Steve Bee: are our pensions affordable after all?

This looks very like that well-konow oxymoron - trade union economics! I wonder what BA's cabin crew make of it?

They will have to say that to calm everyone about the unfunded public sector Golden pensions and the black hole.

I for one do not believe the figures, it can be manipulated to suit the situation/s.

I do not understand why the government did not and do not invest our pension contributions, they do have all these clever men who made/make millions, in their cabinet.

Take Singapore for an example, the government invests and their kitty is overflowing and still the Singapore government still encorages "Prudence" to the people and civil servant.

Fifty year projections should always be taken with a very large pinch of salt in any case. Also, the comparison with GDP may not be that appropriate, as it does not represent the tax base that has to finance these generous pensions. No doubt the civil service unions, also threatened with losses of public sector jobs, are grasping at any straw that comes their way.

you can make figures mean anything,i do think public sector pensions need a bit of an overhaul afterall they do compare very well against those in private sector and for the self employed who rely totally on the satock market.BUT i do think this government will make any excuse to defer or not pay pensions.

Who knows where the economic truth lies, but it's sad to see the politics of envy in play again amongst the comments. Do we really want to compound the damage done by the last government and further inflate the numbers of future pensioners condemned to a retirement of financial struggling?

Same old same old.

If you are a dyed in the wool Tory, official figures are always wrong or deliberately fiddled. Whereas any old scare story printed by the right wing gutter press is always the gospel truth.

The real truth is that if we were prepared to put around 6% into a funded pension scheme and employers were to put in around 12% we could all retire on full pay at age 65 and a State scheme would not be necessary.

Over a long period of time (say 50 years) we should gradually move public sector pension contributions into a funded defined benefit scheme on the same contribution basis.

Pie in the sky? We have to start somewhere and get the moaning minnies off our backs.

I'm afraid that people posting the comments above do not like the truth of the situation as outlined by Steve Bee. The figures are fully validated by the National Audit Office (NAO). The NAO have undertaken a comprehensive study into the subject, in much more depth and with much greater independence than the Hutton review will do. The NAO has to get things right. Their reputation depends on it as they report to Parliament. A link to their report is here -http://www.nao.org.uk/publications/0910/public_service_pensions.aspx

The NAO report states that projections of future payments depend critically on assumptions used as the basis calculations. Changes to these assumptions can have a large impact on results. The Treasury’s four main assumptions for projecting the cost of UK public service pay‑as‑you-go pensions are:

- average life expectancy of pensioners in UK public service pay-as-you-go schemes rising steadily, for example to 94.7 for women and 92.3 for men who reach 65 in 2055, in line with assumptions by the Office for National Statistics, but reflecting the longer-than-average lives of occupational pension scheme members;

- real-terms earnings growing by 2.0 per cent a year for employees in UK public service pay-as-you-go pension schemes, linked to the assumptions described earlier of 2.0 per cent annual growth in productivity and real-terms earnings in the wider economy;

-a constant number of employees covered by UK public service pay-as-you-go pension schemes. This is where the NAO were critical of the Treasury as public sector numbers had been rising; and

-two-thirds of employees’ share of increased future pension costs being taken as reduced future pension payments, and one-third as increased employee contributions, under changes to the schemes.

The NAO concluded that the Treasury has a reasonable framework in place for assessing future costs and has undertaken some analysis on the sensitivity of projections to changes in key assumptions.

LIKE IT OR NOT, THE EVIDENCE IS OVERWHELMING THAT PUBLIC SERVICE PENSIONS ARE AFFORDABLE. LET'S BE CLEAR THE ATTACK ON THEM IS POLITICALLY DRIVEN BECAUSE PEOPLE IN THE PRIVATE SECTOR DON'T LIKE THEM FOR THE UNDERSTANDABLE REASON THAT THEY DON'T HAVE ACCESS TO SIMILAR PENSION BENEFITS.

Amongst others, the NAO,the treasury, the actuarial proffesion and a plethora of other experts and professors , have all given us the benefit of their wisdom since we became consious of the pension funding crisis. As in private sector pension schemes the single most important factor of mortality had, until recently, been completely ignored.

Why wasn't all this wisdom around 20 years ago when we might have put long term measures in place to mitigate these difficulties?

Does anyone remember the milenium bug which was going to bring our lives to a standstill at the midnight hour!

Does anyone remember the dawn of the computer age when forecast projections were that 25 years on we wouldn't know what to do with all our leisure time!

