Charlie Elphicke and Mark Field MP: Modernisation of public sector pensions to pay for 50% council tax discount for pensioners

Charlie Elphicke is a partner with a leading international law firm, a research fellow of the Centre for Policy Studies and Deputy Chairman of the Cities of London and Westminster Conservative Association.  Mark Field MP is Member of Parliament for the Cities of London and Westminster.

> Policy Summary

To halve Council Tax for pensioners whilst modernising public sector pensions.

> Policy Explanation

Council Tax has increased dramatically since Labour came to office.  Government figures show that Council Tax for the average household is £898, up from £412.  A rise of 118%.  The most recent budgets have placed even greater administrative burdens on local authorities without commensurate central government grants.  Nowhere has this rise been felt more strongly than by pensioners. Here is why:

• The average Council Tax paid by pensioners amounted to £720 after Council Tax Benefit according to the latest available figures from the Office of National Statistics (ONS).  Meanwhile, the average income of all pensioners after state pension was £13,336. 
• This compares with the average pre-tax income of working age households being £35,954 in 2004-05.  The ONS figures show that the average Council Tax of non retired households was £874 after Council Tax Benefit.
• Council Tax therefore equates to 2.4% of the pre tax and benefits income of non retired households.  Meanwhile, it is equal to 5.4% of the pre tax and benefits (but taking into account the state pension) income of retired households.

So it is not hard to understand why so many older people feel very angry about Council Tax. And it can immediately be seen why Council Tax reform for pensioners is not a "good to have", but a matter of fundamental fairness for pensioners. Halving Council Tax for pensioners would reduce the burden of this tax into line with the burden it has on everyone else.

> Political risks and opportunities

The reform of Council Tax would be real step forward in providing help to pensioners who have been really let down in recent years.  The issue is going to be cost.  We Conservatives are now to fiscally responsible party that believe in stability and reject so called unfunded mandates.  So we see the Council Tax reform being paid for by the parallel modernisation of public sector pensions.  In our view this is about fairness for the many, not the few.  With this reform, pensioners will celebrate, yet public sector workers are much attached to the incredibly generous benefits they get and are less likely to be so enthusiastic.

> Questions for Conservative Home readers

• Other than Council Tax, what more can we do to help pensioners, who have really suffered under this Labour Government?
• If we were to reform public sector pensions, should we do so in a “big bang”?
• The savings from the modernisation of public sector pensions will take time to come through.  How should we best handle the timing gap – e.g. borrow in the meantime or filter through the savings as and when they arise?
• Does this reform proposal sail too close to the winds of hypothecation.  This is the tying together of tax and spending which the Treasury very strongly dislikes (for a number of very good reasons).  If so, do we care or should these reforms be presented as entirely separate policies?

> Costs

The cost of halving Council Tax for older people will be £2.35bn on the basis of the ONS 2004-05 figures. So the current estimated cost of this policy is £2.5bn.

The Council Tax reform is intended to be paid for by the parallel modernisation of public sector pensions.  This modernisation would mean greater fairness as between public sector workers and move the retirement age to 65, as it is for everyone else in Britain.   This modernisation will save in excess of £2.5bn over time calculated as follows (numbers obtained from expert actuaries):

• All civil servants retiring at 65 will save £2bn – but over time;
• The schemes are all 1/80ths across the board will save £170m; and
• All civil servants make contributions which are fair (i.e. 6%) will save £520m

A further benefit of the modernisation of public sector pensions would be to reduce the long term liabilities of the nation. For further details of these liabilities and why this reform would therefore be doubly attractive, see the recent Your Platform piece by Brooks Newmark MP. Brooks Newmark sets out a useful summary of the position described in the paper Simply Red: The True State of the Public Finances (Brooks Newmark MP and Stephen Hammond MP).

   

Comments

[Phil Taylor]

I am wary of any proposals that reduce the connection between who pays and who benefits from council tax. There are already too many people who vote in a certain way because they do not have to deal with the financial consequences. Sheltering such a large group of voters from the consequences of their decisions would be a real mistake.

There is good justification for having a part of the tax base based on property. It is cheap and easy to collect and makes people think hard about how much space they really need. It is nice to think that you can stay in the same home throughout your retirement but maybe pressure on house prices would ease if we removed stamp duty and encouraged people to trade down as their children left home.

We all need relief from council tax rises. I would like to see education funded directly. Then there would be much more correlation between what is locally funded and spent and the pain of the funding should rightly be shared amongst all households. There should be protection, as there is now with council tax benefit, for those suffering hardship. But letting such a large group, many of whom are among the wealthiest in society, have a discount would be wrong.

