Public Pension Perversion

'Pay Extra and Work Longer for Your Pensions'

October 8, 2010

The Scotsman - Hundreds of thousands of public sector workers in Scotland would have to pay more and work for longer under recommendations put forward by Lord John Hutton to reform the struggling state-funded pension scheme.

The comments have sparked a row with trade unions, angry that a workforce already facing a two-year wage freeze and the likely loss of hundreds of thousands of jobs as a result of spending cuts could be dealt another financial blow. The independent commission, led by former business secretary Lord Hutton, yesterday suggested that public sector pensions should move away from final salary schemes to the career-average schemes more commonly seen in the private sector, branding the existing set-up as "fundamentally unfair".

Around one in four Scottish workers, around 574,000 people, are employed by the public sector, working in a range of organisations from the NHS to local authorities, the Scottish Government and the police force.

In the report, an interim update published ahead of the final version due to be released in time for the 2011 budget, Lord Hutton highlighted that staff were living longer, meaning that pension pots had to cope with paying out for each employee for many more years than when they were first set up.

He said that asking public sector workers to pay more was the best way to achieve short-term savings, while he also recommended that public sector pensions be based on a career average rather than final salary.

Union leaders insisted they would fight to retain the status quo. Prospect general secretary Paul Noon said: "Civil servants have also been subjected to a recruitment embargo, job cuts and attacks on their terms and conditions. They are in no mood to accept unfair and unwarranted attacks on their pension scheme.

"Pension schemes need long-term, stable management and not knee-jerk responses to the latest fiscal crisis."

"Public sector workers are already facing job cuts, a pay freeze and increased workloads as they are expected to do more with less," added TUC general secretary Brendan Barber.

He pointed to the government's existing proposal to change the basis of revaluation of pensions from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI).

"They have already had the value of their pensions cut by the switch to CPI indexing, which will slice a little off their pension every year," he added. "At a time when inflation is breaking targets and pay is already frozen, asking people to pay immediate increased contributions adds up to a significant pay cut. We are adamant that the final salary scheme should be retained."

Most public-sector pensions are unfunded, meaning pensions are paid from contributions made by today's workers, not from pensioners' past savings.

The additional payments made by the Treasury to fund the gap between the cost and current contributions are forecast to rise to £10.3 billion a year by 2015 from £4bn now.

"Final salary schemes, which are the norm across much of the public sector, primarily reward high earners who progress rapidly through the salary scales," said Lord Hutton. "I am concerned that this may no longer provide a robust and fair mechanism for the majority of the public service workforce."

Lord Hutton's report also called for a targeted defined contribution scheme - where pension pots are invested, for example, in the stock market - for pensions, with the risk shared between the employer and the scheme's members.

Most private sector firms have already moved away from the alternative of defined benefit schemes, where workers know they will receive a specific percentage of either their final salary, or an average of their salary throughout their career, but they have long been the mainstay of the public-sector pension.

But Lord Hutton rebuffed the claim that public sector schemes are "gold plated", warning that they only appeared to be favourable compared to their private-sector counterparts. The long held belief that state pensions compensate for a lower public-sector wage has been busted by a string of recent reports showing that state-funded salaries are actually comparable to their private sector equivalents, except at the very highest level.

"It is mistaken to talk about 'gold-plated' pensions as being the norm across the public sector," Lord Hutton insisted. "In the most part, the pensions that are paid out to public service employees when they retire are fairly modest by any standard, although in part these reflect part-career or part-time working."

Dave Prentis, Unison general secretary, said council workers, including home carers, librarians, social workers and dinner ladies, pay in around 6.4 per cent of their wages to their pension, while NHS workers contribute an average of 6.6 per cent.

"This is an interim report, and Unison will continue making the case for public sector pensions throughout the course of the review," he added.

Median hourly pay in the public sector was 29 per cent above the private-sector level last year. The public-private pay gap has been steadily rising.

Scottish Workers Count the Cost of Change

October 8, 2010

The Scotsman - From the lowest-paid public sector employee, to the well remunerated council chief executive, public sector pensions are due to change. Here, we look at some examples of workers paying into state-funded schemes.

