Millionaires, trotskyites and scotoma

David Davison

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I was kindly introduced to the word scotoma last week. The dictionary definition is ‘a mental blind spot; inability to understand or perceive certain matters.’ I would have found it difficult to find a better word to describe the on-going debate, and I use that word very loosely in this case, in respect of public sector pensions culminating in the strikes on 30th November.

Things have been moving at such a speed it’s hard to keep up and to pick out the fact from the rhetoric. The week of the strike began with a bit of school yard name calling as trade union Unite issued their “Dossier of hypocrisy” exposing the extent of cabinet minister’s pension entitlements. All that did was make the case that those particular public sector pensions need to be reformed as much as, if not more than, all the rest.

Unite then did its best to drag us back to the seventies and Citizen Smiths’s already outdated class war rhetoric by suggesting that “what they don’t support is a cabinet of millionaires” attacking their members pension benefits. So presumably it is happy with the long list of commentators who aren’t millionaires suggesting it might be a good idea to have a sensible discussion about sustainable pensions in both the public and private sector, which has to include some significant reforms in the public sector? Or possibly not.

On the other side, the Minister for the Cabinet Office, Francis Maude, waded manfully into the debate and helpfully suggested, in the spirit of the whole class war thing, that leading union figures were Trotskyists.

A spokesman for Unite responded by suggesting that his dad was bigger than Frances Maude’s dad. Okay, I made that bit up, but the sad thing is, it was entirely plausible.

Then that slightly overweight financial guru, Jeremy Clarkson pitched in with his considered view that all “the strikers should be shot in front of their families”. Now clearly the only appropriate response to this would have been for Wolfie Smith to have issued a statement on behalf of Unite pointing out that “Come the glorious revolution, Jeremy Clarkson will be first up against the wall, last fag, blindfold. Pop, pop, pop!”

Instead we had Dave Prentis’s calls for his sacking and consideration of legal action.

Sometimes I despair. This is a staggeringly serious issue for our society and indeed western society as a whole. I don’t doubt the passion and genuine concern of the strikers but the level of ignorance on display about pension matters on all sides is genuinely depressing.

So let’s try and bring some sanity to proceedings.

Very helpfully the Association of Consulting Actuaries (“ACA”) joined the debate with a paper entitled “Bridging the gap between private and public pensions.” Michael Johnson a Research Fellow for the Centre for Policy Studies provided some valuable insights in to the sustainability claims of the trade unions. These mostly rest upon a table included on Lord Hutton’s research which show public sector pension costs falling as a percentage of GDP. Johnson’s research highlighted three main flaws in the assessment namely:-

  1. The chart assumes that the move from RPI to CPI has been enacted. If this was not to be the case then the costs are much higher and unsustainable. The High Court has just found the switch to CPI to be lawful. The Unions are likely to appeal the High Court judgement but they can’t say that pensions are sustainable because of the switch to CPI and then fight to re-instate unsustainable RPI, because that would be irrational. Well actually they can, and that’s exactly what they are doing.
  2. The chart assumes that the public sector workforce will grow by 0.25% a year. How realistic is this given the recent announcements and an expected overall contraction of the sector. Such a reduction would exacerbate the contribution shortfall with fewer contributors but no reduction in pensioners.
  3. The chart also assumes that real earnings growth in the public sector will grow at 2% per annum. Again how realistic is this given increasing pressure from emerging markets and the likelihood that our ageing workforce will become less productive. Again this all doesn’t really stack up.

Other statements such as about lower salaries in the public sector than private sector and comparisons between low paid public sector employees and higher paid private sector workers are wildly inaccurate. No mention of public sector ‘fat cats’ or ‘double dipping’ here.

This all highlights the level of ‘spin’ and misrepresentation prevalent in the debate and how much scope there is to mislead people on what is a highly complex and emotive topic. There are serious questions to be asked if leading figures actually understand the detail and its potential impact. Dave Prentis, Unison General Secretary, on the Today Programme with Evan Davis answered all of his questions about unfunded schemes with answers related to funded schemes!!

I’ve seen letters in the papers where public sector workers refer to their pension schemes as “self funding”! Can we all get one of those? Problem solved.

Next Lord Hutton returned to the fray on BBC Radio 4 on the 4th December. “Change is going to be the order of the day.” The recession is much deeper than expected and “That’s going to affect the sustainability of public sector pensions in a negative way. We could be heading for the rocks unless we make adjustment now.” He described the government proposals as “credible” and said “it is hard to imagine a better deal than this. Moreover, a settlement along these lines would bring forward the point where taxpayers can have real confidence that the whole system is on a much stronger footing. These should be really important objectives for all concerned.”

“There is one other simple fact we should not lose sight of. No strike can change the fundamental mathematics of public sector pensions, or somehow reduce the extra costs of rising life expectancy. The only way to do that is via reforming the system. Sooner or later, this nettle must be grasped. What we cannot do is ask the taxpayer to go on meeting an unfair share of the costs.”

Leading employer organisations and social commentators have highlighted concerns that the modified reforms have already gone too far and have already backed tax payers in to a corner should future change be necessary.

The Government has taken steps to protect those close to retirement and low earners and the move to a CARE basis is more equitable across salary ranges and may even result in certain employees benefitting from higher pensions. Ultimately the Unions are right to say that people are expected to work longer, pay more and get less but that is exactly the findings of not only Hutton’s report but a whole list of similar research over the last 10 years plus. You can’t deny the facts. At least what remains is still a pension scheme of a very high quality and the envy of much of the rest of the UK.

Ultimately change is necessary but how do we do we achieve it from this seeming impasse. Attempts to negotiate public sector pension reform in the Isle of Man offered a microcosm for current reforms, with negotiations there dragging on for five years!!

As leading economist John Kenneth Galbraith said – “Politics is not the art of the possible. It consists in choosing between the disastrous and the unpalatable.”

I can only hope that the scotoma currently existing begins to clear and we’re not heading for disaster.

David Davison

Post by David Davison

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

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