the removal of the exemption of tax on the dividends. After 'fair for all'.

Had this been proposed, the civil service would have been out on strike before the duck had time to shake it tail twice. Also noted the MPs were unaffected in their pensions, indeed they went one better, instead of having to do 40 years graft, they reduced it to 15 years and a pay off on stepping down from office, for whatever reason. not to mention a generous expenses system that can be worked for benefit, even now.

Yes they earned a pension, and now is the time that they are raided, in the time of the nations need. We were raided, so fair is fair and let the civil service get after the Bs, Bliar, Balls, Brown and the rest of the alphabet in the robbery party, calling itself the gaurdians of the worker that voted the raid through.

I have been a worker for 50 years and wuz robbed of half my pot. a like reduction is Justice. And that includes Benn, the retired one, and all the others in whatever party. They remained quite quiet when it was happening.

OK then. I'll make a comment. How about the SERP (State Earnings Related Pension Scheme) that I and my Employer contributed towards for 17 years?

I retired to Australia to join my remaining family living in Perth. The government in their wisdom, decided it would be a good idea to freeze it at the same rate as when I first came here. That was in 1997. I haven't had an increase in any of my state pensions since then They were pay as you go. But not the SERP.The government pamphlet NP34 (1978) tells us that unless you contribute towards a SERP you will have none of its benefits. So the money the UK Treasury derives by freezing it for half of its pensioners living in certain countries,about £25 millions every year and rising, goes they say, to help the needy in the UK. While I sympathise with those poor impoverished souls I do object that I should help pay for them. When Robert Maxwell used his Daily Mirror pension fund for other purposes he was roundly condemned by all political parties and it was deemed to be illegal. My efforts to have this dealt with in Court have met with strong resistance from both MPs and Bureaucrats.But I am determined to see it through.

The Civil Service pension when taken to Australia is also frozen, but by special dispensation the HMRC lift the ban and make up the shortfall! Many Civil Servants are still unaware of this anomaly. So what's good for the Goose should surely be good for the Gander. Fairness and equity must surely give us all the same dispensation that will allow our frozen SERP

to be unfrozen following the same path allowed to Civil Servants.

Steve Bee - You are my hero! It is easy for the public to turn on public sector workers but we have paid for our pensions. I lost my career in local government when I reported my Council for dishonesty. Part of my "settlement" involved calculating the future benefit of my pension. How can it now be retrospectively altered? And another thing .... the Government's assertions that we older persons are not affected by mortgages and other payments is rubbish. I will have a mortgage for ever thanks to the with-profits endowment mis-selling scandal and I also have to pay Council Tax which rises way above CPI every single year. As for paying the mortgage shortfall off with other savings - well the Icesave and Kaupthing Edge offshore scandal took care of that. I hope Steve, that you can make the powers that be, see sense.

It's refreshing to read the calm, insightful article, devoid of the spite and hysteria of tabloid headlines. Some of the comments raise athe reasonable question of whether public sector employees can be left completely immune from the shortfalls affecting many private sector pensioners, but this consideration must not become an excuse for reverting to emotion rather than cool analysis.

One seldom noted (but perhaps popular) feature of public sector pensions is the practice of cancelling the pension provision of convicted police officers and some others. It was alleged (rightly or wrongly) that the late Dr. David Kelly might have been worried about risking the same fate. It is an extra-judicial punishment which should only be used as part of due process of law to recover the proceeds of fraud, theft or illegal earnings.

If anyone wants to look at the real impact of unfunded pensions, read Roger Lowenstein's excellent While America Aged. Once the lessons have been digested, feel free to join the campaign for the end to the entitlement culture that pervades UK society and bring an end to all future DB accruals for private and public sector alike. It is the only way to avert the next financial crisis, one which will make the last look like a tea party...

The advances in Health care are keeping people alive for longer and pensions paid cannot continue to be affordable without either large increases in contributions or reductions in the pension paid to reflect our increased longevity.

