Adrian Owens: Tackling Gordon’s pensions apartheid

Adrian Owens works as a business consultant. He is finance portfolio holder at West Lancashire District Council and a member of the Parliamentary Candidates’ list.

Gordon Brown’s raid on pensions in his first budget is seemingly never out of the news. However, his cowardice over public sector pensions in the face of union opposition should command greater attention given the scale of the problem he has created.

Unfunded liabilities in public sector pensions are now calculated to exceed £1 trillion. While Gordon only seems concerned about paying the £18 billion pension costs of those already retired from the public sector, Neil Record for the Institute of Economic Affairs has calculated that the annual unfunded accruals on the future pensions of current civil servants, police, health staff, teachers and armed forces is £58 billion a year – that’s 4.7% of GDP. Gordon Brown is already storing up problems for the next generation that make the arguments about the hidden costs of PFI seem trifling.

However, it’s not simply our children who will bear the financial brunt of the Chancellor’s inaction. The common cry in Labour’s years of “Where has all our tax money gone?” is partly answered by the words public sector pensions. Increasing longevity and high ill-health retirements are already draining funds from vital services and are major drivers behind the high council tax increases from fire and police authorities each year. As an example, in 2005 in West Lancashire I had to find £473,000 each and every year to fund a massive increase in our employers’ pension contributions from 12.7 to 17% of salary – money that otherwise would have been available for the frontline services our local electors deserve and expect or to cut council tax. We are already having to plan how to extract further savings to pay for a further pension cost hike when the triennial review kicks in next April.

At the same time as the public sector pension problem has mushroomed, the private sector too has been faced with rocketing costs. In part this is due to the increased pension regulation imposed by the Government, much of it ill-advised. In part though, it has the same underlying cause as for the public sector – increased longevity. However, the private sector is much more highly accountable over its pension deficits than government or local authorities. Private sector pension deficits are reported in the balance sheet each year to shareholders and the markets. So the private sector has taken painful actions to stem its rising pension liabilities.

Contrast this with the stultifying progress in the public sector. Every Government attempt at modest public sector pension reform has been followed by a tail between legs retreat in the face of union opposition. Take for example the changes to the local government pension scheme slipped out in typical New Labour fashion just before Easter when Parliament was in recess. The changes will mean that these local government pensions become more expensive as the unions have wrung further concessions through threats of strike action. Conservatives shouldn’t be surprised by this, if Gordon hasn’t stood up to the unions in the past 10 years on this issue, he is hardly likely to do so as the change in party leadership comes ever closer.

Philip Hammond, our pensions’ spokesman has described the chasm between public and private sector as a “pension apartheid”. Both he and George Osborne are clear that an incoming Conservative government must tackle this issue. Given the resentment stoked up by this issue among the wider electorate and the huge future fiscal drag on our economy this is both good politics and good economics.

How though do we approach these much needed reforms? First, any changes must carry the bulk of the public sector workforce with us. While a dust up with the unions is probably inevitable and need not be damaging, public servants need to know that we seek to achieve a fair and enduring settlement of this issue and that we will not simply employ a crude levelling down of their entitlements.

Therefore any benefits already accrued under the current system must be fully-protected; they are, after all, contractual. However, existing schemes could be closed to new entrants; an option pursued in the private sector. Although this would create a two tier workforce, it would protect existing staff. However, in isolation it is unlikely to sufficiently address the financial issues.

Perhaps a more productive avenue would be to explore a trade off whereby employees would receive substantial pay rises in return for a reformed more modest pension scheme – probably a defined contribution scheme. This could be across whole pension schemes or could be operated on an individual opt-in basis. Public sector staff would surely welcome the greater choice and many would opt for increased pay today, in place of the promise of pension benefits if they live into retirement. Staff would of course pay tax and NI on this increased salary and so contribute to the reduction in the cost to the public purse that would be a primary aim of such a restructure.

Other options would be to move to a “career average” scheme where a final pension is based on career average salary rather than final salary. This and other possible reforms would help to increase labour mobility between public and private sectors. It would also reduce the financial effect of the large public sector pay rises under Labour. The large increase in GP salaries has had a corresponding increase to the pension burden for these professionals because final salary schemes raise the cost of all previous pension benefits accrued. Career averaging schemes avoid this.

This is unlikely to be viewed as enthusiastically as other options by staff, but as part of an overall negotiation on the benefits package it should not be dismissed. In the same way increases in employee contribution rates should be considered. For example, it cannot be equitable that local government staff contribute 6% of salary towards their pensions while an employer (i.e. the humble council taxpayer) contributes more than 20% in some councils. Other cost saving changes such as a major tightening of the processes for ill-health retirements are likely to prove easier to implement.

Whatever public sector pension schemes emerge from negotiations under an incoming Conservative government, it is heartening that on this issue as on so many others the party is prepared to deal with the tough issues that Gordon Brown has ducked for the last decade.