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Pensions: the challenge of maintaining unity

The difference in assessment of Monday’s pension talks between Mark Serwotka and Dave Prentis cannot be explained merely by the differing political outlooks of these two general secretaries. According to Mark the talks were “a farce”; whereas Dave Prentis said  “there was a sense that today we were in real negotiations”.

The government seems to have made a substantive concession to the unions representing local government employees, whose pension arrangements are via the funded LPGS scheme; whereas no concessions seem to have been made to the unfunded schemes for teachers and civil servants.

It is important to understand the differences between the schemes. The so-called “unfunded” pensions are paid as required by the government out of general taxation rather than out of a specific dedicated pension fund, and the contributions made by teachers (6.5% of salary), NHS workers (5%/6.5% for most workers)  and civil servants (3.5%) go into general government revenue. In the past these have run to provide a surplus to government, although there is currently a £3 bn annual deficit; the real cost to the state is only the interest payable on raising that amount; and over the long term periods of surplus and deficit reach a rough equilibrium. The government’s own Long Term Public Finances Report continues to reflect that these schemes are both stable and sustainable.

In contrast, the “funded” Local Government Pension Scheme (LGPS) consists of a plethora of over 100 pension funds, all paid for by employee and employer contributions. The whole scheme has asset values of £120 bn, which makes it one of the key institutional investors in the private sector. It provides retirement income for 4 million pensioners, and operates at a considerable cash flow surplus (in England alone in 2008/2009, income was £10.8 bn, paying £5.6bn in benefits). The LGPS does have insufficient assets based upon actuarial calculations, but this is the fault of employers “contribution holidays”, often politically motivated to subsidise council tax payers at the expense of local authority pensions. The suggested government reforms in the present will do nothing to address funding shortfalls in the past.

As a labour movement we have an interest in dignity and economic security for everyone in old age; and the difference between the funding mechanisms should make no difference to us. In general, the trade unions challenge the whole approach of the government.

At the most extreme the Liberal Democrats want to close all the public pension schemes to new entrants, which would push them into a protracted crisis, reducing income without decreasing liability. Many of the hare-brained schemes from the government will not even save money. Raising the retirement age might be sensible with an ageing population, but it is a gimmick unless age discrimination and inequality are seriously tackled; because if the rate of unemployment is high among the elderly then a raised retirement age simply defers the point where working age benefits are replaced by pension benefits. Reducing pension payments merely increases poverty among the elderly, exacerbating ill health, which places additional requirements for social care and expenditure on the state. Indeed wealth inequality leads to poorer health for those with the lowest pensions, so reducing public sector pensions will either lead to scandalous levels of suffering among the elderly, or increased pressure on other state welfare provision.

Because the issues are so complicated, and resistant to easy answers, then there is scope for negotiation between the unions and government, even this government. However, we should recognise that the funded LGPS   does give unions representing local authority workers more leverage than the unions representing workers in the unfunded schemes.

Talk of coordinated union action over pensions may be unachievable therefore, if the government makes concessions to the unions in the local authority scheme, but not to teachers, civil servants or the NHS. On the face of it public sector pensions is an issue that should unite workers; but the detailed differences in outcome may undermine that unity. A Teaching Assistant earning about £7 per hour, working part time and being paid for just 30 weeks per year, typically only pays into the LGPS for less than seven years; whereas a male teacher on retirement may have 30 years of contributions behind him. Does anyone really expect the school support staff to strike to support teachers if the government makes concessions on the LGPS?

Our movement values unity, but actually acheiving it over the pensions dispute may be harder than we first thought.

5 Comments

  1. Evan Price says:

    “but this is the fault of employers “contribution holidays”, often politically motivated to subsidise council tax payers at the expense of local authority pensions”

    I am sorry, but I don’t believe that this is correct. The position in relation to ‘contribution holidays’ is that they are required by law if the pension fund is calculated in accordance with the law to have too much of a surplus. The decisions of the trustees of pension funds cannot be ‘political’ in the sense proposed, as that would almost certainly amount to a breach of duty – giving rise to a potential personal liability on the part of the trustees.

  2. Leon says:

    To view pension schemes purely on the basis of receipts and payments rather than fundamental liabilities is a mistake. It is treating the schemes like a Ponzi scheme where the liability keeps being put back so long as new entrants can be found to prop the scheme up. Having worked on the NHS pension scheme valuation I can state categorically that the real cost of the scheme far outweighs the contributions from staff and government – to buy the benefits of the scheme would cost nearer 30% of salary – I know as I liaised with the Government Actuary on this. The debate has to be about how the gap should be funded and not if there is a gap. This is a political judgement and I offer no view on this but you should get the basis of the argument straight and not give the impression that the schemes are sustainable – they are not

  3. Badger says:

    Leon argues that the schemes are not sustainable. The National Audit Office in its report “The impact of 2007-08 Changes in Public Service Pensions” NAO 8.12.10 examined NHS,civil service and teaching pensions. It concluded that those changes would stabilise costs around their current level as a proportion of GDP. The Hutton review later included the 15% cut involved in moving from RPI to CPI and found that the proportion of GDP would fall from 1.9% steadily to 1.4% in 35 years time. The Teachers’ Pension Scheme is supposed to have regular revaluations which the unions have been demanding but to no avail. It is almost as if the Government had something to hide.

  4. andy newman says:

    Evan

    To quote the GMB’s report on pensions:

    Over the years political expediency has meant the rules affecting how much employers have been obliged to contribute to their employees’ pensions have been changed. In the early 1990’s for example, when the Poll Tax
    was being introduced by the Conservative government, a political decision was made to reduce the LGPS target funding level from 100%to 75%, a move since reversed.

    This contribution holiday, used by some councils to artificially reduce the unpopular tax, is still being paid for by today’s local authorities.

    The result of the 2007 valuation showed an average funding level of around 84%.

    A similar adjustment in the funding target today would immediately enable employers to reduce their contributions. However, it might simultaneously make the scheme less viable over the long term. An approach that would be more robust would utilise a more flexible route to achieving solvency. As a cash rich scheme there is no iimmediate need for 100% funding levels although over time this is a sensible objective.

  5. andy newman says:

    Leon, you say:

    “To view pension schemes purely on the basis of receipts and payments rather than fundamental liabilities is a mistake. It is treating the schemes like a Ponzi scheme where the liability keeps being put back so long as new entrants can be found to prop the scheme up”

    But there are a number of logical falacies from those like yourself who argue that these schemes are like a Ponzi.

    In a funded scheme where the number of contributing members may dry up, then there is a need for the assets to be sufficient to cover the liabilities. This is how the LGPS works, and all private funds.

    However, that is not the only model, and the largest pension scheme in the UK is the statutory state pension, which is unfunded but nominally linked to the income from National Insurance, An arrangement that actualy generates a treasury surplus.

    The unfunded basis of the statutory state pension runs on the basis that the state can regulate its own income. At no point will all contributions cease, and the liabilities do not fall due all at once, but are spread over years and decades.

    In the case of the civil service pension, or the NHS pension, then the state can act as guarantor of the liabilities, and given that with, for example, the civil service, NHS and teaching professions they have a guaranteed input of staff, provided the pension is attractive enough that most people to remain in it, then the schemes are stable and sustainable.

    What is at work here is an shrill ideological assualt on the idea of unfunded schemes based upon prejudice against public sector provision.

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