They may think it is their money BUT the fact is that HMG is bust and has not put aside money for their pensions but has squandered billions of £'s on the benefits of those who refuse to work or who beget bastards and then expect us taxpayers to fund their lifestyle, on wars with Iraq and Afghanistan on MP's expenses and second homes..... etc etc ....

So all public secotor pensioners and workers must tighten their belts for we are in Austerity Britain begat by the Bigot aka Gordon Brown - whose Prudence was not so prudent after all.

Public sector pensions and salaries are often referred to as "our" money. Fair enough. As an investor I sometimes feel that too much of "my" money is going on high city salaries and bonuses through fees etc.

Austerity Britain begat by the banks... starting in the USA. And a LOT of people who couldn't resist the cheap money available. Hardly Brown's "fault"!

Pensions are NOT the same as pay. Pensions are pensions and pay is pay. Funds paid in by employees represent money put aside for those employees but unfunded pension (whether unfunded in part or in whole) is simply that - unfunded pension. If the money is there to meet the pension, whether paid over out of pensioners' own contributions or paid "voluntarily" by the pension fund, there is no problem. If the money is not there then there is no God given right for others to make up any deficiency.

Contract of employment or not if a future Government cannot afford to pay it they will not do so.

If an advisor had recommended a product that is in effect a promise to pay at a later date and then it fails to deliver as promised the FSA require advisors to compensate those concerned, would they not?

How come we have different regulations for Government then and should not the FSA be looking into this or is a Government consumer not the same as a public consumer?

No doubt they will talk and debate the issue for more years hoping the problem witll be someone else's which they have of course done for years.

Not quite sure why Public Sector pensions shouldn't be retrospectively altered! What happens when a Corporation operating a Private scheme goes bust... Will those employees of what was a Final Salary Scheme in the private sector continue to look forward to the same benefits in retirement? No they won't! And why .. because it's then unaffordable to do so. Why should the Public Sector be Immune to the affordability of their (largely) unfunded schemes now that it is obvious that the Country can no longer afford them?

Retrospective evaluation has been with us for some time - take a look at National Insurance for instance.

Public sector pension discussion is a non event anyway. At some stage there wont be the money to pay these pensions.Full stop.

It will then be a simple case of reducing public sector jobs to a level which is sustainable.

If we are looknig for someone to blame - look no further than Gordon Brown and Tony Blair. If they had put as much effort into mangaging the country as they did bickering between themselves, we would in a lot stronger position now.

As has been noted above, ALL pensions should have been affected by Brown;s extra tax. So all DB schemes should have reduced benefits payable to reflect the changes, rather than just let personal pension plans suffer. After all, ALL pensions are affected by changes in income tax, so DB schemes should not have been protected. And as funded DB schemes go into deficit as a result, companies have to pay in greater contributions to fill the hole, so their net earnings fall, dividends and share prices are held back, which affects only private pensions again. A recursive double whammy.

But also when people with DB schemes entered the pension scheme, they did not expect to live so long. So their benefits have risen way above what they thought that they had originally contracted to with the employers / taxpayers. Thus it would have been reasonable to reduce the final pensions proportionately as average life expectancy increased. This what happens with a private pension.

Then, largely to keep interest payments down on the irresponsible huge debt run up by the last government, we have artificially low interest rates, which reduces annuities. So again, as this is indirectly another tax, all pension funds should reflect this and reduce payouts.

After all I cannot demand a pay rise to cancel out any changes in my personal tax rates and inflation with the argumant that I am not being paid the same in real net spending power and therefore without this rise my employer is breaching his contract. So why is it that poeple in DB schemes can claim that it is their money irrespectibe of tax and economic changes? Of course they are all in denial of every one of these arguments as they do not want to know which is understandable. But it does not change the logic or equity in the above.

snoekie

The dividends chestnut is a pin prick.

Sean - you must have some big pins. £5bn pa for 15 years in to-days money is around £1500 per head of the population. Exclude children, pensioners, those not in funded pension schemes it is more like £5000 per member. And of course it is proportionately more on those nearing the end of their working life with larger funds. If you take out the casual savers - ie those with minimal pension funds, then the cumulative effect is very considerable on the serious savers.

