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Public Sector Pensions - Why Will The Government Not Bite The Bullet!

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Cost of public sector pensions estimated at £1.2 trillion

Miles Costello Times June 29 2009

The true cost of pensions for all current public sector workers has been estimated at £1.2 trillion — equivalent to 85 per cent of Britain’s GDP and worth £20,000 for every man, woman and child in Britain.

According to the British-North American Committee , made up of academics and business leaders who publish a paper today, the Treasury is greatly understating the cost of providing gold-plated retirement schemes for public sector workers such as nurses, teachers, the police and Armed Forces.

The committee calculates that public sector pension costs, as a percentage of economic output, are three times higher than in Canada or the US.

Neil Record, a former Bank of England economist and pensions expert who helped to draft the report , warned that generations of future taxpayers would have to foot the bill. “Neither politicians, the Treasury, nor employees know what public pensions cost — or are worth — each year [or] what the total future taxpayers’ pension liability is,†he said.

He urged the Government to be more open about its calculations. “We are hiding behind actuarial assumptions that are designed to push costs out into the future. What we need here is more transparency,†Mr Record said.

Vince Cable, the Liberal Democrat Treasury spokesman, said yesterday that public sector pensions were “in danger of running out of controlâ€. He said that changing the system was “the big test of political courageâ€, adding: “The system has to be reformed and there are various options, including shifting to an average salary basis and raising employee contributions, which must be pursued.â€

He added: “Behind the fat-cat culture in the public sector is a wish to enjoy the rewards available in the private sector without the risks. But the truth is that many of those senior civil servants, parliamentarians, local government bosses and others who feel underpaid on their generous packages would sink without trace if they had to manage a business through the recession.â€

About 6.4 million British workers, or about 25 per cent of the workforce, are members of public sector pension schemes. The five biggest schemes cover the NHS, teachers, Civil Service, police and the Armed Forces, with a further scheme for local government workers.

Unlike in the private sector, most public sector pension schemes offer a pension based on an employee’s salary at retirement. The five biggest schemes, though, are unfunded — meaning that there is no separately managed pot of cash used to build up sufficient capital to pay pensions when workers retire. The value of their liabilities is calculated using discounted government bonds, or gilt yields, indexed to inflation.

The Government set the rate at 3.5 per cent in 2001, when interest rates where higher and better returns were assured. Interest rates have since fallen to 0.5 per cent, sending the returns from investing in government bonds plummeting.

The committee was formed in 1969 and consists of business leaders and academics in Britain, Canada and the United States. Its findings were endorsed by other pensions experts. John Ralfe, an independent pensions consultant, said: “The Treasury remains in painful denial — either it does not understand the economics of public sector pensions, or it does understand but chooses to ignore the implications.â€

The Treasury admits to an estimated public sector pensions liability of £886 billion but has defended its calculations. Sources close to the Treasury, which declined to comment, have previously said: “Public services pensions are affordable, both now and in the future.â€

Our next test of courage: to cut public sector pensions

By Vince Cable

Last updated at 8:12 AM on 29th June 2009

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What do MPs, head teachers, judges, Jonathan Ross, the boss of our biggest bank, Service chiefs, GPs and Sir Humphrey all have in common? Not much, except that they are all paid by taxpayers - and all paid very well.

Last week there were arguments about MPs' pensions, bonuses for civil servants and head teachers, BBC pay and Mr Stephen Hester's £10million honey pot at the publicly owned Royal Bank of Scotland.

In each case, self-serving arguments - based on 'market rates' and 'performance' - are trotted out to justify rewards beyond the wildest dreams of most of those who actually pay for them. It is time to ask whether we should, or can, support a fat-cat culture in the public sector.

Workers like Sir Humphrey (far right) in Yes Minister are paid very well for what they do, but must start to accept the harsh economic climate

Gordon Brown's continual squirming and denials can't conceal the truth: public finances are in a truly terrible mess. People know that nasty spending cuts and tax increases are on the way. They want political leaders to be frank and spell it out. What, when and how?

They will not be convinced by George Osborne's alternative: to win an Election and then get Ministers round a table behind closed doors to decide what the painful cuts will be. His message seems to be like the South Sea Bubble or some of today's property clubs: 'Invest in the project and we shall tell you the details in due course.'

The public want to be part of that debate. They should be.

We know what happens when fat cats are asked to clean up the cattery. There is some arbitrary figure for public spending cuts. The good is cut with the bad. Politically invisible groups such as the very old and the mentally ill, and unpopular groups like young offenders, take the biggest hit.

Investment is cut, not bureaucracy. An army of consultants is hired at vast cost to give advice while lowpaid workers are fired or their jobs contracted out. And if the numbers don't add up, taxes go up as well.

This crisis is too deep for cynical games. Britain has lost the windfalls that kept public spending at unrealistic levels: North Sea oil revenue and the tax take from the housing bubble and the banking casinos.

The British State will have to downsize. Here is a starting list of candidates for the axe: the Trident replacement; the NHS IT scheme; the ID card; other databases like Contact Point; 'baby bonds'; and tax credits, which extend way beyond the low paid.

But that still leaves the need to cut costs without undermining frontline services. The Government's efforts to improve efficiency are a triumph of hope over experience. Its claims to have saved billions have been exposed by its own auditors as largely phoney. This begs the question why, if efficiency could be so improved, wasn't it done earlier?

So we have to address public-sector numbers, pay and pensions. At the last count, three million people worked for the Government and its agencies (including 526,000 civil servants) and three million for local government. Over ten years, the number of public-sector jobs has risen by 800,000, including 90,000 civil servants.

