Friday, 12 August 2011

Letter to Mercury - Public Sector Pensions

An edited version of this letter appeared in yesterday's Weston Mercury:

I am writing to let your readers know the reality behind the dispute over public sector pensions, particularly in light of the misleading comments of the leader of North Somerset Council in the August edition of North Somerset Life. Councillor Ashton stated that “there are now more people receiving a pension from the funds than are still paying into it” and that if “nothing is done, the existing pension fund could simply run out of cash to pay all its commitments”. I am surprised by Councillor Ashton’s lack of knowledge about the pension scheme of his own employees. The Local Government Pension Scheme has a positive cash flow, which means income from investments and contributions exceeds expenditure on pensions every year. For instance, in the financial year 2008/9 £5.6 billion of pensions were paid out, against a gross income of £10.2 billion. Based on current assumptions it is likely to remain cash rich for at least 20 years. Councillor Ashton’s claim that it hasn’t got the cash to pay all of its commitments is untrue and is based on a scenario where everyone in the pension scheme retired and collected their pension on exactly the same day – but this isn’t going to happen. Quite simply the pension scheme, of which even some of his own councillors are members, is funded and is affordable.  The scheme was reformed in 2008, and as a result the cost of public sector pensions is on target to fall from the current 1.9% to 1.4% of Gross Domestic Product by 2030 – and this is without any changes to existing public sector pensions schemes. The Local Government Pension Scheme has £150 billion invested in the UK economy. Other public sector schemes are also cash positive, which means that billions of pounds of employee contributions are being used for public investment every year. Cuts to these schemes will have a drastic effect on the UK economy, which is already fragile and not growing as strongly as predicted by the Chancellor George Osborne.

Councillor Ashton also stated that one of the options to tackle this imaginary public sector pensions deficit would be increasing council tax but that in his opinion asking “council tax payers to pay more for other people’s pensions when many of them are receiving inadequate or reduced pensions” seems unworkable to him. It is important that your readers know that under 5% of the money raised through council tax goes to paying the employer’s pension contribution. But the whole point is that rather than reduce public sector pensions we need to avoid a race to the bottom and instead bring private sector pensions up to an adequate level so that all pensioners have a comfortable retirement. In any other scenario, for instance a school that is failing, you don’t bring all schools down to the lowest standard – instead you bring schools up to the standard of the highest. It is also the case that public sector workers retire with relatively small pensions - the average pension for Health and Local Government workers is only £4,000 per year. In addition it needs to be pointed out that public sector workers are also council tax payers, and whether you work in the public or private sector we all pay for each other’s pensions one way or the other either through taxes to fund state benefits, or the prices we pay for goods, which private companies have set by factoring in all their overheads, including pension costs.

If workers don’t save adequately for their retirement the result is pensioner poverty and it’s the tax payer that picks up the welfare bill. The state pension in the UK is already under the poverty line. In fact the UK pays the lowest state pension in Europe – 17% of salary compared to a European average of 57%, with Denmark providing the highest state pension of 75% of salary. Increased contributions for low paid public sector workers are likely to make many leave the scheme, thereby adding to the tax burden as these pensioners end up claiming state benefits. Quite simply the government’s proposals to change public sector pension schemes will turn out to be a false economy. Whether we work in the private sector or the public sector we should all expect a pension that provides us with a comfortable retirement.

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