Shadowy right-wing pressure groups, politicians and parts of the media have waged a long campaign against public sector pensions. You’ll have seen the headlines, over and over again: Public sector pensions are supposedly “gold-plated“, “unreformed“, “unaffordable“.
But it’s remarkable how few of these stand up. Check out some of the more common myths here, to see the truth behind the headlines:
Public service pensions are ‘gold plated’?
Most public sector pensions in payment are less than £5,600 a year. (£3,000 in local government). Half of women public service pensioners get less than £4,000 a year.
This is what John Hutton said in the report of his Commission:
A YouGov poll asked people what they thought the average public sector pension ought to be.
The average answer was £17,088. Nearly half (44%) said it should be more than £15,000.
Almost half (49%) of respondents believed the average public sector pension is more than £10,000, and only 23% think that it is less than £10,000.
Public service pensions are unreformed?
Tough negotiations with the last government resulted in an agreed deal to reform public sector pensions. The National Audit Office say that it would reduce the future cost of pensions by 14%.
Changes included higher pension ages for new starters and higher contributions in some schemes – including bigger percentage contributions for the highest paid. Other negotiated changes included a move to a career average scheme in the civil service.
It also dealt with what everyone agrees is a difficult pensions issue: trying to predict how long people will live. If people live longer than expected, pensions will cost more than predicted.
Under the deal, the extra costs of unexpected increases in longevity would first be shared by employer and employees together. But the employer cost was capped, meaning that meeting the higher costs of any further extra increase in lifespan would fall entirely to members.
Public service pensions are unaffordable?
The critics talk of a pensions time-bomb and say that the costs of public sector pensions are out of control.
Pensions commitments go many years into the future. So working out what it would cost if every pension payment for decades to come had to be paid tomorrow morning produces a big, scary number.
But it is also a meaningless number. That is not how pensions are paid.
Both the National Audit Office and the Hutton Commission say the best way to measure whether public sector pensions are sustainable is to work out the likely cost of future payments as a share of the wealth the country will produce (GDP – as economists call this.)
This was been done twice in recent years. First after the changes negotiated with the last government, and again to also take account of the switch to CPI indexation.
So what did these show?
The deal negotiated with the last government in 2007 made costs stable. This is how the National Audit Office described it.
Before this government made any changes at all therefore, public sector pensions had both been reformed and made affordable.
Experts agree that these negotiated changes reduced the value of public sector pensions by 10%.
An even more sophisticated exercise was done for the Hutton Commission. This was based on the switch to CPI indexation as well as the 2007-8 changes.
Predicting the future can never be exact, so this exercise looked not just at the most likely cost, but looked at best and worst cases as well. This is why the graph line below gets thicker as it moves into the future.
The government is protecting the low-paid?
We are proposing in particular that the lowest earners will face the least, or even zero increase in their contributions. Our proposal would not increase contributions at all for those earning less than £15,000 a year, and we propose a limit of 1.5 percentage points increase for those earning up to £18,000. This would be progressive and fair.” Danny Alexander, Chief Secretary to the Treasury 17 June 2011
The government wants contributions in pensions to rise by an average of 3.2 per cent. They say they want bigger increases for the high paid and smaller increases for the low paid. But they are not using people’s actual pay to measure whether they are low paid, but their full time equivalent pay. This means that many part-time workers who take home what most would consider a low wage will not get this protection. Let’s look at an example to see how this works. Meet Sue, she works in the NHS and works half time. Her pay is £14,000 a year. But as she works only half the week the government counts her pay as £28,000 a year – the full time equivalent. At the moment Sue pays 6.5 per cent of her pay into her pension. By 2014 the government wants her to pay 9.5% – an extra £416 a year or £8 a week. That’s a 45 per cent increase in the amount she pays. Sue’s pay is currently frozen for two years, even though inlfation is higher than it’s been for many years. The government’s own estimate is that prices will have gone up by 16 per cent by 2014. If Sue’s standard of living is to keep up with both this increase in the cost of living and her extra pension contributions she would need a a 19% pay increase by 2014. That’s not very likely – and shows the government is not going to protect Sue’s standard of living.