Work and Pensions - Public Sector Pensions – MPs must take a lead!
Added 26/03/2009Paul Rowen MP is a Liberal Democrat Shadow Minister for Work and Pensions covering issues as diverse as employment, benefits, the Child Support Agency and for course better pensions. In the last twelve months, Paul has spoken out at the TUC Northern Pension’s Conference, led for the Liberal Democrats on the Child Support Bill and the Bill giving faster payments for victims of mesothelioma. Here is an article that he has written for Pensions Management Magazine - the number 1 publication amongst the Financial Services Industry: Public Sector Pensions – MPs must take a lead
There is a growing pensions apartheid. Not the traditional divide between those relying solely on the state and those with occupational pension schemes but between those in the public sector and the private sector. Ninety percent of all public sector workers are members of DB schemes compared to just twelve percent in the private sector.
Recent falls in the stock market and the governments purchase of gilts for quantative easing can only serve to worsen the divide.
Nowhere is this more apparent than with those at the top of the public sector tree – MPs, Ministers, Judges and Senior Civil Servants. All have gold plated final salary schemes paid for by the tax payer and because all bar local government officers are unfunded schemes there is a public pension ticking time bomb. If it is not reformed quickly it will totally undermine public finances.
In the last three years MPs pension costs have increased by almost 25%, the average employer contribution is 24% compared to 14% for teachers and civil servants and 8% in the private sector. Senior Civil Servants fare even better, the Permanent Secretary at the Department for work and Pensions Leigh Lewis has a pension pot of £1.8m while his counterpart at the Home Office, Sir David Normington has a pot worth £1.75m. These compare to the average private sector pension of £25,107
The pensions for judges are even more generous. Judges contribute an average of only 2% of their earnings towards their pensions with the exchequer making a 30.75% contribution in 2006-07. The 918 retired judges received an average payment last year of £65,000.
The traditional argument for higher public sector pensions has been the differential in pay with the private sector traditionally paying more. However the gap is narrowing Between 2001-2006 public sector pay has risen by 42.6% and private sector pay by 44%. While the government made changes to Teachers, NHS and Civil Servants pensions schemes back in October 2005 they retained the link between benefits and index linking. The retirement age for new entrants was raised to 65 but existing employees can still retire on full pension at 60. They did put a cost envelope of 14% on employer contributions with any increased costs shared 50/50 between employer and employee. However the reforms were inadequate and unsustainable.
MPs, Judges and Ministers were not affected by these changes hence the rapidly rising costs of their schemes and growing calls for these costs to be rained in.
While the media was fixated with Fred the Shred’s Pension Pot on February 12th Prime Minister Gordon Brown wrote to the Senior Salaries Review Body to ask them to conduct a review of the scheme. He said: “The Government is committed to providing public-service pension schemes that are affordable and sustainable in the long term, consistent with the principle of fairness for all taxpayers and between generations.”
Liberal Democrats welcomed this move though it does not in our view go far enough. Currently MPs contribute either 6 or 10 per cent of their salary which gives us either a 40th or a 60th of our salary for each year of service up to a maximum of two-thirds of the £63,291 salary. MPs should in our view receive the same pension entitlements as other public service employers.
In the long term the pensions of all public employers need to be reviewed. It is unacceptable in our view that most private db schemes are closed to new members and most employees are on dc schemes while those in the public sector are still db schemes.
The total cost of these unfunded public pensions has been estimated by the IoD over a 50-year time frame at between £140 billion and £335 billion, over £13,000 per household. These cost can only be met by one of three ways:
(a) Increased taxes
(b) Cuts in public expenditure
(c) Reform of public sector pensions.
The first two options are in our view unacceptable – why should public services be cut or taxes increased to pay for pensions? Urgent reform is needed. Twelve months out from a General Election no party is going to promise to cut public sector pensions; that would be electoral suicide. We have suggested a Pensions Commission similar to the New Zealand Retirement Commission. This would look at all aspects of public sector pensions including funding and benefits.
MPs must take a lead in reforming their own pension and we must then have a proper debate about public sector pensions. The Pensions apartheid cannot continue.