Pension reform can't be put off for ever
By
Contributing editor
Emily Hohler Sep 12, 2008
Print this article
Gordon Brown decided to remind us of his 'personal story' this week, says Richard Littlejohn in the Daily Mail. But what we want to know is why he makes private sector workers work till they drop while "raiding their pay packets" to provide "gold-plated, index-linked, early-retirement for public 'servants' who contribute less than zero to the real economy". Indeed we would, says Miles Costello in The Times – particularly since the renowned pensions expert, John Ralfe, told us this week that taxpayers face a £30bn annual bill to fund pension promises made to the UK's public sector workers, more than twice the accepted official cost.
Ralfe, the former head of Boots' pension scheme, accused the Treasury of moving the goalposts by fixing the rate that it uses for its pension calculations, thereby disguising the true rise in costs. Public sector pensions schemes are unfunded (there is no separately managed pot of money used to pay them), so the cost to the taxpayer is effectively calculated using discounted Government bond yields indexed to inflation. The Government fixed this rate at 3.5% in 2001, but since yields have been falling since 1997, a more accurate yield is 1.2%. This, says Ralfe, "dramatically" raises the real cost of retirement provision. The total public sector pension liabilities are now, he claims, around £830bn and heading for £1trn. Our children and grandchildren will have to foot the bill. Last week, financial adviser Hargreaves Lansdown claimed that even if the Government makes no further unfunded pension promises, a child born today will be paying for existing liabilities until they are 77.
The divide between private and public grows starker by the day, says Liam Halligan in The Sunday Telegraph. Almost the entire public sector – a fifth of the workforce – will get an annual index-linked pension, worth a relatively high chunk of their final salary, sometimes for longer than they actually spent in the job. The idea that generous pensions are a reward for low pay is "tosh". The average public sector worker now earns 33% more than his private sector counterpart. Since the politicians and civil servants who make pension policy have public sector pensions too, it's no wonder they don't want change. Nor do ministers worry about pension liabilities; they don't count as part of the national debt. The entire £1trn liability is 'off the books'.
So what about the rest of us? The picture isn't pretty, says Michael Lea in the Daily Mail. The number of people paying into private pension schemes dropped by a million last year to seven million. Savings are at their lowest levels since the 1950s. You can see why people have given up. Research by Dr Ros Altmann, a former Treasury adviser, shows that to secure a pension of £10,000 a year, the average private sector worker on a £25,000 salary would have to work for 46 years. A similar grade state employee could work half that time, and an MP just over six and a half years. Brown's decision to "plunder" private-sector pension funds by scrapping tax relief on dividends paid in 1997 didn't help, says Jeff Randall in The Daily Telegraph. With inflation and the loss of compound interest, the move "whacked" about £100bn off their value. Politicians may shy away from pension reform, but without change, "a future Government will one day be forced either to renege or raise taxes to riot-inducing levels".
Published in
Economics
| More
articles
by
Emily Hohler
Related articles
-
Jun 02, 2012
-
Jun 01, 2012
-
May 31, 2012
-
May 30, 2012
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.