Time for greater fairness in pensions

Allister Heath
IF you are youngish, work in the private sector, and are not the chief executive of a major firm, your company is unlikely to offer you much of a pension. In most cases, sorting out your retirement will be entirely your responsibility; in a minority of cases, your firm will assist you to fill a defined contribution pot. Defined-benefit schemes – let alone final salary pensions – which pay a pre-agreed income stream have almost completely disappeared for anybody under the age of 40 in the private sector.

Instead, workers need to use their nous to invest their money, and then to purchase an annuity, the income stream from which varies enormously depending on interest rates at the time and can be hugely affected by inflation. The government has also slashed the tax advantages of private pension pots. No wonder so many private sector workers are so jealous of their counterparts in the state sector – and will remain so. For all the “anger” generated by Lord Hutton’s proposals yesterday, public sector pensions will remain more generous than those in the private sector even if all the reforms are implemented.

There was a time when state workers were paid less than those in the private sector; better benefits were the compensation. This is no longer true, with the average income in the public sector £467 per week (including bonuses), against £447 in the private sector. When the value of pensions are added in, the gulf between private and public is even greater. This is even though working conditions tend on average to be less intense and the number of hours worked lower for those in the employ of the government. There are, of course, many exceptions; the tragedy of the public sector is that it doesn’t reward or encourage its best, most dedicated workers (such as frontline nurses and the military), while cosseting the worst (including poor managers).

But pension arrangements ought now to be similar to those in the private sector. Increasing the public sector pension age from 60 to 65, and rising, as recommended by Hutton, is a no-brainer. Moving from a final salary pension to one based on average career earnings is a step in the right direction. It will better control the risks of these schemes but won’t cut costs much. The move by the government to hike contributions by three per cent of income is radical. There are other ways in which the reforms don’t go far enough, however. There should have been a much more radical embrace of defined contributions. It is unfair that accruals would be up-rated in line with the earnings index, rather than inflation. As the Pensions Commission set up by the Institute of Directors and Institute of Economic Affairs has pointed out, Hutton’s whole approach also involves further centralisation of the terms and conditions of employment of public sector workers. This is a mistake: individual schools, hospitals and other public sector employers should determine their own deals (including any pensions) according to local labour market conditions. Nationwide bargaining and one-size fits all rules ought to be a thing of the past. Last but not least, proper, transparent accounting of public sector pensions is needed, as is the case in the private sector; the era of off balance-sheet liabilities must end. This issue has been referred to the Treasury. Let us hope it imposes real equality between the private and public sectors.

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