Wednesday, 16 June 2010

Who Broke The Pensions Piggy Bank?

Many public sector retired did not get a pension rise in April 2010 because at the determining point in late 2009 there was no increase in the specified price indexes. The present arm waving and posturing on the subject of public sector pensions may indicate that whatever the inflation rate may be the Con-LibDem Government are about to abandon automatic pension increases in line with any inflation as well as reviewing arrangements for public sector retirements in the future.

Inevitably this will hit the poorer pensioners much harder than the better off and there are far more of them than most people think. The debate has been distorted by the recent emergence of a number of high paid appointments in the public sector and those in schemes where the government has fouled up the pay agreements. In this category a good many people have not only had much larger pay increases than others but many immediately have taken advantage of the laxity of terms to take early retirement and then return to work on a consultancy basis.

The comparison with the private sector omits to say about the scale of the damage inflicted by Labour on private schemes compounded by offering tax advantages to firms to adopt anti-pension policies. This followed on the weakness in the previous government in allowing companies to adopt over optimistic criteria in awarding themselves “holidays” in their obligation to maintain pension funding. None the less Labour allowed the big boys to raid their company pension schemes big time for their own personal financial advantage and too many have done so.

The real problem with the unfavourable comparisons between public sector and private sector pensions is the treatment of the private sector by the last Labour government apart from the select number of big wheeler-dealers who were able to make personal arrangements that Croesus would have envied. There was a period when private sector pensions could give a good deal and in a few cases could compare well with those in the public sector at that time.

There is still a more general problem in the public sector. This has arisen because of the way critical structural problems have been building up since the 1980’s which have been avoided by successive governments and those concerned. The vultures have come home to roost as a small number of informed observers have been predicting. Some have been warning for a decade, others aware of the potential for difficulties for two and some back three to the early 1980’s were flagging warnings about what might happen.

After the crisis of 1976, going into the late 1970’s and beyond, it was clear that a lot of difficulties were going to arise as readjustments and reductions were made. One was that in government and its services centrally and locally there were many older staff in their 50’s. On the traditional basis of “last in, first out” a consequence would be that the redundancies would fall more heavily on the younger ages, often just married with young families. There were other complications as well.

It was in this context that the many of the first deals were made to allow those who did not want to stay to take an early pension. Many did because whilst not being ill enough to draw the sick card they were already beginning to struggle. Others did, notably women, who had elderly parents on their hands to be cared for. For many, looking at the expectation of life at that time and having attended a few funerals already of colleagues who passed away, it gave them the chance of at least a few years to enjoy. Remember, this was a generation who were adults in the 1940’s.

There were people around at the time drawing up certain schemes who did try to explain what we thought should be obvious to the politicians and unions. Quite simply it was that if you created a situation where those retiring would spend twice as long drawing a pension then whether the scheme was funded or unfunded it was going to have major consequences.

So if the contributions etc. stayed the same then the schemes would have to be very temporary, for the period of the immediate crisis only, and the conditions limited. Fat chance as it turned out. In the public sector over the next two decades the schemes became embodied as an essential condition of service, often with extra benefits and easing of this condition or that. Contribution conditions were based on thinking that was at best optimistic.

There has been in some cases a degree of tinkering and readjustments in some schemes but almost always on the basis of past data and wildly optimistic readings of government predictions about economic growth and income flows. Pay and service negotiations commonly meant that amongst the horse trading to make the immediate figures look good this or that would be conceded because the bill would not come in until much later. Moreover the increase in the number of public sector employees after 1997 meant a cosmetic boost to contributions which could not be sustained.

Critically, the expectation of life became longer and longer. To claim that this could not be predicted is plain silly. Not only was there a clear trend line but it was evident that recent medical progress was going to impact significantly on the future numbers. The effect was substantial. Instead of a typical period of retirement for a man to be more often less than ten years after 65, it virtually trebled with early retirement. With women already entitled to retire earlier then it still at least doubled.

Although there has been some tinkering with contributions they have not been anywhere near the sums needed to meet the increased costs. Now the bills are becoming due and at the worst possible time. It is a pity that the situation is such that the logic of restoring the private sector to a healthy state is lost in the panic about the public debt. But in the late 1970’s and early 1980’ there was not much logic in much of what happened. At least at that time the arrangements were in place to allow both funded and unfunded schemes to function in balance both publicly and privately.

Worse still, the funded schemes in the last few years have been strong armed into buying increasing dodgy Treasury Bonds to prop up government spending, broadly speaking The Enron Strategy. Also they have been encouraged to take risks in speculative areas, accruing what is now toxic debt and to go big into commercial property. The balances have been further disrupted by allowing a privileged few to claim totally disproportionate pensions at a very early age.

A decade ago I recall a meeting at which a prominent writer was a speaker who both knew Gordon Brown well and had written about him. When asked about Brown’s position on pensions he referred to Brown’s deeply held Maoist/Trotskyite beliefs that personal pensions were wrong on social and economic grounds. In the latter case this related to his very odd ideas about what was consumption spending. We know what he has done to private pensions and to their incomes on such savings they have.

But why has he allowed the public sector pension problem to escalate in the way it has? Essentially, it was to keep the public sector unions quiet and to keep these voters on board for Labour. Instead of intervening he has let them dig their own graves, almost literally in effect. The calculation he made in 2007 with the markets riding high was that the vultures would not come flapping in for at least another decade when others would be around to taken the blame, possibly a Conservative government.

Balls may have worked out the detail and Blair would have bought the package because he was never a man for detail, except in his own personal financial affairs. But it was Brown who let it all happen and who did the groundwork for the present disaster. He called the date wrong for the time when the bills came in but unless they are very careful the Conservatives and Liberal Democrats will allow themselves to be saddled with the blame.

For the working population of the present their taxes, national insurance and pension contributions will increase to pay for the stupidities of the recent decades. In their ageing future they will pay again by drawing smaller pensions from a retiring age a lot later than those of those who have retired in the immediate past. They will not like it.

And really, it was all so predictable.

1 comment:

  1. Comprehensive and accurate summation
    Gildas the Scribbler