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Cheering news on pensions: our experts have some bright ideas
Jonathan Prynn26.03.09
LONDON'S £10 billion pensions deficit crisis could be solved by raising the retirement age and forcing workers to pay more each month, the Evening Standard's panel of experts say today.
In a major investigation this week, the Standard has identified the scale of the pensions shortfall faced by the capital's 33 local authorities. The deficit threatens local services and could force town halls to raise council tax to plug the gap.
Today we ask experts from the pensions industry, unions and business — as well as the Local Government Minister — for their ideas on how to close the deficit, ensuring that funds remain healthy and solvent in the decades to come. They call for greater transparency in public-sector schemes, and caps on the size of individual pension pots for high-earning council staff.
When the public-sector schemes were set up more than a lifetime ago most local government workers retired at 65 and died, on average, at 67. Their pensions only had to provide for the last two years of their lives. Now, most can expect to live well into their eighties, a reflection of rising living standards but a huge source of strain on the schemes.
At the same time, stock markets that councils hoped would steadily rise, building up huge pots from which pensions could be paid, have gone into meltdown. Local government schemes are guaranteed by the taxpayer, but those of the vast majority of London's private sector workers are uncertain and vulnerable to the vagaries of the markets.
Private-sector staff, particularly young people frozen out of final salary schemes, face having to save more for their retirements and also stump up higher contributions for other people's pensions.
THE MINISTER, John Healey, local government department
Local government pension schemes remain solvent models of pension prudence, affordable to the taxpayer.
They are invested for long-term returns and governed by a set of regulations and accountancy standards that do not allow deficits to be passed to council tax payers.
The Audit Commission confirmed today that potential losses would not lead to service cuts or council tax rises and they agreed our guidance properly emphasised risk management.
Hard-working, often low-paid, council workers in London deserve a decent retirement. The average pension is still only £4,000 which is hardly gold plated or excessive. But we do need to hold councils to more account.
I have already changed the pension rules to protect taxpayers with higher employee contributions and capped employer costs, paid by the taxpayer.
I am also taking steps that will put a big brake on senior council salaries. New legislation will mean councils must fully disclose what their top people get in pay, perks, pensions and pay-offs. The salary spiral can't go on.
THE TRADE UNIONIST, Brian Strutton, national secretary for public services, GMB union
For more than half a million Londoners, the local government pension scheme is what stands between them and dependence on state benefits in retirement.
The GMB rejects the argument of those who would reduce everyone's retirement income to the lowest possible level.
Already an unacceptable 22 per cent of London's pensioner population live in poverty. Creating more impoverished pensioners as the Conservatives and Liberal Democrats seem intent on doing by slashing public sector pensions would dramatically increase poverty in London.
This in turn means increased pressure on council services when recruitment shortages in care for the elderly are already a problem.
Closing the local government scheme tomorrow would hardly change the costs for taxpayers because most of the liabilities are already there.
Instead, a new strategy is being implemented by the Labour government, councils and unions to address future cost fluctuations. Society needs better, not worse, pension provision.
THE POLICY ADVISER, Dr Ros Altmann, former pensions adviser to Tony Blair
The first thing you have to do is have a proper assessment of the costs and affordability.
At the moment the Government is just hoping for the best. It has to be honest about these costs as, ultimately, it is underwriting these local authority schemes.
The second thing is that the Government needs to issue “longevity bonds” to the pension schemes to help them back their liabilities. This would help with one of the biggest risks the pension funds have suffered from — people living longer. The Government does need to look urgently at its role in financing these requirements. So why not issue gilts that are aimed specifically at these investors?
Longer term, the schemes as they are currently set up will probably have to be closed to new members as has happened in the private sector. I would be in favour of capping the amount that you can accumulate in the schemes. This would protect lower-paid staff but would stop these huge pensions building up for people at the top.
The Government will have to sit down with the unions and negotiate how much it can afford to pay.
THE BUSINESS ADVISER, Corin Taylor, senior policy adviser, Institute of Directors
The recession has underlined just how good the pension deal is in the public sector. The fact that the Government is now borrowing more than £100 billion a year means it has to take tough decisions on these long-term costs.
There are things that can be done in the short term and long term to save money in local government pension schemes. You could increase employee contributions rates from the current 5.5 to 7.5 per cent to 10 per cent. The accrual rate is currently one 60th a year, that's a very, very cushy deal. You could push it back to one 80th as it was before 2008.
You could also raise the minimum age at which people can take early retirement and tighten up the rules to make sure that if people do retire because of ill-health they cannot get other jobs.
You could also raise the retirement age, currently 65 in local government. If state retirement goes up to 68 there is no reason why the local government pension scheme retirement age cannot follow. But ultimately you might have to think about the public sector moving to defined contribution arrangements.
THE PENSIONS CONSULTANT, John Ralfe, independent pensions consultant
We have to get away from the Government's view that there is not a problem.
The first priority is transparency, coming clean with the taxpayer about what these costs are and the implications are.
Once you have that transparency then you can start to have a proper discussion — at the moment everything is mired in confusion. There is the problem of disclosure about the cost of the new pension promises that are being made.
We also need a proper assessment of the accumulated liabilities — the pension promises that were made in the past.
There is also the issue of risk management. We need to make sure that the assets we have got stand a fair chance of paying for the liabilities.
There needs to be a proper debate: what is the risk management strategy, what do we do when things go wrong, which they can very quickly?
What are you going to do if the investment returns you are expecting don't happen?
Local authorities are taking huge risks and that is not their job.
THE CONSUMER JOURNALIST, Jonathan Prynn, Evening Standard Consumer Business Editor
Sorting out the finances of London's local government pensions is not going to be quick or easy but there are some relatively short-term fixes.
