King Canute, Ostriches and Public Sector Pensions

David Davison

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I’d been asked to draft some thoughts on the current, and likely future, state of public sector pensions for The Scotsman which I did in an article on the 4th April- Time Turned on Pension Attitude. Not surprisingly (well it was of little surprise to me at least) that the article received a prompt rebuttal from a leading trade unionist, Dave Watson of Unison, denying that any problem exists with public sector pensions – Contrary to Popular Belief Pension Costs are Falling.

This is undoubtedly the problem with raising the spectre of public sector pensions as it completely polarises opinion between those affected and those who are not and raises strong emotions on both sides. I could feel the irked indignation from Mr Watson in every keystroke.

Fortunately, unlike him, I am not conflicted on this issue but have raised it purely from the perspective of a pensions professional, tax payer and as someone concerned by the legacy of debt we are leaving future generations. Despite what Mr Watson may have implied there are no political motivations in my article as none exist.

Apparently my, and others, concerns about the state of our public sector pensions are misplaced and we should be re-assured that everything in the garden is rosy. I remember Mr Watson well from the 2008 negotiations he mentioned in his article as he is quite clearly a wonderful negotiator and has very ably looked after the interests of his members through that negotiation and beyond. These 2008 negotiations lasted for about three years and resulted broadly in members of schemes contribution rates increasing from 6% to 6.3% on average – I wonder if Mr Watson’s members appreciate just how good a job he did on their behalf!!

Whilst LGPS are indeed funded schemes it shouldn’t be ignored that the contributions to these schemes are mostly made by the tax payer. In addition many public sector employees are in unfunded schemes where pensions are paid directly from the Exchequer and the point made about Strathclyde Pension Fund was to highlight how demographics are influencing scheme funding, demographics which are likely to be more difficult to deal with in a Scottish context as has been recognised by recent Scottish Government publications and the House of Lords Economic Affairs Committee – Independent Scotland to Face Pension Timebomb (but we can ignore that as they’re all Tories – apart from those who aren’t!!). This was the reason behind highlighting the recent move to negative cash flow experienced within Strathclyde Pension Fund, not something now in any way unique.

The point about the funding rate of LGPS schemes is indeed well made however it does ignore the fundamental issue that funding levels were maintained at this level in the last round of valuations purely because of the move from RPI to CPI, something which Unions opposed through the Courts. Had they been successful funding rates in all likelihood would have been around 10% worse with a commensurate increase in contributions, not to mention something of a weakening in Mr Watsons argument. In addition only some schemes are funded as well as 95% with others down in the low 80’s.

The potential fall in costs of public sector pensions referred to is a completely spurious figure as it was based on actuarial assumptions widely accepted now as overly optimistic and was based on a future basis of public sector pension provision considerably below that successfully negotiated by the Trade Unions with the Government. The figures have been discredited by John Hutton himself and the true costs are much more clearly defined in the statistics I’d highlighted in my article.

In terms of fair deal it’s worth clarifiying that I advise 100’s of charity / not-for-profit organisations who are forced to participate in these schemes despite being unable to afford to do so and are unable to exit because of the legislation currently surrounding them. Many of the employees in these schemes are indeed represented by Mr Watsons Union. Hutton’s proposals specifically suggested that public sector schemes should be for public sector employers. It is these NFP employers who would be well-equipped to provide out-sourced public sector services but are unable to do so because of the onerous pension implications.

In addition the basis upon which past service liabilities in these schemes are attributable to new employers is unfair and can leave many organisations insolvent at the end of contract periods. Indeed I’ve seen numerous charities placed in this position at the end of a contract having lost the engagement to another employer who doesn’t provide DB pension benefits. This results in organisations who would be well suited to provide services, often on a no profit basis, being unable to tender for this work which results in higher cost, less suitable provision being selected which can’t be in anyone’s best interests. This is where fair deal needs to be reviewed. Mr Watson is right about the State, or rather the tax-payer, picking up the Bill, as they are already doing so through increased costs and for service provision and covering unfunded pension liabilities when participants become insolvent.

Public sector pensions lack choice instead retaining a one-size fits all ethos, even when it clearly doesn’t fit everyone. Other similar schemes have had to recognise this need so why not public sector schemes. It would be great if there could be a less emotive debate about the issues surrounding public sector pensions and a wider range of options was available but given Mr Watson response I am not at all hopeful. In the meantime I’m off to polish my bust of Boris Johnston.

David Davison

Post by David Davison

Specialist consultant on pensions strategy for corporate, public sector and not for profit employers

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