Tuesday, 5 July 2011

Public sector pensions

Last Friday The Times carried an interview with a teacher from my old primary school, St.Margaret's Plumstead Common. This 59-year old complained, 'I'd like Michael Gove to come and spend a week doing my job .. When he does that he can come and tell me about cutting my pension.' Given that she is near retirement age, her pension is unlikely to be affected much.

Even if the Government's proposed changes go through in full, those in the public sector will still be much better off than those most of those in the private sector, many of whom do not have a pension worth speaking of or have to make their own provision in schemes which are vulnerable to stock market fluctuations. If vox pop and radio show texts are anything to go by, many in the private sector resent what they see as the privileged treatment of the public sector.

There are two answers to that view. One is that relatively good pensions form part of an overall renumeration package which public sector workers signed up to as part of their contracts. But that is an argument for phasing in the changes not abandoning them which is what is proposed anyway. And if the grass is greener on the other side ...

A second argument is that poor private sector pensions need to be tackled rather than reducing those in the public sector. Employers should be 'required' to provide them. In other words labour costs in the UK should be substantially increased which wouldn't do much for competitiveness.

Career average pensions could actually benefit the less well off and the unions seemed to be prepared to concede that point. As for working longer before pensions become available, trade unionists complain that they are being made to pay for the banking crisis.

But the banking crisis didn't lead to people living longer. It's one thing to pay a pension for seven years after someone has worked for forty years and another thing to pay it for thirty years.

Where the unions do have grounds for complaint is the increase in contribution costs at a time when the pay of their members is frozen for all except the lowest paid. In other words this means a further cut in take home pay.

It is actually not as much as the figures suggest because of the generous tax treatment of pensions - something that is never really discussed. Even so, it is substantial and it is here that the Government may need to give way, although by doing so they place at risk their deficit reduction strategy. But a hot autumn could damage the Government's standing. In other words, there might be a political price to pay for failing to give concessions.

It's a tricky tightrope and while David Cameron is good at tactics, he may be less good at strategy. Given the recent proposals on paying for care, one thing that does need to be thought about is whether those of pensionable age should continue to be exempt from National Insurance contributions.


john said...

Hi Wyn
I enjoy your Charlton comments and contribution very much, as a Charlton exile who manages to see only a couple of games a season.
I have to comment on you statement that private sector workers receive worst pension provisions than the public sector.
Most large U.K. companies originally set pension schemes at an accrual rate of 1 60th per year of service, teachers and public service workers have an accrual rate of 1 80th per year of service, making public sector schemes inferior.
Unfortunately, during the ‘Thatcher’ years of government, private companies abused the surpluses in their employee schemes by having contribution holidays and in some cases businesses were brought and sold for, and in some cases by, the surpluses in their schemes.
This is the reason some private sector pension schemes are closing due to a shortage of funding.
Regards John

Wyn Grant said...

It's a very good point, but it doesn't alter the underlying politics that those in the private sector resent what they perceive to be better pensions received by the 20% in the public sector and to some extent at their expense.

Anonymous said...

I am slightly concerned by the arguments that the Public Sector is too generous in pensions compared to the private sector. Not because I want private sector workers to suffer hardship to subsidize the public sector. But rather the race to the bottom argument that I find worrying. It is the same way Tories attack tube drivers' generous salaries arguing that other semi-skilled workers earn less. Well, it is a problem that wages have been stagnant and pension schemes stagnant. This was a problem even in the boom years, and probably reflects employers power in the labour market. After being the target of populist attacks from Cameron and Co, not to mention wage cuts and job losses, no wonder civil servants are angry. And lots of ordinary people have supported the strike. People are angry, and rightly so.

Wyn Grant said...

It's a fair point, although median wages have been stagnating in a number of countries including the US. Arguably this is partly the result of globalisation pressures (which do tend to produce races to the bottom) but also a consequence of the disappearance of many jobs between the retail/catering/hotel level and graduate level jobs. This in turn is the result of automation/capital intensification in manufacturing plus its redeployment to low wage environments if it is labour intensive and also the IT revolution which has impacted on middle level non-manual jobs. In other words it's as much structural as anything although that isn't to say that a particular government does not have choices.

Wyn Grant said...

There was a comment about the impact of globalisation on semi-skilled workers which I certainly accepted but it seems to have disappeared somewhere. The writer also asked what measures national governments could take. I think that there is an adverse effect on the less skilled, both in terms of wage competition and job loss. Wage competition is in large part a migration effect. What governments can try to do is to improve the skill composition of the workforce, but such policies are not always effective. Germany is generally agreed to have very effective skill formation policies, but also high levels of unemployment (and not just in the east).