These views were from experts ?

I don't think that anyone is suggesting that there should be no public sector pensions, only that the terms and conditions now look extremely generous compared with the much reduced ones on offer in the private sector, especially for new entrants.

I do note that xxxxx's useful summary of the assumptions in the NAO report does include one vital item, that two-thirds of the employees' share of increased pension costs be taken in reduced pensions and only one-third in increased contributions, under changes to the schemes. Thus the report cannot be allowing for the full cost of sustaining the present arrangements, something that the unions are likely conveniently to forget in attempting to defend the status quo.

The assumptions that have been used to support this alleged affordability are questionable to say the least.

If however, public service pensions are affordable then it must also be possible to afford other things instead. The majority of people in this country would rather see the money spent on other things.

The government would be unwise to ignore the groundswell of public feeling against over generous pay and pensions in the public sector.

Is it a surprise that this 'groundswell of opinion' in the private sector comes at the time that attention would otherwise be focussed on bankers bonuses?

The debate should be about how to give everyone a good pension, not about setting up and fomenting an artificial antagonism between public and private sectors (remember that many people work in both in the course of their lives).

Neither the author of this article nor the posters above have considered the enormous economic contribution which could and I hope will be made in the future by women and men willingly working beyond the ages of 60 and 65 respectively. Trades unions must fight to ensure that work for older people becomes more congenial as well as more enriching than the contemporary age-ist enforced-idleness called 'retirement'...

I find the comment by F Fuchs offensive as it is makes one enormous assumption which is sweepingly applied to all retired people ie they are lying around doing nothing. This is the sort of thinking perpetrated by the Tories. Yet if you use your own eyes there is a very different story. I suggest that F Fuchs takes a walk down his local high street during the week and count the number of elderly people with pushchairs. No they haven't started having children in later life because of the wonders of modern science. I suggest also he pops into his local charity shops and may be even the Citizens Advice - the list of suggestions goes on and on. He may be surprised to find pensioners giving their time without payment to help others. Many are virtually doing a full time job. I think the Tories have called it their Big Society project. They want more of it. Why? Because it costs them nothing. But at the same time they want to increase the State Pension age and reduce people's pensions (CPI rather than RPI) as a big thank you for all of that effort.

As the saying goes, the devil can quote the scripture to serve its own purpose, so goes the political parties of any colour or organisastions. Parties and most people, use any projections and predictions of any so called experts to suit themselves. At present the condem governemnt PR is winning with the media, frightening the public of the doom and gloom we face and if does not work out there will be always an excuse one way or the other. All these financial experts predictions make good reading no doubt one or two will get the projections or predictions right and oh! they become experts.

Assuming xxxx analysis is correct, then everyone should have pensions as good as government/civil service ones.

The analysis concludes that the government/civil service pensions are affordable – affordable, but not fair.

Just like the bankers, unions only look after their own and sod the rest of the people.

As long as my group of people are okay, sod the remainder.

It is the way of the world / evolution........

We have lies, damn lies and statistics, all over again.

Firstly, it is sensible to try to put figures into a perspective - something that the industry and the media are singularly bad at doing. If one little ole lady got mugged we had headlines damming the country to hell - until the police pointed out it was probably more dangerous putting the rubbish out; so no more stupid headlines.

Secondly, it makes sense to use an appropriate bench mark. Using the UK GDP seems to me to be using a totally inappropriate benchmark. If a private company costs a pension scheme it is relation to the payroll of the company, i.e. we will contribute 10% of pay, not 10% of the value of the company.

I may be wrong on this point but does not the GPD also include pensions either in accumulation or in payment, in which case there would be self referencing, which would hardly make for a sensible analysis.

What we need to know is the level of payroll for the Civil Service (I’m sure some bright spark out there has it at his/her finger tips) and use that as the benchmark. What is the relative cost of the pension black-hole, if costed in a sensible manner - 10% , 20%, 30% of payroll.

We have recently heard that the payroll for the Civil Service has risen substantially in recent years. To that has to be added the additional pension cost, and the cost of relative security of tenure. Then we need to compare unit cost in the Civil Service with unit cost in the private sector. This may not tell us whether we are getting value for money, but it would allow a better understanding of these “hidden” costs. Are Civil Servants rewarded or over-rewarded?

We also need to know the annualised cost of meeting the current obligations, and put that in a sensible context e.g. it adds 25% to current Government administration spending.