Council chief executive

Retirement salary: £155,000

Annual pension: £85,000 a year, plus lump sum of £77,500

When Tom Aitchison, the current chief executive of Edinburgh City Council, retires at the end of this year, he will receive a pension of £85,000 a year. The timing of his departure means he will still receive a one off payment of £15,000 for organising the Lothians' General Election counts, which gives his pension a final boost.

Teacher

Salary: £32,000 average

Annual pension: £10,000 a year for the average UK teacher, plus lump sum

The average teacher puts 6.4 per cent of their salary into a pension. "I've got a baby on the way and it has really made me think that I am going to have to pay into a private pension as well," says one teacher. "I didn't go into the professions because of the benefits of the pension scheme, but it was a bonus. These changes would be quite a problem for some people."

Nurse

Salary: £31,000 (Band 6)

Annual pension: £8,900 (average)

Our nurse has already paid 13 years of contributions and expects to work for another 28 years. But she says her most recent pension analysis shows that even if she continues to be employed by the NHS for that time, she will retire on just £8,900 a year. "I was headhunted not so long ago for a private sector job and one of the reasons I didn't go was because of my NHS pension," he said. "I wouldn't strike over pay, but I would strike over pension cuts. Nurses are being told that we are a pension burden. This at a time when we are already being asked to do more with less."

Policeman

Salary: £21,000 (average)

Annual pension: £14,000 (average)

Police officers who started work before 2006 are entitled to retire on an inflation-linked pension worth two-thirds of their final salary after 30 years of service. They typically contribute 11 per cent of their annual salary into their pension, but the bulk of the pension is funded by the employer.

Council worker

Salary: £22,000

Annual pension: £6,200 (average)

The civil service pension scheme has four sections, some of which are final salary schemes closed to new staff for a number of years. Nuvos, a "career average" scheme with a normal retirement age of 65, has been the scheme offered to new joiners since July 2007.

At a Glance - The Five Main Public Sector Schemes in the UK

The Scotsman
October 8, 2010

LOCAL GOVERNMENT

With 4.6 million members, this is the largest pension scheme in the UK. It offers a defined benefit final salary scheme to all members, who receive either 1/60th or 1/80th of final salary for each year of membership with local councils themselves meeting around 20 per cent of the contributions. The number of pensions being paid has increased by nearly 30 per cent since 2000. In that time, the total bill has risen from £3.8 billion to £4.8bn. In England, the total liabilities have been valued at £159bn. The average pension is £4,052 a year, with more than a half getting £3,000 or less.

CIVIL SERVICE

A total of 1.5 million people. Older employees and retired members still get the final salary scheme, but there are now new "career average" schemes being introduced. Some of the gold-plated final salary schemes which allowed officials to retire at 60 have now been closed to new members. Nonetheless, the bill for maintaining pensions has gone up from just over £2.9b to around £3.6bn over the last decade, with average payments hitting £6,199.

NATIONAL HEALTH SERVICE (NHS)

Second only to local government in size, there are nearly 3 million members. It has the largest number of members with salaries of £100,000 and the largest number of public sector pensioners receiving pensions in the top 1 per cent, where pensions amount to more than £37,000 a year. With ministers boosting spending on the NHS by 100 per cent since the turn of the millennium, pension costs have gone up. A total of 700,000 pensions are being currently paid, up from 500,000 in 2000. During that time, the annual pension bill has gone from £3.5bn to £5bn, a near 50 per cent increase. The average pension is £7,234.

TEACHERS

There are some 1.8 million members, with over 600,000 receiving their pension. All teachers can retire at 65, and those who have served a full career get around two-thirds of their final salary. The total cost has gone up over the last ten years from approximately £4.5bn to £6bn, with average annual payments now standing at £10,000 a year.

ARMED FORCES

A total of 1 million members. Members of the scheme are able to start claiming their full pension at the age of 55. A serviceman or woman who has served 35 years can expect to get a pension worth around 50 per cent of their final pay. The MoD pays up to 37 per cent of the costs of the scheme. Average payments total £8,693 a year. It costs £3bn a year, but total liabilities are worth £121bn.