For a start it makes no sense to run 33 separate schemes. The only people who benefit are the expensive advisers, actuaries and City fund managers who pocket tens of millions in fees each year.
Contributions from highly paid council bosses who stand to benefit the most must be increased from the current maximum of 7.5 per cent to at least 10 per cent.
By 2012 all private sector workers will be automatically enrolled into pension schemes with contributions of eight per cent split between employer and employee. By contrast local government workers will be getting contributions three or four times that amount, mostly paid out of the public purse.
Unless the public sector accepts lower pay the yawning “contributions gap” will only stoke resentment and anger.
The Government must persuade employers in the private sector and employees in the public sector to chip in more. Not an easy task.
Reader views (11)
Yes, work longer and pay more. That protects the wealthy and businesses that back political parties. That's fine until you take into account the fact that London is the 5th most expensive city on the planet to live in. Various govt's (Thatcher, Major, Blair and Brown, to my knowledge) have looked at geograhical pay and each said "Great, provided it excludes London". The current snapshot makes the public sector look lucrative, well that shows how bad things are generally. It's the first time for nigh on 30 years it looks that way. If people are inclined to seek parity, remember once this recession is over parity would have to continue in the good years too. The thorny issue is the transfer over to any new system (after the Mirror scandal there are legal protections on pension rights...) Do you say it's means tested? under 10, 20, 30 years? Does that include AVC's or transferred pension rights? Do you fund early retirements to sweep clear the old terms and conditions? Difficult questions with even more difficult answers.
I understand the anger and frustration of those who have lost out on private pension schemes. For decades it has been a case of private sector employees poo-pooing the public sector on salaries and bonuses. Well in the good times, the one sure thing was a lower salary but a secure pension. On the whole we are not talking about people lording it up on the gravy train, as stated, we are talking about an average of a £4K p.a. pension.
- Ian, London
The quickest fix to the problem of public sector pensions would be to sack the army of non productive bureaucrats and other wasters in non-jobs, and to make those that remain actually work for a living.
Gormless Clown promised that he was going to crack down on the public sector when he was chancellor and cut it down to size. Instead he created another 800,000 public sector jobs!
- Keith Lonsdale, Doncaster
The Public Sector Pension scheme is bust.
If it was a Private Sector scheme, the Taxpayer would pay out a maximum of £26,000 a year.
Put this as a limit on Public Sector Pensions, and increase the retirement age to 65.
- Cap, london
This of course is ridiculous!! The Government should tae the blame on this one for not handling the Pension Fund properly. However, I do believe that people should pay a bit more and also take out a private non-taxable pension fund policy as well. All you young ones out there, take heed.
- Wq (Ex Pat), Frankfurt, Germany
If the Government extended the retirement age to 120 years of age; the problem would be solved.
If they doubled your income tax, council tax, VAT, National Insurance contributions etc; they could get back all the money they have pumped into the banks; this would solve that problem as well.
If they deported all the British people to Australia; and imported more none speaking new British People; that would solve the population showing decent, problems.
It seems that educated people are not that bright; when it comes to sorting out National problems.
As a Greek once said; IF.
- Mickyinlondon, london
I am very happy to continue to fund gold plated public sector pensions whilst my own private sector pension has reduced in value by 40-50% over the last year. Of course i realise those public sector guys are doing a great job and they deserve a good pension after a life of hard work. I take it that, in return, they will be happy to look after me in my old age.
- Havinalaf, manchester, uk
It doesn't take an "expert" to tell us that civil servants need to pay more towards their own pensions. This little time bomb is ticking away to the tune of over £900bn, which is about the same amount that Darling and Brown have wasted on the banks in the past year.
Reduce the size of Government; make them pay for their retirement; reduce taxes for the rest of us. You might just find that the economy picks up.
- Nobby Clark, Perth, Scotland
If the only people who took money from the pension pot were the ones who had paid fully into it then this would cover at least half the problem.
Then government should save the money from the savers deposits to use when the saver rtires rather than spending this years savings in the same year.Also stop immigration.
- Mick, preston england
Moving the minimum retirement age for Public Sector workers to 65 and then 68 would go a long way towards saving money and restoring parity with the Private Sector. Somehow the future liability of all of these pensions needs to be managed and paid for - as all the experts say, the government is in denial about the total costs and that scares the life out of me to be honest because we're talking about billions and billions here/ We may as well get all of these debts on the table, pensions, PFI, bail-outs etc, have a near heart attack about the size of them, and then get on with wondering how to start to pay them off! The head in the sand approach employed by Crash and his government are doing nobody any favours - it's like hiding your bills away in a drawer when they come in and hoping they'll go away!
- David B, Manchester
Heresy, how dare you actually suggest that the poor darlings in the public sector should put their hands in their pockets and pay increased contributions, or even have to work, (never mind longer) for their pension.
Can any of these experts come up with a scheme that will transfer some of the public sector largess to the private sector, so that on retirement there is more of an equal distribution of funds. What was it, 800,000 private sector workers unable to afford a pension in london, whilst supporting the gold plated pensions of local govt workers?
- Al, Kingstown UK
Brilliant! Work longer and pay more in! How do they think of these wonderful ideas? - send 'em a fat cheque now. What about all those who are within a few years of retirement and have paid in all their working lives only to see it all disappear (starting with Brown pillaging their funds with the removal of the divided tax credit?) I've got a better idea - just get yourself voted in as an MP, then you can vote yourself an ever improving pension. And I have a prediction; MP's expenses provisions will be slashed and replaced by a £50k a year pay rise ............. and that will be pensionable, thereby inflating their pots even more!
- Paul, London