[Adrian Owens]

This policy fails on two fronts:

1. It is exceptionally timid about the reforms to public sector pensions that are required. For example, proposing an employee contribution of 6% when the taxpayer in my council is currently making an employers' contribution of 17% is indicative of the unbalnce in the current system and the scale of the problem.

2. Ironically council tax is a tax that the public should welcome. It is clear, easy to understand and transparent. It is the antithesis of a "stealth" tax.

However, it is also for these same reasons that it can be unpopular, but only when politicians lose control of the public purse or introduce new burdens which result in the tax rising by more than the growth in the economy.

Income tax, sales taxes etc are beloved of many politicians because they can rake in the revenues from the public without protest.

The fact that council tax is billed to households is a great discipline for controlling the levels of this tax.

To introduce new subsidies via council tax discounts strikes out in an opposing direction to simpler taxation. It will also discourage older people from downsizing to smaller properties. Furthermore it is poorly targetted.

People on lower incomes including retired people can best be helped through a massive increase in personal allowances.

[Mark Wadsworth]

I aree with Phil and Adrian.

Of course, politically and tactically this might be great, but just I don't believe in hypothecation.

If you are going to go for hypothecation at all, then why not say "We'll cut back on these over-generous civil service etc pensions and use the saving to increase the basic state pension"?

[John Moss]

I'm afraid we are going to have to be much bolder with Public sector pensions and Council Tax reform.

In respect of pensions:

There should be an immediate freeze on new public sector employees joining the final salary scheme. All new entrants should be enrolled in a money purchase scheme to ensure that no new liabilities are incurred for new employees.

All existiing PS employees with less than 10 years public service, in aggregate, should have their final salary schemes, "bought out" and be placed on the same deal as new entrants.

All other PS employees should be required to work to 65 and all payments, including those made to MPs, should be based on 1/80th accrual each year based on salary in that year. (ie, If you earn £40,000 in Y5 of your employment, you gain the right to £500 pa on retirement, not 1/80th of your final salary.)

In respect of Council Tax:

We should allow Councils a far wider range of options for rasing revenue to suit their local circumstances. Part poll tax, part property tax, part business rates, part local income tax. If we do not do this, we end up with policies like the one above which would halve the Council Tax of pensioners with high personal wealth and large incomes rather than targetting the help on those with no personal wealth and meagre incomes.

I for one would not wish to have to defend that policy on the doorsteps.

[aristeides]

"This does not get my vote because I do not believe in wealth redistribution."Of course, politically and tactically this might be great, but just I don't believe in hypothecation." Mark Wadsworth.

Equally, it does not get my vote because I do not believe in redistribution. Tax bribes are Labour's game and, frankly, there are an awful lot of pensioners sitting on large assets who just don't need this benefit.

As previous commenters note, it is also important not to severe the connections between the amount paid in council tax and the cost of the services.

[Jonathan Mackie]

Adrian identifies the issue about the scale of employer contributions to public sector pensions. 17% is about average although I have TUPE'd out staff from one authority where the contribution was 19.6% of salary.

This is a massive burden and future liability.

The answer is to encourage much greater externalisation of services. Ensuring that existing staff have the benefits protected but any new recruits would be placed in a money purchase scheme consistent with the Cabinet Office Guidelines on Staff Pensions. (Money purchase with capped 6% contributions). That approach would see the liability on future taxpayers gradually atrophy.

On the Council Tax point, there is undoubtedly an issue in respect of asset rich but income poor households, but the real resentment isn't so much the level of tax but the quality of service delivery and the perception of watse and institutionalised complacency that prevails in most local authorities.

[Mark Wadsworth]

Aristeides "it is also important not to severe the connections between the amount paid in council tax and the cost of the services"

I think it is more important for there to be a link between the amount paid in tax and the VALUE of the services RECEIVED. Some councils spend billions on stuff that adds no value whatsoever. Some councils spend smaller amounts much more effectively. You should pay for what you get (i.e. a grammat school is cheaper to run than a new fangled City Academy but is still worth more to local residents).

And if you're not getting anything, then vote for a different party at the next local elections.

[Deborah]

John Moss makes some good points.
The cost of public sector pensions (my local authorities contribution is over 20%) needs addressing right now.
As regards the proposed policy, although many pensioners are suffering financially, others - who retired on very comfortable pensions - are jetting off on holiday several times a year to spend their income abroad. These pensioners are doing very nicely thank you and are enjoying a lifestyle that few of today's workers will be able to afford.
Blanket subsidisation is a bad idea.

