Thursday 10 March 2011

Public Sector Pensions The Accidents Waiting To Happen

This blog has gone on at length before on the subject of pensions and the issues arising in the public sector. Put “pensions” into the search at the bottom and all will be revealed.

Lord Hutton has reported that it is necessary now to take radical action on public sector pensions because of the way the system and the world have developed. What he means is that it is no longer a simple accident but more like a major motorway shunt.

The media are giving us the effect on the futures of some ordinary middling and lower paid employees. It is a pity that have not paraded all those at the top who have been treating themselves to substantial pay and pensions packages that have added significantly to the problem.

When I began work those in the public sector who had schemes mostly expected to work until they were 65 (often 60 for women who were on lower pay) with some exceptions, to do their forty years or as many as possible and to have a fixed pension without any adjustments for rising prices.

However, often they were able to afford to buy a home at a price which they could afford on the basis of a mortgage at two and one half times income over twenty five years. Also, they tended to save and not to expect to continually re-mortgage for “improvements” or to attempt high consumption levels that were debt based.

When “inflation protection” was introduced, this was seen as necessary and a consequence of governments following a “Keynsian” (it wasn’t) policy of allowing persistent low level inflation as a means of maintaining employment and reducing the burdens of government debt.

We all know where that ended in the late 1970’s and the consequential reductions that had to be made. This led to a number of “early retirement” schemes that should have been temporary but were left in place.

Down the following years it was often the case that pay increases were curtailed with some improvements at the margins for future pensions. The “classic buy now pay later” approach to politics. Almost it became routine for a pay negotiation to include some favourable treatment of pension conditions.

The effect to all this was that schemes that were essentially solvent at the end of the 1970’s and only needed minor tinkering as the expectation of life rose became vulnerable to deficit and major liabilities as all the improvements became “rights” and employees expected to have much better pensions on the basis of rather fewer years of service.

By the end of the 1990’s it was apparent that there could be troubles ahead for many schemes. However, New Labour instead of addressing the problem both continued to buy off public sector employees with further concessions and fooled itself into believing that the “Goldilocks” economy would wondrously pay for it all forever and a day.

At the same time the public sector was visited with the full burden of increased regulatory and employment costs, added expensive “duties” whilst pay at the top in most sectors, together with pension deals for individuals, went totally out of control.

Also there were a range of other added costs, notably PFI, agency costs and the armies of consultants and accountants with their botched computer plans.

Do not blame Lord Hutton nor the Coalition. This one has been coming, it has been seen to be coming and if the economy ever was to experience problems then it was certain to come.

And the longer it was allowed to go on the worse it was going to be.


  1. can't really argue with that.
    But it should be delayed. 3 years {or even 2} isn't going to make much difference.

    Have you noticed how its being reported that all final salary employees will be losing out after having paid in for 20 years..blah., blh.

    Isn't it true that all contributions, on the scheme that they were in, MUST stay by law? Only new payments can be subject to change?

  2. Again, I understand your point. One snag is that then we are in the run up to another election. I have a theory of matters where "There is no right decision" and I suspect that this is one of them.