Keeping Pensions in Perspective

Buried deep within today’s newspapers, behind front pages screaming more dire warnings about the future of the Euro and hailing the latest false dawn in the Israel-Palestine saga, was a revelation that could defuse the tense stand-off over public sector pensions… if only the two sides would allow it to.

As part of the consultation, a lobbying group representing local authorities has submitted proposals that claim to achieve the government’s targeted savings of £900m without the need to increase workers’ contributions until April 2014 – after the public sector pay freeze has ended.

The plan also offers employees a choice between higher contributions now and lower returns in retirement – rather than imposing both, a prospect that has caused much anger among those affected – and protects the low-paid by allowing them to maintain the status quo.

The authors claim that their plan overcomes the unfairness on part-time workers by offering choice and encourages the low-paid to stay in the scheme, reducing opt-out rates that threaten to cripple the system. They also boldly predict a reduced risk of industrial action.

So far, though, the proposal – like all others in this dispute – has met with stubborn resistance from union leaders, who have refused to halt the propaganda machine and have, bizarrely and depressingly, dismissed the plans as a short-term mechanism for imposing a £900m tax on local government pension scheme members.

This statement by Unison, the country’s biggest public-sector trade union, demonstrates a striking lack of understanding of the rationale behind the government’s determination to reform public pensions. Yes, the policy fits within the all-too-familiar deficit and debt reduction strategy and the letter published today does not disguise the raw savings motive.

However, it is also about protecting the millions of public-sector workers who will come to depend on their government-administered fund to supplement the basic state pension in providing for a decent quality of life in their extended retirement.

Many large national and multinational firms realised years ago that they could no longer afford to offer defined-benefit, final-salary pension schemes to their staff, and withdrew it from new employees. Some pension funds even collapsed altogether.

The UK’s bloated public-sector pension scheme has, in the meantime, existed in a fantasy world of infinite resources and static life expectancy. It cannot go on like this.

The sooner the unions realise this, the better. And the sooner they understand that higher contributions do not represent a stealth tax but a redistribution from the present to the future life of an individual, and that lower accrual rates do not represent a lower pay-off but a more realistic and sustainable dispensation of the fund accumulated, the better too.

The irony of this whole dispute is that we actually know very little about the government’s intentions. It may propose much higher contributions (by employee, employer, or both), or much lower accrual rates, or some combination of the two. It may apply changes to existing workers, or only to new recruits; the changes may be immediate, or phased in somehow.

This row has a long way to run, and much more information to be divulged. Nevertheless, both sides seem firmly entrenched. Perhaps a little perspective is needed – after all the lesson from across the continent is that the situation could be, and may yet become, so much worse.