Saturday, February 16, 2013

The trouble with pensions - part 2 (public sector)

No review of UK pensions can be complete without a discussion of the divide between the private and public sector. Unfortunately, that word 'discussion' is pretty rare in practice - instead we have, on the one hand, public sector unions screaming hysterically at any suggestion of change, and on the other, an ill-informed press, printing headlines that border on scaremongering.

The truth is somewhere between the two, and frankly, there isn't space here for detailed financial analysis.  But what is undeniable is that the public sector has seen comparatively little change over the last twenty years.  Meanwhile, as I described in my last post, successive governments have stood by and watched the wholesale dismantling of comparable schemes in the private sector.

The end result is what's been described as a pensions apartheid - with the vast majority of citizens now dependent on self-invested funds (known as Direct Contribution schemes), whilst workers in the public sector continue to enjoy what are stratospherically better terms, underpinned by the taxpayer, inflation linked, and often with early retirement thrown in...

To understand why this disparity has come about, it's important first to return to the old company schemes and specifically, the way they were funded.

In simple terms, company schemes were financed by contributions from members and the sponsoring employer. Over many years these contributions grow and are invested, typically in stocks and bonds, with the proceeds paying for the pensions of members.  There are strict rules to ensure the funds have enough cash and investments to cover the projected future payments.  And CRUCIALLY, if there is a shortfall, the employer has to make up the difference!

What happened in the private sector - putting the whole issue in a nutshell - is that companies realised they could no longer afford to fund these schemes. As the population began to age the shortfalls (known as pension deficits) were becoming enormous - in many cases bigger than than the entire value of the sponsoring company.  Over a few years, virtually every large UK company closed their final salary schemes.

It's important also to understand - despite the hysteria of the TUC and the conspiracy theorists -  that most of them did this with a heavy heart. In the vast majority of cases, those making the decision would be directly affected and there was deep concern over the impact on long serving employees. But ultimately, it was not in anyone's interest to continue with what had become unsustainable schemes.

Last week I read an otherwise rather good paper which argued that public sector pensions should not be changed - two wrongs, it said, don't make a right!  But in this regard, the paper is missing the point - the companies were not 'wrong' to make these decisions; to have continued would  have bankrupted them and left pensioners in the lurch. Sure, there were some which took advantage, some were less scrupulous and generous than others - but the basic point is undeniable: companies could no longer afford to fund pensions schemes to the level we had all become used to!

So why was so little done in the public sector?

Well, here we have to get into generalities. But the key reason is that the majority of public sector schemes do not have accumulated funds - instead, the member contributions go directly to the government and the taxpayer picks up all responsibility for future payments.  There are not the same rules for funding; not the same rules for how early retirement should be accounted for; not the same prospect of bankruptcy - in short, there is not the same incentive to change.

The result is an almost inestimable deficit, which continues to grow, and though not included in our calculation of public debt, it will soon (at a low-end estimate) cost every single taxpayer £1200 p.a.! In my last post, I described certain aspects of public sector pensions as 'verging on the immoral' -  it is largely this deficit I had in mind. The failure of successive governments (and the recent Hutton Report) to deal with this, is something future generations will pay very dearly for indeed. We are talking about trillions and trillions of pounds.

The trouble though, with any debate on public sector pensions is it depends where you stand - not surprisingly everyone I've met who works in the sector will defend their pension vigorously, but then they're hardly objective are they!  I believe I've demonstrated over many previous posts that I care deeply about pensions, that I want to see a better system in place for my children, that we lack vision and courage - that we have to stop the rot. And yet even I can't accept that what we have in the public sector is any way fair or good for society as a whole.

It's no doubt possible to present the figures above in a different way, to argue that we need to avoid a 'race for the bottom', to claim that certain parts of the public sector (the armed forces for example) are a special case. But ultimately, we have to answer one single question - why should the public sector have substantially better arrangements than that which the government deems right for everyone else?

And the honest truth is I can't answer that with any rigour.

