Why should we worry about Public Sector Pension Reform?

by Brian Spence   •  
There has been much recent press comment about the continuing row between the Government and the Public Sector Unions over proposed pension reform. So why should we be interested in this local difficulty/skirmish? Well basically because it is us as tax payers who will ultimately pick up the bill for the decisions taken and ultimately any government climb down similar to that of John Prescott prior to the election could see us all with increased tax to pay. The Government has rightly identified that the growth in the number of workers in the public sector, the level of salary inflation and probably most significantly the impact of improved longevity all threaten to push public spending on pensions above the stated objective of costing no more than 2.1% of GDP. The government also wishes to move towards a system where private provision accounts for 60% of the total rather than the 40% currently. The most recent life expectancy figures published recently by the Continuous Mortality Investigation Bureau show mortality rates around 30% lower for both males and females in their late 60’s, the equivalent of an improvement rate of over 4% per year. This information comes hot on the heals of similar findings from the Pensions Policy Institute PPI) who’s research director, Chris Curry commented that “unskilled manual workers, who are likely to have the lowest life expectancy, can still expect to live 16 years after state pension age.” Ultimately paying out pensions for more people for longer will be likely to put a significant additional strain on the public purse and has therefore necessitated government action to try to control sponsor cost inevitable. The key proposals suggest:-
  • Increasing the date at which full pension is available from age 60 to age 65. Benefits would still be available at age 60 but this would be considered an early retirement.
  • the Civil Service & NHS Schemes move from Final Salary benefits to Career Average Earnings, a move which will have a less significant impact on those likely to have lower salary growth than the high flyers within the schemes.
  • To abolish the “gold standard” schemes to produce more of a level playing field for all staff in public sector schemes.
  • To revise the tax free lump sum options available to members to provide more choice and flexibility.
  • Ill health early retirement benefits to be reformed.
The government has already admitted it wished it had begun the consultation process earlier and whilst this may have made the negotiating position more difficult this alone does not necessarily make the proposals unreasonable, given the background against which the changes are being proposed. Private sector final salary pension provision continues to decline with NAPF statistics suggest that already 70% of existing schemes are closed to new entrants with around 10% closed for all further accruals and this trend only likely to continue. It seems likely that most private sector workers would probably welcome such limited change with open arms. It is also worth noting that the proposals will only initially impact on new recruits with changes for existing staff only being applicable after 2013 at the earliest. An argument put forward against change is that salary levels in the public sector are below those of comparable jobs in the private sector but recent statistical evidence suggesting that not only are benefits comparable but in some areas considerably in excess of those offered in the private sector. The biggest differences are in Northern Ireland and the north-east, where private sector graduates average £12 an hour compared with £15 in the public sector. This level falls to £1 an hour if the West Midlands, north-west and south-west, with only those in London and the south-east worse off than their private sector counterparts in pure salary terms. This however does not include the improved level of pension benefits available which PPI research suggests, even after the changes proposed, represent an improvement over equivalent benefits in the private sector anywhere between 3% and 18%. It is welcome news that on average we are living longer and as such the proposals to move provision of full retirement benefits from 60 to 65 seems rational given the improvements in life expectancy, improvements which all within the UK must come to terms with. Benefits would still be available from 60 but discounted to reflect early payment. The argument levied here is that would we expect a policeman to be patrolling the beat or a fireman to be entering a burning building when they’re 64? This however is not a phenomenon unique to the public sector as private sector schemes such as those providing benefits for deep sea divers for example must come to terms with this issue. It must also be questioned if just because an individual can not do their current job does that mean they cease to be a productive member of society. Recent information suggests that with declining birth rates in the UK the economy needs people to continue to work beyond 60 & 65 if it is to continue to grow. In addition it is not just a problem with those retiring at 60 but based upon startling statistics produced by the Pensions Policy Institute (PPI) in March 2005 it is also those who require pension provision before the age of 60. The PPI figures show that between 1995 and 2000 68% of all fire service retrials were ill-health early retirements. This figure was 49% for the police, 39% for local government, 25% for teachers, 23% for the NHS and 22% for the civil service. These figures compare with a level of well below 20% in the private sector. This is a very significant additional cost to the public purse. Ministers have seen the official cost of public sector pensions rise from £340bn to £460bn in the last 2 years and there are fears that the true cost would be closer to £700bn. For all our good these changes need to be embraced. There is a reduction in benefits but it is massively less significant than that experienced by many in the private sector, increased tax free cash flexibility is to be welcomed as is a greater uniformity of scheme benefits within the public sector. The government has even agreed to re-invest around half of the £9.2bn saving made to 2013 to fund ideas put forward by the TUC, including better pension provision for part-time workers. This is a debate the government cannot afford to lose on behalf of us all as taxpayers and we should all be watching developments with interest. ENDS 1098 words Published in The Herald 3rd December 2005

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