[TaxCutter]

Of the living, its pensioners who voted for the social democratic governments the UK had between 1945 and 1979 and 1991 to present that voted for an unfunded pension provision. They already do well out of the current system. Making them pay their fair share of council tax when they already get tax benefits such as higher personal allowances seems reasonable to me.

Why not reform Public Sector Pension provisions and cut income tax for all?

[aristeides]

Fair point, Mark. However, it is only if you feel the pinch that you are interested in whether the money is spent wisely or not. This proposes cutting the contribution of pensioners (NB a surging demographic) by half, so why should they care how it's spent for the next few years... and when it starts to bite again, now that the principle will have been conceded, will the proposers be asking for further reductions in the rate that pensioners pay or more efficient spending then?

[Winchester whisperer]

Council tax should be abolished. Why should our hard-earned cash be spent by a load of financial incompetents?

[Jack Bains]

Many pensioners have huge incomes. It gets on my fiscal nerves to see "pensioners" in new BMWs picking up free prescriptions and then going back to their 5 bedroomed houses. My wife's Aunt used to give her winter fuel allowence to her son for Christmas - he lived in the USA and worked for a multinational corporation on a six figure salary! Stop assuming pensioners need help.

[ThomasMarksGibbins.]

Is Charlie Elphicke the brother or some sort of the Vicky Elphicke that Mark Field is now supposedly meant to be getting married to?
Nothing like keeping it in the family......

[greg]

Er, the Local Government retirement age of 60 has already been abolished. Please try and check your facts first.

[greg]

Here's an idea. How about publicising how pensioners can release some equity in their houses to pay their share.

Why is it always bl**dy pensioners who get have campaigns arguing for reductions? As for arguing that the people now entering the job market, many with enormous marginal tax rates thanks to student loans etc, who can never dream of the wealth of many of today's pensioners, should not just sacrifice their pension deals because they are not affordable, but to actually give others council tax reductions!

Whatever happened to the "deal" whereby public sector workers got worse pay, but better pension benefits?

[Deborah]

Greg,
The deal was broken when public sector pay rises went through the roof.

[Deborah]

In recent years when public sector employees have taken early retirement the cost of "topping up" their pension has exceeded the value of the total pension pot for many private-sector retirees. The public sector pension is so expensive that hundreds of thousands of pounds of taxpayers money is needed to make up a few years service.
What kind of deal is that?

[David Sergeant]

Just a technical point. Local Government pensions are funded, they are the only public sector pensions which are fully funded - and we want to target Council Tax? I agree with most of the above, pensioners are not necessarilly that badly off, and those that are probably do not pay Council Tax anyway. I am a pensioner and I am fed up with all the special deals, buses, TVs, heating, etc for pensioners. We should be given the money for us to decide what to do (I don't come anywhere near qualifying for state benefits) and get rid of all these special deals which probably cost a fortune to administer.

However, one point out of all this is yet another statistical demonstration that this government has not reduced poverty (see the CofE survey and Rowntree trust calculations).

[Adrian Owens]

David at 6:46pm,

To a point local government pensions are funded, rather like private sector schemes, but don't be complacent. Again rather like private schemes, most local government schemes have massive deficits - Lancashire's from memory is less than 80% funded.

The difference is that many private sector schemes have taken hard decisions including raising employee contributions. Local government has avoided these hard measures and so the situation continues to worsen and we as council taxpayers will foot the bill when the next revaluation kicks in in Spring 2008. But then don't entirely blame local government as central government pulls the strings.

[Matt Davis]

I agree entirely with John Moss above, especially about the inadvisability of a blanket reduction in Council Tax for all pensioners, with no regard to their means, since what us Conservatives ought to be endeavouring to do is to drastically reduce the current unsustainable levels of this tax for everyone, not just some people. This means addressing the fundamentals of what Local Government does, whether it should be doing some of it at all, and if so then how it can be done most efficiently.

However to move to the Local Authority pension scheme John Moss is absolutely correct to target a halt to new joiners to the final salary scheme as the first and most urgent step. It is iniquitous and just plain unfair to impose a major change to their pensions on individual people with whom we have a long established deal, and yes it is a deal that many will have planned their futures around that we the public have with them, and will undoubtedly lead to a long and painful strike by the affectd employees, which may or may not be won by the Government. However there is nothing to say that the rules for those joining now, or who have not been in the scheme for a long period, cannot be changed and that would allow Councils to completely quantify their liabilities and so plan properly for them.

Ultimately the Labour Govenrment have established a principle of relative pay equality between the public and private sectors and the trade off benefit for the tax payer ought to be that same rough equality also applied to retirement age and pension provision and not just to inflating public sector salaries.