The Government has recently introduced a quasi compulsory pension plan known as 'auto-enrolment' - it has been lauded as a scheme that will ensure every worker has a decent pension. And to give you some idea, an average wage earner participating in that scheme for their entire working life might just, if they are lucky, accrue a pension equivalent to 25% of their wage - almost certainly not index-linked, and extremely limited in its guarantees and other benefits. A public sector worker on the same wage and working over the same period would enjoy a pension of upwards of 50%, index linked, spouses pensions, etc, etc.

I could go on about the unfairness of public sector pensions.  Why, when the minimum pension age was raised to 55, was the Police Service 'red circled' to allow their pensions to be taken from as low as age 48?  Why were so many public sector workers (estimated at millions of retirees) given enhanced packages that would never be justified in the commercial sector? Why do those 'funded schemes' such as exist in local government, not have to adhere to the same recovery schemes as the private sector?

My own family reading this blog may wince (they include three teachers, all early retired; one policeman soon to retire; my brothers are a teacher and a nurse; my late father was a policeman retired age 50).  I'm not saying they don't deserve their pensions - but I am saying they would never have got them in the private sector today, and that at some point this disparity has to stop. For my close family also has eight children and young adults - we have to also think about them.

Of course, it could be argued (to some extent it was by Lord Hutton) that the State should set an example - and that by doing so it encourages best practice in the commercial sector. If I thought this were true, I'd support it - but, sadly, there is not a scrap of evidence to show that companies will change course.  What's more, the recent Government changes to pension funding makes it almost impossible for them to do so. The truth is, the old company schemes are dead and they will not be replaced. And this is why I passionately believe public sector pensions must change too. For only then will we see the creativity and vision needed to improve pensions for everyone.

If you want me to pin my colours to the mast, I'd like to see a system that is broadly universal - that makes saving compulsory regardless of earnings - that pays out near to 35% of salary by retirement age - that is capped at roughly £50,000 p.a. so very high earners can't use it as tax haven - that is index-linked and not eroded by means tested benefits - that can be calculated with a high degree of certainty - that can be bequeathed in the event of deaths.  In other words, a system that lies somewhere between the public and private sector norms - a half way house that is fairer for everyone.

All that is possible, but only if we pool our resources and not if we continue to over-egg schemes for 20% of the population whilst constantly cutting those which apply to the rest. It is not a matter of reducing what we pay for pensions as a whole, nor is it a matter of racing to the bottom - rather, it is a matter of paying more ( a great deal more if necessary)  but spreading that cost and its benefits more evenly.

And above all of this, there is simply a question about the kind of society we want to live in. I want one that offers the prospect of a decent retirement for all, not one that's riven by envy and division in old age  - nor, at the other end of life's spectrum, one in which young people are forced to make career choices based on a fear of old age.  I want one that is shaped by neither hysteria nor scaremongering, but by an understanding that whilst we need to make some unpalatable changes, those are best achieved if apply the same rules to all.

I rest my case.

I wait for comments with interest and can almost feel the icy blast of those in the public sector - my challenge to them is to answer the question I posed in italics many paragraphs above. We can all contrive to defend our self-interest - the harder task is to show, in the greater scheme of things, how that self-interest sits comfortably with the legitimate interests of others. 

Friday, February 8, 2013

The trouble with pensions - part 1

A couple of posts previous to this, Mark in Mayenne commented that he could weep for what has happened to education in Britain. I'm not so sure, but I could certainly weep for what's happened to our pension system. In a little under twenty years we've destroyed (or at least allowed to die) one the most tangible aspects of social progress since the creation of the Welfare State - the prospect of a decent and secure retirement.

The reasons for this are largely the preserve of experts. Of the general population, even the well educated and financially savvy don't understand pensions; most folks are simply bemused, confused and mistrusting.  Younger people have all but given up hope - they'll 'work till they drop they' say, in a tone that's half humour and half resentment.

I don't blame them.