In this case the tax rules were changed not only on new contributions, but also on existing funds which could not be withdrawn. Hence the tax was retrospective, So savers were suddenly hit by a change which they did not think they had contracted to. Another reason why existing DB funds cannot be regarded as protected or guaranteed.

If you do the maths Sean, then you will realise that the cumulative effect taking into account the magnifying results I mantioned previously will lead to a reduction in pension of around 10%.

Are you happy to take a 10% pay and pension reduction on the basis that this is a pin prick?

The problem is that most MPs do not understand pensions let alone have the mathematical capability to work out the cumulative long terms effects of what seem small changes. And of course they had no personal interest. Thus they voted the tax changes through.

Steve Bee should waken up. HMG are broke so where does Bee think this cashpile to discharge unfunded state pensions is coming from? Perhaps he could advise HMG on where thiese finances are to underpin his comment?

It has been reported that the component of Council Tax, paid by individuals, that is being used to fund local government pensions in many cases exceeds the amount those same individuals are paying into their own pensions and this is clearly unjust. Steve Bee's comment that pension promises to public sector employees represents their money may be debatable. However the inarguable fact is that such promises are being funded from our money and that surely gives us a right to explore the options. It seems to me that the first step towards drawing a line in the sand, is to stop making such promises. Just as many corporate pension schemes have closed their final salary schemes to new members, so the public sector should do likewise. A starting point should be the Parliament pension scheme since in the election campaign, David Cameron made a commitment to do this.

In some counties over 35% of all Council Tax goes on the employee pension schemes. How much of our income tax goes on the civil service pension scheme? If 40% of the working population is employed in the public sector and 90% of the remaining taxpayers have no pension provision whatsoever then there appears to be a great imbalance in society.

"David Cameron made a commitment to do this."

Politicians will say and do anything to get into power, once they are in all bets are off.

Evan-your statistic, which is widely circulated, is misleading.This is because local authority expenditure is mostly funded from central government. Thus, the correct comparison is with total local authority spending.

"Misleading"?

I did an FOI request and this 'widely circulated' statistic was in fact at the low end, ours is even higher. The fact remains that ordinary people see almost HALF their council tax going down the DB black hole and there is still a deficit somebody needs to fill particularly after disastrous investment of pension funds over the last few years!

Misleading? Tell me about it. We are living a lie, in denial, heads in sand.... whichever way you cut this cake there are only a few crums left, let them eat cake, just make it cheaper cake.

AND, please use your real names, what are you trying to hide?

Chazza's - comment number 1 along with Steve Bee have got it right. Well done!

Like it or not, the Government and myself have contributed 27% pay (employee and employer) into my public sector scheme, more or less year in and year out. The contribution rate was set every 5 years by an actuarial valuation of the scheme to ensure that the income of the scheme matched liabilities (the pension benefits payable for each member). The valuation on each occasion listed the benefits to be paid which without exception showed that the scheme would uplift annual pensions by RPI. By changing the uplift factor to CPI the Government has snaffled around 10 per cent of the value of the pension fund.

I feel particularly annoyed because I made very substantial additional contributions into the scheme to purchase benefits at full cost and based on RPI uplifts. The Government has snaffled a portion of this as well.

Now some say the Government is broke and has no choice. Well there are two points here - no it is not broke by any definition of the word and second the Government has confiscated assets. When Governments do this sort of thing it tends to be habit forming. What next confiscate shares/ property because it is "broke"? There is an important principle here - is it ok for Governments to confiscate the assets of citizens? Think carefully before you answer. They may be popping along in the near future to take a part of your back garden without any compensation.

Local authorities, their workforce, have it every which way .

We contribute via rates the proportion which is to be paid by the employer to the employees pension.

There are trustees that then invest out in the market or for the best return. They were fully funded until Brown/Balls got their sticky fingers into the dividends exemption, and everything went pear shaped.

