10 Mar 2011

Public sector pension reform: a recipe for strife

Near the start of the NHS Pension scheme in 1955, the retirement age of 60 meant that 28 per cent of a male NHS pensioner’s life would be spent in retirement. By last year that had risen to 41 per cent, driven by rapid rises in life expectancy. Increasing the retirement age to 65 reduces that ratio back down to 34 per cent.

That, from table 4B of the Hutton report, is a sure fire example of the pressures of unaffordability arising from unfunded public sector pensions, right? The amount of public money devoted towards maintaining this “gold-plated” pensions “apartheid” is spiralling out of control, right?

Well have a look at Table 1B on page 23 of Lord Hutton’s report today. It is an analysis based on Government Actuarial Department figures of the taxpayer cost of public sector pensions as a proportion of GDP. And, yes, the cost has spiked up to near 2 percent and will stay there for the next few years. But then it slumps. In fact from the 2030s, the cost will be below what it is today as a proportion of GDP.

What does this show? That the “crisis” to the extent that there is one, is entirely about meeting the costs of the baby boomers retiring over the next decade.*

So we knew that public sector workers face massive increases in pensions contributions from next year at a time when their pay is probably frozen. It’s an effective pay cut of 3 per cent when fully implemented. Today the rest of the Hutton report indicated what they stand to get for these extra payments. Answer: a palpably worse pension in retirement, which they will have to work five years longer to enjoy.

Let’s go through that again, massively higher pensions contributions, working for years longer, for a much worse pension, and all at a time when cuts threaten their jobs. And remember this is the only matter about which it is possible to have legal mass industrial strife. Little wonder why the Prime Minister’s union tsar, Richard Balfe told me that the Coalition needed to find a way of smoothing out this pain.

The Hutton Report on public sector pensions is a ticking timebomb for this Government. Though they deny it, this seems to have been implicitly recognised by the curious three month delay on discussions to implement the 3 per cent extra contribution from public sector workers phased in from April 2012. The move, which raises £2.8bn, was announced by George Osborne in his Spending Review, as a response to Hutton’s interim report.

Alongside the move from RPI to far less generous CPI indexation, it is rather difficult to see why Lord Hutton even bothered delivering his final report. These massive changes rather pulled the rug from underneath the former Labour Cabinet minister.

Nonetheless, a move to career averages rather than final salary seems likely. It is difficult to see why public sector workers would accept it at the same time as a significant increase in contributions. One or the other maybe. It seems like a potent recipe for prolonged industrial strife.

* The reality about likely sharp rises in age-related payments over the next four or five decades is exposed by the Office of Budget Responsibility’s long term projections, table 5.6. There is a massive near 5 percentage point increase in age related expenditure expected over the next 40 years. That would be £80bn extra annual spending in today’s money. Precisely zero of this is down to public sector pensions. It is all driven by extra health and social care costs. Robert Chote will address this in an important OBR report expected in May.