Saying it would only add 1 or 2p to the tax rate is not useful, because it hides why I am now paying for previous maladministered promises, and there is no guarantee of what the extra money would be used for.

The process of dealing with the pension funding is a matter of choice. Many countries do have pay-as-you-go pension arrangements in both public and private sectors, that, to date, has worked. The future is the ‘unknown country’, so we have to determine whether pay-as-you-go is still a viable entity. Fiddling about with inappropriate comparisons isn’t likely to do anything other than increase the profits for companies selling blood pressure tablets.

And we should also stop taking the rather inane jump to compare these costs to the State Pension which is a quite separate concept. It may make a nice sound bite, but it does nothing for a sensible debate.

The public service pension scheme was conceived when most people smoked, and most workers died before or shortly after retiring. It was never designed to be the hugely expensive gravy train it has become, for paying millions of men and women generous index-linked incomes for doing nothing, for decades.

I propose to work till I drop. One reason for this is that, as I am "saving" hard to pay public service pensions, I can't afford to save for one for me.

Glen McKeown makes some fair points about how to value the "burden" of taxpayers paying for public sector pensions. Knowing what % of payroll is used up each year may be valuable. Pretending to be an actuary and calculating the stock of assets needed now, ,to pay pensions in the future, and waving it around as a big scary number is not. It is dishonest because it is misleading. It does not represent anything real at all. Frankly, it's a bit rich of so many people with lucrative careers in the pensions industry to decry public sector pension schemes as a burden which should somehow be reduced. What about reducing the influence and size of the pensions industry instead? It has been guilty of outrageous mis-selling scandals (private pensions & endowment policies), and burdens everyone else with its grotesque fees which are designed do little more than keep stock brokers in Ferraris and everyone else in a new Audi each year. Actuaries, accountants, lawyers, stockbrokers, investment managers, IFAs, insurance companies, banks - all take their percentage and make a fat living from their clients funds while adding remarkably little value to the pensions of either their private clients or the public schemes which also employ them.

The author of this article is a very knowledgeable man about Pensions and I think he raises an interesting debate.

Are the eggs being over whisked to suit political policy or are there real long term funding issues? I personally think both and the unfunded nature of them makes them a grave challenge.

The UK has one of the lowest basic state pensions versus average earnings in the EU - my opinion is we need to improve this bedrock first and encourage savings.

The main party in charge enacted the Pensions Act 1995 and oversaw the Minimum Funding Requirement rule that if a scheme was over 105% funded on this basis (companies hiding profits in the eyes of the then Chancellor). Then one of 3 things would happen, pay the surplus back to employer and pay tax, enhance benefits to members or take a contribution holiday.

Many employers took a holiday and others advised by Actuaries took the option of making 'affordable' improvements. Both these options have proved to be unworkable long term.

Allied to Gordy Broon pulling out £5bn pa in ACT credits for Pension schemes it is not hard to see why Private defined benefit schemes are huffing and puffing. Public sector pensions schemes on the other hand are comparable 'swans' paddling along gracefully.

in 78% of cases 156% of statistics were made up.

Surely the main issue over the question of pay as you go or funding state pension is down to the implied or actual investment return from each option.

If all state pensions were fully funded the government would be required to borrow greater sums or tax at a higher rate to afford the ongoing contributions to the schemes. The effect of which would be to lower economic growth now or in the future.

Alternatively by funding on a pay as you go basis the state (and by right the UK population) has effectively reaped the benefit of lower than otherwise taxes and borrowing. The downside of this is that there is a huge bill waiting as the population under these pay as you go schemes retires.

It can be argued that by not funding the schemes the effect has been to increase economic growth in the UK economy over this period so in some ways pay as you go can be likened to the ultimate investment in a tracker fund.

Obviously many people will argue shrug their shoulders and ask "what economic growth" but the fact is that if we were funding pensions we would have suffered higher taxes and interest rates in the past, but we also wouldn't have faced the massive bill that we are now due.

It's possible then to look at either method from an investment or actuarial point of view and argue that the net result will be the same. Either greater growth now and a big bill at the end or lower growth in the past with no bill.

The trouble is that many people have decided to create the illusion that they can have it both ways, greater growth and lower taxes in the past and no bill in the future.

I wouldn't want to return to my usual refrain on this one but I'm going to! It does seem to me that it's the baby boomers that are at the ones leading the cat calls on this one, of course it was the baby boomers that benefited the most from not funding pensions in the past and to leave the bill to their (lesser in number) kids in the present and future.