Now that there has been a downturn in the market and combined with loss of 'contributions' of the tax exempt income, 20%, the funds are inadequate to meet future liabilities so, because of the pension raid in 1997 et seq, having already paid, we have to then go to make up the shortfall because shares are not doing so well. Not just 20% but a lot more because of the cumulative effect over the years, i.e. the 20% from year one gets no income and so on for each subsequent year.

That is unfair, unjust, in equitable, daylight robbery, fraud, dishonesty and any other tag that you wish to put to it.

When the shares recover, will a refund of our rates be paid together with profit? I think not.

This loophole must be closed. They should be on the same basis of every other pension fund/pot in the land and suffer the consequences everybody else was to suffer.

I've already said that MPs should suffer the same fate as the pension funds in relation to their pensions, whilst lifting the "full contribution" from 15 years to 40 years and that should be backdated, just as the raid backdated in respect of private-sector pension funds.

In respect of the civil service, there should also be the adjustment so that their funds are affected just as the rain affected the private sector. That is only fair, equitable and just.

I see the comment from public sector workers constantly that they paid for their pensions. This is not quite true because employee contibutions are between 6-8%. If you work 40 years and retire for 20 the true cost is nearer 33%. We are morally bound to pay these pensions because that was the deal they had, when they joined. It is the fault of government over the last 30 years for failing to act sooner and hoping the next government would do it. The total pay, including pensions, in the public sector is now way above the private sector, and needs to be reduced.

Evan-the statistic that you quote is misleading because only a small part of local government spending is funded by the council tax.

A meaningful statistic would be local government pensions as a percentage of local government spending

Not all public sector pension scemes are alike.

The Local Government Pension Scheme is a fully funded scheme similar to defined benefit schemes in the private sector, with annual employee contributions of an average 6.4% (a higher % is required from higher earners) to which are added employer contributions of an average 13.6%. The funds so collected are held in trust and the scheme is administered locally. There are 101 locally administered LGPS schemes and investment performance varies from one to another.

I have details of the investment performance of one very large LGPS scheme, and what is remarkable in this case is how little the fund was affected by the market decline of 2008-9. The fund fell in value by less than 20%, an amount that must by now have been more than made up by subsequent rises in the bond and equity markets. (The investment managers include a variety of major city firms and, as well as investing directly, they employ derivatives to stabilise the funds). The contriibuting local authorities are the backstop guarantors of such schemes, but inflows to this particular fund have continued to exceed outflows, the fund is not in actuarial deficit, and so payment of its obligations should not be a further burden on the taxpayer.

Changing the indexation of LGPS pensions is not, then, a financial necessity (actuaries are well aware of increasing longevity, which is why the employee contributions to the scheme were increased in 2008). So the imposition of a change from indexation in line with RPI to CPI seems to have been proposed not to make the schemes more affordable (if they pay out less they are likely only to build up surpluses) but to make working in the public sector less attractive. Or perhaps to punish pensioners for having worked in the public sector?

The great majority of lcoal government employees are not highly paid, but the idea that all those in higher paid positions in local government are time-serving jobsworths is ludicrous - most of those I know could have earned significantly more in the private sector but were committed to the provision and efficient management of essential services to the public, and usually rose to their higher paid positions only after many years of dedicated and demanding professional work.

Is it really necessary to destroy the ethic of public service by degrading the conditions of public sector work to the level of the worst of the private sector? I think not.

Public sector employees - Continued pay rises for previous and current years.

Public sector pensioners - 5% pension rise last year,

Private employees - wage freezes and wage reductions & pay offs.

Private pensions - no increase last year.

.... in my experience.

Public sector employees should be grateful of any pay rise and extremely gratefull to still have a job without a pay increase, which has a gauranteed pension - which receives increases in line with inflation (yes, in line with inflation, not a 5% max)

Chazza. Let me say what most contributors believe - but perhaps might not want to express it...

...the idea that all those in higher paid positions in local government are time-serving jobsworths is NOT ludicrous - most of those THAT I KNOW could DEFINITELY NOT have earned "significantly" more in the private sector. In order to DO THIS, they would have had to rise through the rank to earn their salaries of TODAY rather than timeserve. I've yet to meet a fireball in public services... Committed to the provision and efficient management of essential services to the public? Hmmm...

