Friday, 29 February 2008

TaxPayers Alliance report on council pensions

Let’s be clear from the outset – this is not a good report. It is right that people scrutinise every aspect of public expenditure, but this report doesn’t even try to put across a balanced case. It is an attempt at a hatchet job on the LGPS, probably to help soften up opinion ahead of a future Right attack on council workers’ pensions.

As is (or should be) well known, the TPA acts as a bit of a front for the Conservatives, and indeed the report doesn’t do a good job of hiding the group’s un-stated political affiliations. The report eggs on the Conservatives (rather than any of the other parties) to have a go at the LGPS both locally and nationally:

There have been welcome calls for public sector pension reform from the Opposition.
The Conservative Party does not need to wait for a change of government to help alleviate the burden of local government pensions on ordinary taxpayers.

The confused nature of the report is highlighted by the fact that it isn’t even very clear on what sort of fundamental ‘reform’ is in order, perhaps because there isn’t a clear line on this yet from their political allies. They say:

The LGPS should move from a final-salary scheme to either a career-average or a money-purchase scheme for new employees.

As anyone with any knowledge of pensions can tell you there is a big difference between career average and money purchase. The former is still a form of defined benefit provision. A shift from final salary to career average provision might (depending on how it was structured) not be too bad. A shift to money purchase is a complete transfer of risk. This is not a small consideration. Yet the TPA report doesn’t attempt to explain what either of these changes would mean, ‘change’ in itself is enough.

And of course if the LGPS did go money purchase, the killer question would be the contribution rates – again something the TPA does not even attempt to explore. Average DC rates are far lower than those in DB schemes. If a DC LGPS adopted average contribution rates this would represent a huge cut in the remuneration of future local government employees. It would make it much, much less attractive to future recruits.

In reality it may be very difficult for any Government to establish a DC LGPS without matching the contributions paid to the DB scheme. But if that occurred what would be the saving for taxpayers? It would simply be a transfer of risk, and how do you pitch that politically?

At the end of the day the TPA report doesn’t ‘prove’ anything, maybe it isn’t intended to. It is simply a mindless attack on the pensions of one group of working people. The call for an attack on the LGPS is nothing more than advocating levelling down. If some in the private sector have poor pensions then we should drag everyone down to that level, rather than try and improve the poor provision that exists.

I hope one of the unions does a good critique of the TPA paper as it deserves a proper trashing. But here are a few bits that I think are worth flagging up:

In 2006-07, local authorities across the country spent a total of £4.6 billion on employer contributions to the Local Government Pension Scheme and unfunded payments and added years benefits to local government employees, teachers and fire-fighters.

I actually don’t think £4.6bn is much money at all given the size of the LGPS and the numbers of people’s pensions we are talking about. And to put the figure in a bit of context, the cost of tax relief on pension contributions (which disproportionately benefit the better off) was £17.4bn over the same period. How much could we save the taxpayer through having one flat-rate level of tax-relief?

Employer contributions, however, are far higher [than employee contributions]. The LGPS website states that, over the long term, employer contributions will be around double those of employees – i.e. around 12 per cent.

Wow. Employer contributions are double those of employees. Funnily enough that 2:1 ratio has been fairly common way to split contributions amongst final salary schemes for a long time. Except when private sector employers took substantial contributions holidays (excel file) that is.

And how do these contribution rates stack up against the private sector? According to the NAPF, private sector employers’ pension contributions are actually about a third higher at 16%.

So the “gold-plated” LGPS actually gets less generous contributions than private sector equivalents. And according to the NAPF stats LGPS members also pay more for their pension (6%) than private sector DB scheme members (4.4%).

Public sector pension arrangements are not responding to these demographic challenges:
- Between 1995 and 2004, the proportion of public sector workers enrolled in final salary pension schemes has increased from 78 per cent to 88 per cent. At the same time the proportion of private sector workers has declined from 23 per cent to just 16 per cent.

Here responding to demographic changes is clearly equated with closing final salary schemes to new members. Yet (stick with me, this is going to get technical) closing final salary schemes to new members does not address demographic changes – it just shifts responsibility for funding. Unfortunately for members of money purchase schemes, they die too, and they tend to do it after a comparable length of life to members of DB schemes. Closing DB and opening DC does not affect this – it simply shifts responsibility for the risk inherent in long-term funding of pensions from the employer to the individual. And it’s usually allied with a cut in employers’ contribution to funding pensions too.

So again the argument is leveling down. We need to ‘respond’ to increased longevity by transferring risk to the individual, because that’s what the private sector does.

unfunded public sector pension liabilities are becoming increasingly unsustainable

I think the way the report conflates the funding of the LGPS with funding of unfunded schemes is very dishonest. A lay reader will probably not know that ‘unfunded’ has a specific meaning in pension policy and may therefore misread this as meaning ‘under-funded’ or ‘not properly paid for’. The LGPS is very clearly a ‘funded’ scheme and therefore irrelevant to any discussion of ‘unfunded’ provision.

Finally check out point 5 in the appendix. It quotes the infamous claim by a consultant at Hymans Robertson that of a quarter of council tax goes to fund pensions (the firm later said it was actually around 5%!), and then admits that the figure was retracted. But they go on to suggest - with no evidence given - that this is because Hymans feared a loss of business.

It goes something like this - Here’s a figure that says something I like. Oh no they‘ve said it isn’t true! Oh well I’ll use it anyway, and suggest a conspiracy theory for why the figure I like might be true even though they say it isn’t.

Not very impressive!

1 comment:

Jon Rogers said...

A very useful post. thanks