News reports today (Wednesday 15th June) indicate that public sector pensions are going to be next on the chopping block. The Office of Budget Responsibility report released yesterday says that the costs of paying them are “unsustainable” and “unaffordable”. The cost of these pensions is going to rise by 20% in real terms each year, it says. Case proven, surely? That means the cost will double in less than 5 years! However, the small print also shows that the cost of these pensions will take the same proportion of GDP over that 5 year period. Obviously they can’t both be correct, so what are the facts behind these “gold plated pensions”?
Well, let’s take that first one – gold-plated. The details here are from the largest public sector pension scheme, the Local Government one (and for the record, the one which I am a member of). This scheme has 4.6 million members, the vast majority of which are currently working in councils up and down the country. This scheme has an average payout of just £4,000 per annum. That’s right, I haven’t missed out a zero, just four grand a year. Hardly gold plated – and don’t forget that the £4,000 is taxable.
Ah, but that burden falls on the taxpayer, its unsustainable, I hear you cry – but no, yet again the true story is different. The LGPS actually has about £120billion worth of investments, earning money which it uses to pay pensions – and the employees contribute substantial sums of their own (low) pay towards. In fact, employee contributions have recently changed, so rather than a flat 6% across the pay scale, the employee in Scotland, for instance will pay 5.5% on earnings less than £18,000 (that’s me), with steps up to 7.25% at £18,000, 8.5% at £22,000, 9.5% at £30,000 to a whopping 12% of their pay over £40,000. Those contributions will have to be made for 30 years in order to get a pension of half their final salary.
Those tales of whopping fat cat public sector workers, retiring on massive pensions are very wide of the mark. A very tiny percentage of workers have a pension in excess of £50,000 a year, and those that do have had to work for decades to reach that level. A far cry from the £703,000 a year that Sir Fred Goodwin received after just 10 years ’service’ at RBS.
I’m sure that everyone’s heard about the appalling stock market returns that private sector schemes have made, resulting in final salary schemes being rarer than hen’s teeth. I know my last private sector employer managed to close their final salary scheme a few years ago, and only advertised the fact afterwards. So what about the pressures on the LGPS? Well, it’s currently running a surplus. In 2008-09 (the last year for which full figures are available) income from contributions (both employer and employee) and from investments (that £120,000,000,000 they’ve got tucked away) was a staggering £10.2 billion, whilst benefit payments were only £5.6billion. Now no one is suggesting that employer’s have a contribution holiday – that was the policy which destroyed many private sector pension schemes, not some minor changes to their tax regime – but this indicates that the current scheme is well-managed, and should survive on current levels of contributions.
But what of the future? Well, there is an argument for removing the right for early retirement at 60 without affecting your benefits, to bring the public sector pension into line with the state pension, but this will have limited effect. So what we have is the usual attack from the Tories on the public sector, misrepresenting the facts (or just downright ignoring them) in order to bring about an ideological reduction in staff.