"Hope I die before I get old!"

I note Neil Lovatt talked of the government borrowing money to fund pensions. I wonder why he says that when the government has at its disposal the income it gets from taxpayers, corporation tax, IHT etc etc. After all, it only has to cut back in some areas (like unfunded pensions in payment, for example!) and it will be able to start funding from taxes.

Why should it do this? Well compare what Neil said with what would happen in the private sector. Would a company borrow money to pay into its pension scheme? Of course not, and neither should the government. It should pay from the revenue it generates through taxation. Recognising it had to do this, it could start exercising rather more financial discipline than has been the case in the last 10 years. Sooner or later, an invested scheme will pay for itself as the investment generates profits.

Since the public sector pension debt is currently over £1 trillion, imagine instead the effect on national wealth generation if this were to be invested capital. It should produce somewhat above £60 billion in profits before tax each year (6% or so). The annuity cost of unfunded public sector pensions is only (!) around £40 billion each year so the case would be firmly in favour of investment-led pension funding. Other countries recognise this and have gone that way. Strangely, they are often the financially successful countries...

Oh, and finally, it may appear to cost only an "affordable" 1.2% of GDP to pay these pensions, but it can only actually pay for them from the profits generated by activity and those are much lower at, overall, the 6% level gross. So 1.2% is actually 20% of all the profit that the country makes and which is the only thing available for investment which could be directed towards improving the national standard of living.

If we have all the facts and it is agreed they offer sensible conclusions then why not make all "public sector" salary packages include the expected annual costs of providing their pension so everyone can compare their total package and public sector employees can see the value they are getting.

Well the comments never cease to amaze me. Here you have a report prepared by some of the sharpest minds in the country (with no axe to grind or political affiliation) over a period of at least one year and with five minutes thinking and some scribbling on the back of fag packet you come up with some better thoughts on how to value public sector pensions.

Some question why use GDP as a means of expressing the pensions liability. Clearly there are different ways of doing it such as saying £1 trillion to which everyone goes my gosh that's too much money and it sounds as if we should be worried about it. But does it mean that at all? There is no benchmark. The answer is the Government’s ability to raise taxes to pay for its activities, including paying public service pensions, depends on the size of Gross Domestic Product (GDP), so the Treasury reports projected pension payments as a percentage of GDP, which the National Audit Office says is a sensible way of doing things.

One suggestion in the comments is to express the pensions as a percentage of the salary payroll. This doesn't quite do the job. Like other pension schemes including the funded ones, public sector schemes are actuarially valued every five years. This takes accounts of all the liabilities accrued and the contributions made (and returns on surpluses - notional of course) to see whether the scheme is in balance or otherwise. The valuation sets the contribution rate going forward. For the Civil Service scheme the contribution rate for employer and employee is around 20 per cent or so. Now I know there will be howls about this but from personal experience I can tell you that people in the public sector take account of their total remuneration package in determining whether to stay or move jobs (we know this figure only too well re Michael Fallas comment above). Public sector workers particularly in London can move to the private sector quite easily. Where I worked the City took and still does take a lot of people from us even with the pension provision. This is because the public sector has invested a lot of money in training its staff.

The problem with the private sector is the way companies have been allowed to reduce the pension benefits for their employees. I can't help noting that the down grading has not been applied to the Directors of the major companies, if anything their pension provision has improved hugely over the years - Fred Goodwin is just one example.

A great deal of complete garbage is talked about state pension provision. It is true that governments pay for state pension provision out of annual tax raised not by investing contributions we all make. It is also true that the Civil Service pension is also funded in the same way. The figures and claims for accuracy are all highly dubious. The idea that the Civil Service is correct in its figures assumes a level of competence and degree of indepence from political interference which has been less and less evident as years have gone by.

All of the inabilitry to predict adverse affects on pension income whether private or public sector are also misleading. The effects of improvements in living standards and medical advances on increasing lifespan were entirely predictable, as was the baby bulge etc etc all of which has been obvious to any one who bothered to think, even if nobody bothered to think it was clear from succesive census information. The real problem is that ethics in both business and the public sector [economic with the truth] and MPs has been in considerable decline for years. Of course the Civil Service and their unions claim there is no pension problem. They are affected by the national disease more than most. It is high time we started to restore public and private sector ethics before we ruin our own country even more.