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This is not a pension reform – it is simply a pay cut

Nigel Stanley demolishes the myths used to justify cuts to public sector pensions.

Few people understand how pensions work. The government is relying on this in their attacks on public sector pensions. Ministers claim that they are gold-plated, unreformed and unsustainable. The right-wing press join in by saying that it is unfair that private sector workers’ tax should pay for public sector pensions.

Yet what the government is doing is simple. It is asking public sector workers – already facing a two-year pay freeze, job losses and inflation running higher than it has for more than a decade – to make a further, and even more unfair, contribution to reducing the deficit.

They are doing this by trying to impose an arbitrary extra pension contribution of three per cent of pay on the public sector. This is not a pension reform – it is simply a pay cut.

This comes on top of significant reductions in the value of public sector pensions that blow away the claims that they are unreformed or unsustainable.

Changes negotiated with the previous government reduced the value of public sector pensions by 10 per cent through a range of changes. In particular, under so-called “cap and share”, members agreed to first share – and then fully bear – the costs of any unexpected increase in longevity. This is due to add a billion pounds of extra member contributions.

The National Audit Office closely examined this package and concluded:

“In addition to saving significant sums of money, the changes are projected to stabilise costs in the long-term around their current level as a proportion of GDP.”

So even before anything done by the coalition government or recommended in the Hutton Report, public sector pensions had been both reformed and made sustainable. This is not union assertion, but the hard-headed view of the National Audit Office.

On top of these negotiated changes, the coalition has made a further attack on the value of public service pensions by replacing the Retail Prices Index that has always been used to uprate pensions with the lower Consumer Prices Index. This will further reduce the value of public service pensions by 15 per cent – so we have a cut of 25p in the pound if you combine this with the negotiated changes. 

Changing indexation breached the commitments of both coalition parties to protect accrued rights. This is pensions jargon for the pension you have built up in the past. Scheme members made contributions to what they thought was an RPI-linked pension; now they have had its value reduced by 15p in the pound at a stroke.

Yet ministers persist in saying that public sector pensions are unaffordable. The Prime Minister said on Tuesday that the system was in danger of going broke. But this chart in the Hutton Report shows that public service pensions payments will decline as a share of GDP – even before any of the changes proposed in Hutton bite.

Public sector pensions as proportion of GDP

Treasury Minister Justine Greening was completely unable to argue that pensions were unaffordable when this was put to her on the Today programme.

No doubt this is exactly the kind of assertion that the Public Accounts Committee had in mind when it said: "Officials appeared to define affordability on the basis of public perception rather than judgement on the cost in relation to either GDP or total public spending."

So public sector pensions are sustainable. They have changed.

That leaves the assertion that they are gold-plated. John Hutton was clear that this is untrue:

“The Commission firmly rejected the claim that current public service pensions are ‘gold plated’.”

The figures bear him out. In the big four national schemes the majority of pensions paid are less than £5,600 a year. In the Local Government Scheme half get less than £3,000.

Of course a few very well-paid public servants get considerably more than this. But there are not many of them. And unlike the private sector, where top boardroom pensions are solid gold, not just gold-plated, top public servants are in the same scheme as their staff.

Here is the distribution of civil service pensions. As can be seen the vast majority are well-short of even being modest.

Distribution of public sector pensions

What is true is that many in the private sector get a raw deal – the private sector is now a pensions disaster area. Two out of three private sector workers get no employer help in building up a pension. Even the better employers have not only closed salary related pensions, but significantly cut their contributions to the riskier replacements.

But the answer is not to level down by removing pensions altogether from two-thirds of nurses; it is to improve pensions in the private sector. And it is telling that those so keen on attacking this unfairness never talk about the costs of pension tax relief, currently running at £35 billion a year – more than the cost of public sector pensions and heavily skewed towards the rich.

It is no wonder that public sector workers are angry. One union on strike has never taken such action in its history before. Unions know that pensions are long-term arrangements that do change over time. Negotiations are common in private and public sector. But the government's agenda seems to have little to do with pension reform. This is simply making public sector workers – most of whom are modestly paid – take on an ever greater part of the burden of closing a deficit they did not cause.

Nigel Stanley is Head of Campaigns and Communications at the TUC.

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