[ChaunceyGardener]

This is bad politics. It is seeking to reward a group of voters who are already more likely to vote Conservative by taking from a group of voters who traditionally don't vote Tory but you need to persaude to do so in significant numbers in order to form a government. This is one policy that you could guarantee ensure the public sector workers stay very firmly in the Labour camp. It sends a very clear message that you are anti-public sector and don't value the work of those who work in it. Public sector pay is for most still behind that it the private sector.

Others have already said why reward todays pensioners many of whom are quite well off. This generation of pensioners really have never had it so good and I am sick and tired of all help being focused on them. Nothing is done to help todays 20 and 30 something many of whom are struggling to buy modest houses because of sky high house prices and are burdened with student debt that saving for their own retirement is a luxury that many just can't afford. Many of these people are already limiting themselves to one child because of the costs involved which is further undermining the number of young people we have to support older generations.

We need to find away of stopping pensioner poverty in future generations rather then further feather-bedding the current generation. To this end solving the problem of poor pension provision in the private sector is not to make the public sector equally bad. Many companies have walked away from their commitment to their workers and their private sector pension schemes by switching from final salary to money purchase or shutting them down altogether. We are shifting the entire burden burden of saving for retirement to the indiviudal but for many this means they will not be able to build up suffiecent savings pots to deliver pensions high enough to make it worthwhile. We need to find ways to restore the tripartite mix of state, individual and employer funding to ensure the next generation of pensioners are not impoverised.

I vote NO NO NO to this one as this should not be the priority or focus for a future Tory governemnt.

[tired and emotional]

I'm against bribing pensioners but for reform of local government pensions (and public sector pensions as a whole). I do sympathise with pensioners who are struggling with 8-9% real inflation in their cost of living while on fixed incomes but I have to say, given the ageing of the population, that swapping one huge liability for another is not my idea of a sensible policy.

If you are going to take on the local government unions you might as well make a proper fight of it and actually take the hard choices that are needed. Retire at 68, freeze the scheme for new entrants, higher contributions from people in the schemes, lower benefits for those ten-fifteen years or so from retirement. All sensible and necessary. If you reduce council tax as a whole for all payers by cutting the cost to the taxpayer of local gov. pensions then that is a laudable aim.

The argument that you can solve the pension problem in the private sector by forcing companies to fill the gap created by excessive regulation, tax raids, demographics and Treasury duplicity is wrong.

The individual has to be at the centre of providing for his or herself in retirement. Labour’s proposed solutions are a good stab but will fall down in the predictable areas. In attempting to ensure ‘fairness’ rather than ‘quality’ the way the NPSS and the reformed State Pension interact will ensure that a massive disincentive to save is put in place and the complexities of individuals’ situations combined with the costs involved will prevent anyone with any expertise from advising anyone usefully whether to opt-out of NPSS.

If you want private pensions to work again for the low paid you need to get rid of means testing entirely from the State pension. Then everyone, no matter their circumstances, has an incentive to save in NPSS. Scrapping the higher rate tax boost to savings going into pensions would pay for this. I also think that a higher flat rate pension linked to prices rather than earnings would store up less liability looking ahead but no-one will want to hear that I suppose.

If you want people who do know what they are doing to use pensions as a savings vehicle then you need to scrap compulsory annuitisation. It is that more than any other factor which disincetivises people from building up long-term savings specifically for their retirements.

Pensions will remain fucked because of Gordon, ultimately, but that other fraudster Robert Maxwell deserves a mention. People think Gordon Brown is obsessed with Inheritance Tax avoidance. He isn’t. He is obsessed with Inheritance, full stop. I believe this is because he knows that, as wealth accumulates over generations, people have enough money and the freedom to decide for themselves what to do. He knows that given the choice everyone chooses private schools and would choose private healthcare and this does not fit his vision of the bountiful state dispensing ‘its’ largesse to the collective who remain eternally grateful to GB as they toil nobly across the great mural in his mind.

[David Sergeant]

"He (Brown)knows that given the choice everyone chooses private schools and would choose private healthcare and this does not fit his vision of the bountiful state dispensing ‘its’ largesse"

Just cynical old me, but I wonder if when Brown raided the private pensions he had in mind making people more dependent on the state (pension). ie. him. No no, of course not, he wouldn't have been happy at the rising house proces either because that makes new starters depependent on state housing and we all know NewLabour arn't socialists don't we.

P.S. Adrian Owens, at the last count Lancashires penrion sceme was 93% funded, but, no one should be complacent with this lot.