Strikes and Pensions - 27th November 2011

Little has changed following the oddly named ‘day of action’ –in reality a day off on strike, and for some an involuntary day spent looking after children because schools were closed. What hasn’t changed is the need for reform. Occupational pensions in the private sector have been adapting over many years to the fact that people are living longer. As a consequence, in the private sector, pension income based on a proportion of final salary is now very rare indeed. Public sector employees however, have continued to benefit. The basic economic reality is that when public sector workers live longer and draw their pensions for longer, the greater cost has to be met by higher contributions from the taxpayer or the workers themselves, retiring later, drawing a smaller pension, or some combination of all these. The first possibility – more from the taxpayer- is out of the question. It would be quite wrong to ask people to pay higher taxes to keep public sector pension schemes solvent when those taxpayers have much less generous pension schemes themselves.

Between 1999-2000 and 2009-10 the amount of benefits paid from the five largest public service pension schemes increased by 32 per cent in real terms Public sector pensions now cost £32 billion a year – more than we spend on police, prisons and courts combined.

It used to be argued that more generous public sector pensions were compensation for relatively lower public sector wages, but this is no longer the case: Over the past three years median public sector salaries have increased by 8.5 per cent; 9.7 per cent more than the private sector; full-time public sector workers earn an average of £28,802, nearly £4,000 more than the average private sector worker on £25,000.

A number of public sector workers have been to see me to complain about the government’s proposals. I understand their anger at what they consider to be the arbitrary change to their terms and conditions, but they are wrong. The pension they have already earned is guaranteed and unchanged. We are negotiating changes for their pension going forward. Those negotiations are still continuing, and for some schemes agreement is very close. So, I think it was the height of irresponsibility, in these very difficult times, to strike while negotiations are still in progress. Those who have come to see me often show very little understanding of the costs of pensions and the comparison with the private sector. One fellow went away slightly embarrassed and chastened when I pointed out that to afford an annuity of just £5,000 per year a private sector worker would need a savings pot from his own and his employer’s contributions totalling £100,000. Some also show remarkably little awareness of what is actually on offer –perhaps their unions haven’t told them. So, here’s the deal: Public sector pensions will remain among the very best available – a guaranteed level and inflation proofed; Most employees will see no reduction in the pension income they receive at retirement and many low and middle income earners will in fact receive a larger pension income at retirement; Low earners making under £15,000 a year - that’s 15 per cent of the workforce - will not have to make increased contributions; Another million workers earning up to £21,000 will have their total increase limited to 1.5 per cent over three years; and no one within ten years of retirement will see any change - either in the age they retire or in the amount of pension they will receive on retirement.

To get an equivalent pension in the private sector you would have to contribute over a third of your salary each year. For example, under the Government’s proposed scheme, a primary school teacher earning £32,000 per year could receive a pension worth £20,000 per year. In order to get an equivalent pension in the private sector they would have to have invested 38 per cent of their salary each year.

Of course, it has to be fair to everyone else too, and some people have emailed me to complain that the government has caved-in and offered too much. They should be reassured. Most public sector workers will work longer before retirement and pay higher contributions, The reduction in the cost to the public purse will make the scheme sustainable for the next generation. It is both fair to the taxpayer and to the public sector employee.

As for the strikes, perhaps we should not be too harsh in our judgement: only around a third of union the members actually voted for them. Two of the biggest unions, Unison and Unite only managed to get 23% of members to vote for the strike. Maybe we should blame politicians for not changing the law to require a majority of members to actually vote in favour of a strike before the unions can call their members out.