Michael Johnson: The government has surrendered to the unions on public sector pensions

Michael Johnson is Pensions expert and Research Fellow at the Centre for Policy Studies. He was author of 'The 100 billion negotiations'.

Yesterday’s concessions by the Coalition, in respect of the public sector pensions negotiations, verge on an unconditional surrender to the unions, perhaps on a scale unprecedented in the history of public sector labour negotiations. The price will be paid by those who are not at the negotiating table; the private sector and the young. The latter could be summed up as simply an extension of the on-going perpetration of generational injustice.

By agreeing to exclude those within ten years of retirement from any deal, as well as increasing the pensions accrual rate, the Coalition has wiped out, for the next ten years, any scope for meaningful cost savings. The only remaining benefit, within that timeframe, will be additional employee contributions, a mere trickle when compared to the burgeoning cost of meeting pensions in payment. 

Today, the cashflow gap (between contributions and pensions in payment) is forecast ^[1] to be £9.7 billion in 2014-15, up from £4.5 billion for 2010-11. At best, additional employee contributions will reduce this by £1.8 billion in 2014-15, so the cashflow gap will still increase to nearly £8 billion (and rising thereafter).

The gap is to be plugged by the Treasury; this, together with employer contributions, leaves taxpayers meeting at least 80% of the cost of public sector pensions. Consequently, increases in employee contributions that are small relative to the total cost of pensions will be of limited benefit to the Treasury. The real economic benefits only arise well beyond ten years hence, principally powered by Lord Hutton’s proposal to link the retirement age to the retreating State Pension Age. Economically helpful in the future, but of no political value today.

Furthermore, yesterday it was announced that the acceptable range for the cost of public sector pensions will be increased, from 17% to 21% up to 20% to 22% of the annual wage bill. The latter is approximately £182 billion; the 3% increase in the lower end of the range is £5.4 billion per year. Consider an alternative use for this state spending; it is equivalent to cutting the rate of corporation tax by 4p. Imagine the potential for economic growth were such an initiative to be implemented today.

There was an alternative: there are a few cashflow "quick wins" which the Treasury could have used as far more effective bargaining counters. The most productive would be to put an end to contracting out of the State Second Pension (S2P), saving some £3.9 billion annually on allied NICs rebates. Indeed, the Coalition should have started the process of public sector pensions reform by raising the State Pension to at least £140 a week. By putting in place a bedrock of retirement income above the means-testing threshold, the Coalition could claim to have addressed the unions’ legitimate concerns over pensioner poverty. It could be (more than) financed by reinvesting the ensuing reduction in means-tested benefits (saving up to £8.6 billion annually) and ending higher rate tax relief (£7 billion annual saving). The Coalition would then be in a much stronger position to negotiate a route map to a wholly DC-based framework for public sector pensions.

To date, the unions have comprehensively outwitted the Coalition in the media war, harnessing to full effect the opportunities for obfuscation and bamboozlement offered by the pensions theme. But, paradoxically, could the unions’ success, to date, ultimately be their undoing?  Such is the opacity of pensions that few within the public sector appreciate just how good the current offer is.  Enthused by their success, Unison has voted to strike; is their own membership about to snatch defeat from the jaws of victory? Could this be a tactical error of Scargillian proportions?  From the Coalition’s perspective, this keeps alive the glimmer of hope of a full blooded national strike on 30th November, which would allow it to pull the deal and walk away from the table. 

In the interim, the unions may accept the deal, but this could ultimately prove to be a Pyrrhic victory, the price being subsequent job losses to exert some control over the cost of future pensions.  Meanwhile, the Chief Secretary to the Treasury should reconsider his ludicrous comment yesterday that the proposals would “endure for 25 years”.  Over that timeframe, no one knows how our economy will perform, nor what the additional costs may be from increasing life expectancy.  This leaves one final question, to the Prime Minister.  Yesterday he made it clear that the pensions offered to the public sector are “far, far better than pensions in the private sector”.  Why should they be?

^[1] HM Treasury; Public Expenditure Statistical Analyses 2011, July 2011. This includes the “cap and share” arrangements announced in 2010.