Nope, time-serving clerls will be much closer...

Nobody begrudges the public sector pensions as long as the rest of the population can afford to pay them. Clearly the current economic disaster the rest cannot afford to pay these colossal commitments given by Brown and the Socialists. In addition to this background we have had 15 years of systematic ,deliberate erosion of the pension savings of the private sector by Brown. Britain before Brown/Blair arrived had the highest value pension pot in Europe ;like the Gold it didnt take long for Brown to get stuck into this. No wonder we have resentment. The public sector had better prepare itself for real shocks, and all the strikes, civil disobedience and the like will be in vain, you cannot get Blood out of a stone.

As an employee in the private sector, my current plan is to work until I drop.

So, anyway, what will happen ? Well, public sector workers are entitled to what they've already built up, so that should stay.

But you can't get a quart out of a pint pot, or something, and public sector pensions will be scaled down gradually for future service.

What I find faintly distressing, if you can ever get distress that is faint, is the

sheer, naked envy displayed by some of the above contributors. Why are some so resentful of what others have and are perfectly entitled to have ?

Jon,

Mathematics is good. You're following Euclid for the number of hidden assumptions.

"Why are some so resentful of what others have and are perfectly entitled to have?" Because they can't get at the bankers, but the public sector are an easy target.

"What happens when a Corporation operating a Private scheme goes bust... Will those employees of what was a Final Salary Scheme in the private sector continue to look forward to the same benefits in retirement?" What happens is that the pension gets paid by the the Pension Protection Fund which the last Government set up.

In some parts of the country, Wales for example and Gwynedd in particular the, "public sector" employees outnumber those emploees in the private sector who pay their wages through taxes, I won't mention the retirement hotspots where the public sector workers sit, waiting to die. If you then strip out those who are heavily subsidised by the taxpayer, farmers are a case in point, there isn't much wealth around to keep this mirage going, is it the City that keeps us afloat? It certainly isn't tourism.

WE CAN'T AFFORD THE PUBLIC SECTOR AS IT STANDS, sorry I shouted..

Evan

As I understand it some 70% of the GDP of Wales was reliant upon the tax-payer last year. I gather this year they are campaigning for more tax-payer funds as they think they do not get their fair share !!

Evan - and others - it's the City that helps keep us afloat - and it's ALSO HELPED BY THE REST OF US who work, purchase things, invest - even in our small (pathetic to the City spivs) ways. Even the wrinklies in old folks' homes sitting staring out to sea all day do/have done our bit. Under our system, it's today's tax payers that pay for today's services - just as we oldies paid for it during the many years WE worked and paid tax. One world - and the sooner the City realises, the better. The rest of us ALLOW them to operate here... as we all contribute to keeping businesses going.

I think I should have asked "are we afloat"? The City appears to be finished, the Europeans don't think much of it and the last time I was there the taxi driver said it was like a ghost town. What was it built on? Greed and avarice?

Gordon Brown swallowed the line from the banks "Let us regulate ourselves", look what happened...

Sadly the idiots that oversee us all have created an environment where the cure is now also part of the discease.

The crisis is far from over.

Euan

I think the answer is "calm on top but paddling like hell underneath"

Evan, Europe is envious of the City and are trying to curb that success and hobble it so that more financial dealings flow to them. Another example of Europe trying to stifle excellence and replace with below par mediocrity, as did Zanuliebore with education.

snoekie, Europe was envious of our private pension provision, look what happened to that!

I HAVE BEEN REFUSED A SPOUSE'S PENSION

AFTER HELPING MY HUSBAND TO CONTRIBUTE FOR OVER 40 YEARS BECAUSE HE DECIDED IN HIS DECLINING YEAR........AT 73 YEARS OF AGE TO DIVORCE. NOW ALL THE MONEY WE SAVED IS RETAINED BY THE PENSION FUND.

SURELY THIS ANOMALY SHOULD BE CORRECTED?

Sybil, I need more information