Successive Governments have made the system so complex it is now way beyond the layman. The recent announcement of a 'new simplified state pension' is a classic example of political spin sneaking through a measure through which ought to have caused an outcry.  In case you didn't know, it's effect for the vast majority will be they work longer, receive less and have fewer means to provide a cushion should they wish to save for it. 

It's true that pensions are a complex business - and there's no single reason for the demise of the UK system. We have an ageing population; successive governments (and New Labour in particular) have made some stupendously bad decisions on the tax treatment of pension funds; politicians have run scared of tough decisions for fear of electoral backlash...  I could go on.

But instead I want to give you a slightly different perspective. It comes from years of being a trustee of two very large funds, and many more spent caring about and planning for retirement. I am, perhaps sadly, one of the few who (broadly) understands pensions; who takes a very close interest in how they are structured, how policy affects them, and how in turn it will impact future generations.

I'm going to offer you three very different reasons for their demise.

The first is you and me.  I don't mean that literally, but if the changes in pension provision have shown one thing, it is that if you require people to take personal responsibility, huge numbers will choose to spend today rather than save for tomorrow.

To some extent this is a result of confusion and mistrust - the reason so many people joined the old company salary schemes is that they were very simple to understand - but it is also because our culture and attitude has changed; I'd argue for the worse.

I've long ago lost count of the number of middle earning people who tell me they can't afford to save for a personal pension. The operative phrase here is 'middle earning'. There has always been a section of society that struggles to afford a private pension, but middle earners (austerity aside) are rarely in that bracket. Of course, I understand they don't use the phrase 'afford' in an absolute sense, but as a general population we continue to make active choices to spend on houses, cars holidays, whatever...  rather than save for retirement.

And it's important to recognise that we've been under-saving for twenty years - not just in times of austerity; indeed, the supposed boom saw some of the biggest reductions in pension provision. In part, this was because of a widely adopted mantra that 'my house will be my pension' - but it was also, frankly, because attitudes to saving for retirement changed.

As a whole, you'll pick up that I regard the demise of pensions as a national disgrace - but at the risk of some controversy, if there is one section of society I will have little sympathy for in years to come, it is those who clearly have the means to save but demonstrably choose not to.

The second is public sector pensions, or rather the failure of consecutive governments to tackle the issue. It might seem counter to my position to say that public sector pensions are unsustainable  - I'd go so far as to say they are verging on the immoral - but in fact I believe they are central to the lack of progress in the private sector.

As a rule, I don't like conspiracy theories, but my deeply held belief is that one of the chief reasons the private sector system has been allowed to die, is that those in power have not been affected. Public sector pensions are such a huge issue that I plan to discuss them separately in a follow up post (can you wait) - but for now I would just register that until we are all in the same boat, there will not be the political drive and thought leadership necessary for our rescue.

Which brings me neatly to the third reason - that there is no political vision for retirement.  The policy makers have come to see pensions entirely in terms of cost and risk and future debt projections; they run scared from the figures and even more so from the electorate.  No politician wants to lose votes for a decision that will bring benefit after they've gone - and this is perhaps the biggest trouble of all.

But if ever there were a case for re-framing a debate, this is surely it. I happen to be passionate about pensions, but it's not the financial instruments I care about; it is ensuring I and my family - and millions of others like us - have a secure and fulfilling retirement.

Everyone understands the days of pay-offs and feet-up in your fifties have all but gone - but that doesn't mean we can't still have an ambitious political vision which, for example: recognises that winding down from full-time employment is going to be necessary for millions; incentivises companies to offer more than minimum pension contributions; legislates for more flexible and age appropriate employment contracts for workers who've given years of service; acknowledges a better balance between the private and public sector would be a social good.

I could easily add to that list - and perhaps I should.  But the tragedy is that our politicians do not do it for me. Most don't understand, many don't much care, some are willfully blind. It is an absolute tragedy and a one we all will pay for.

As I said at the start, I really could weep.

