Sunday, 20 January 2008

Why the MPs' pension fund shouldn't close

The more I think about it the more I think that the Tory policy recommendation that the MPs' pension scheme should be closed - as opposed to being made less generous - is a gimmick and a fundamentally bad idea. Unfortunately the Observer business section took the bait today and gets a dig in against public sector schemes -

David Cameron has proposed closing the scheme to new entrants, an idea that deserves a full hearing.

The deeper issue behind this is the widening chasm between 'gold-plated' public-sector pensions, funded by the taxpayer, and private-sector schemes, where benefits and security are evaporating. If public-sector pensions are gold-plated, then the parliamentary scheme is coated in platinum and studded with diamonds. Time for an overhaul.

I think this is wrong for several reasons, quite aside from the fact that closing the MPs' scheme will be used as a Tory tactic for softening up opinion ahead of an attack on public sector pensions as Cameron himself has made clear.

Firstly, if we give MPs a DC pension scheme with fairly typical (ie too small) contributions what incentive does this give them to promote anything better for the workforce as a whole? Some in the pensions industry are currently fighting a rearguard action to try and get risk-sharing schemes (ie neither DB nor pure DC) taken seriously. But if MPs are in a scheme where they take all the risk why would they think that other employees need something better?

On the same point there is a danger that the level that contributions are set at for the MPs' scheme both become seen as the 'gold standard' and contribute to framing and/or anchoring MPs' perceptions of what a reasonable contribution level is in a DC scheme. This will matter a lot if we ever try and improve the rates intended for Personal Accounts.

Secondly, it would clearly send out the message that DB is no longer a politically acceptable form of pension provision. A scheme which is under no pressure to close will be closed to make a political point. Although this might make sense to the Right in terms of am attack on the public sector, what impression is that going to give to the minority of private sector employers trying to keep DB going? How should an organisation like the NAPF (which incidentally has a DB scheme for staff) respond?

Finally, isn't doing this, and attacking public sector workers' pensions, actually doing exactly what those on the Right always accuse the Left of wanting to do - dragging everyone down to the same level? Almost everyone seems to think that most of the DC schemes that have been set up in the private sector are not generous enough. So surely we should focus our attention on sorting that out - rather than trying to take away good pensions in the public sector?

As such, whilst I think there is a case for making the MPs' scheme less generous, closing it entirely would be a bad idea for everyone else, despite its gimmicky appeal to politician-haters. It will be interesting to see how the pensions industry reacts.

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