Wednesday, February 6, 2013

The trouble with speeding - and a perversion of justice

The recent publicity surrounding the guilty plea of Chris Huhne, and the tragic consequences for both him and his family have been playing on my mind. It's not that I care especially for Mr Huhne, or condone any of his actions (be they personal, political or perjurous) - it's that I'm left deeply uneasy at the thought such a trivial matter could lead, as if by some unstoppable logic, to such extreme an outcome.

The strict legal position is that Chris Huhne perverted the course of justice; that's a serious matter and as a consequence, he should expect a custodial sentence - 6 months, possibly more. As a cyclist, I have more reason than most to ensure speeding offences go punished. It's straightforward isn't it: he did the crime -  he should do the time!  So why I am so uneasy?

The clue, I think, is in the phrase 'perverted the course of justice'.


It was reported this week that an estimated 300,000 people have offloaded speeding points - do we genuinely regard all those as perverters of justice? Do we think that's how they viewed it when say 5 years ago (or more) they asked a wife or partner to avoid an increase in their car insurance?

It seems to me that to categorise the off loading of speeding points as a crime carrying up to a life sentence is a clear case of mislabeling.  More than that, it's an aggrandisement of the issue by the prosecuting authorities and legal system.

Now before you think I've gone all soft, it's important to remember that we're not about to send Chris Huhne to prison because he's an MP, or because he left his wife, or because he wasted public time - it's because he lied to avoid speeding points.

If you're comfortable with that - if you feel the punishment fits the crime, then fine. But to be consistent you'd have to be equally comfortable with dishing out exactly the same punishment to the 300,000 other folks who've done precisely the same.

Imagine if, by the wave of some magic wand, we had the technology to prove all those cases beyond reasonable doubt - would you really be comfortable putting that many people away? Even if we assume the figure of 300,000 is grossly exaggerated (it probably is because the press reported it) -  there'd still be tens of thousands involved.

Almost any adult reading this will know someone who has off loaded penalty points - your sister perhaps, your uncle, a friend?  Six months for them too - does that seem like justice?  Indeed, if you know they did it, why aren't you ratting on them -  after all, perverting the course of justice is a serious crime; surely you're an accomplice if you don't tell?

The truth is we don't regard points dodgers as being in the same league as robbers and muggers. Most of us wouldn't want our friends or neighbours incarcerated for such a relatively trivial offence - that's not to say a substantial deterrent isn't needed. But surely a five-year driving ban would be sufficient, rather than a criminal record, loss of job, ruination of their career and life prospects.

It occurred to me that a fair challenge to this view might lie in the word deterrent.

The problem with points dodging, a prosecutor would say, is that it's easy to do and hard to detect. In these circumstances, we need a strong disincentive - and custodial sentences provide that. By their nature deterrent sentences are disproportionate; they are harsh on the individual but justified by the wider context. That's why we use them for crimes such as drug trafficking, or in the corporate sphere, for breaches of competition law.

All very logical?

I suppose it is when you put it like that - indeed it almost convinced me - and yet I'm still uneasy.

And that's because points dodging isn't the same league as smuggling heroin or price fixing cartels. Drugs traffickers are few and far between, they peddle misery to millions and make a killing for themselves - what's more (and to my mind critically important) they know the consequences of getting caught.

That patently isn't a parallel to the off loading of penalty points - for a start, we know that tens if not hundreds of thousands have done it. Whilst the deception isn't to be condoned, I'd contend it doesn't directly peddle misery in a comparable way. And most important of all, I don't believe that when your sister or your friend or your colleague agreed to take those points they fully understood what that could mean.

But more than all this - sometimes we just need a sense of perspective.

As things stand we have hundreds of thousands of criminals in our midst, all of them hoping they don't have a row with their spouse; all of them hoping there's no magic wand; all of them sleeping uneasily. When you think of it, that's a sad state of affairs.

Call me an old softie if you wish, but in my view, it's also a perversion of justice.

I await comment from the lawyers who follow!