Most new recruits do valuable work in health, education and policing. But an army of quangocrats is deployed ticking boxes, monitoring and controlling the NHS.

Timewasting, overlapping agencies tell schools and colleges what to do. Desktop farmers sit in rural agencies telling real farmers what to do. And poorly paid, badly equipped Service personnel compete for funds with a thick layer of military red tape.

Regiments of bureaucrats and flotillas of land-based admirals will have to be demobilised.

I also predict a battle over publicsector pay. When workers in private firms are taking pay cuts to save their jobs, they have every right to expect responsible behaviour from the public sector.

Pay restraint should start at the top.

Bonuses for senior civil servants have become a concealed pay rise and should stop.

There is no good reason why mandarins with well-paid jobs should need additional inducements to get out of bed in the morning.

We also need transparency over pay and conditions. When I questioned the pay of top public servants last year, I received a volley of aggressive emails and appeals for sympathy and TLC - this from people earning up to 20 times the minimum wage. Actually, I didn't go far enough.

Just as MPs have had to disclose details of their expenses and other payments, so should everyone paid by the taxpayer who earns more than the Prime Minister - say £200,000. The BBC has made a start.

The big test of political courage is public-sector pensions, which are in danger of running out of control. Highly paid staff are obtaining pensions often worth two- thirds of a final salary, index-linked for life.

It has been estimated that the total Government subsidy for unfunded schemes is about £28billion - roughly the amount we spend on policing - and it is rising rapidly.

The MPs' scheme involves a contribution from the taxpayer of 26.8 per cent of salary.

Had my colleagues not argued that this was unfair and unjustified, it would have been raised again last week to plug a £50million hole in the fund. The MPs' scheme is merely the tip of a publicsector iceberg.

There must be no question of cutting the entitlements of existing pensioners. Most have modest pensions earned after a career teaching, nursing or in poorly paid manual jobs.

But the fat cats have muscled in in an outrageous way, creating a system that is unsustainable.

There are, of course, fat-cat salaries, bonuses and pensions in the private sector - some extraordinarily generous. But the taxpayer doesn't have to foot the bill. Indeed, many executives are paying the price of excess in the cold reality of recession-hit markets, and shareholders are starting to crack down on their greed.

Behind the fat-cat culture in the public sector is a wish to enjoy the rewards available in the private sector without the risks.

But the truth is that many of those senior civil servants, parliamentarians, local government bosses and others who feel underpaid on their generous packages would sink without trace if they had to manage a business through the recession.

The system has to be reformed and there are various options including shifting to an average salary basis and raising employee contributions which must now be pursued.

As Sir Humphrey would have said in Yes Minister: 'It is time to be very bold Prime Minister.' Sadly, the Prime Minister doesn't get it.

Vince Cable is the Liberal Democrat Treasury spokesman

When will common sense prevail.

The Public Sector over the past few years have got comparable salaries, without the same risks, bonuses and great terms and conditions, making life so so soft and easy. AND they get us to pay for their pensions. They get their pensions paid through our taxes and from taxing the few final salary pension schemes around - Brown was the git that taxed dividends don't forget.

The cold wind of change must blow and that means a change to ALL future pensioners not just new entrants, perhaps even some of the existing ones too!

Come on let's get it sorted.

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My dad has a public sector pension (teaching) which he has been receiving for the last 25 years. He worked out that he has had more money through that pension than he ever actually made when he was employed in the job. He got a 4% increase on it last month. He thinks it's mad.

Mind you he could have dropped dead a week after retirement.

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My dad has a public sector pension (teaching) which he has been receiving for the last 25 years. He worked out that he has had more money through that pension than he ever actually made when he was employed in the job. He got a 4% increase on it last month. He thinks it's mad.

Mind you he could have dropped dead a week after retirement.

it made reasonable sense when salaries were lower for public sector workers - the good pension balanced this out

but now that public sector workers tend to earn same or better than like for like private sector skillsets, then it seems very unfair

anyway, there you go,

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Think Ted Heath.

It will probably be very hard to remedy the pensions problem without either large scale industrial action, or else bit by bit privatization. Ironically i think privatization is the inevitable result due wholly to the unions inability to adapt.

I guess Thatcher saw Heaths failures and was able to build up coal stockpiles and so on. How do you do that with public services like schools and hospitals though? Ship all the ill off to germany? Draft in American teachers till ours stop striking. It would be unworkable, thats why i think privatization of all public services is the only option.

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Think Ted Heath.

It will probably be very hard to remedy the pensions problem without either large scale industrial action, or else bit by bit privatization. Ironically i think privatization is the inevitable result due wholly to the unions inability to adapt.

I guess Thatcher saw Heaths failures and was able to build up coal stockpiles and so on. How do you do that with public services like schools and hospitals though? Ship all the ill off to germany? Draft in American teachers till ours stop striking. It would be unworkable, thats why i think privatization of all public services is the only option.

I don't think it's the same as Ted Heath's problem. White collar public sector workers are less likely to be influenced by scumbag hard-left unionists. As home owners they'll also fear missing mortgage payments - striking won;t be as easy as it used to be for railwaymen and miners in council houses.

I have noticed a quiet confidence from various economists with newspaper columns who are (a) right of centre and ( B ) involved in the treasury and BoE. They genuienly expect to deal with these excess costs at source.

I think basically over a period of 20 yrs the index against which public sector salaries and hence pensions are inflation-linked will lag inflation cumulatively up to about 50%. This should make up the difference of the overspend, as they still deserve their pensions, just not as much as all that, say only half the practical spending power.

I bet none of the public sector ranks really notice, I don't think they're bright enough, and generally far too vain to accept that a fast one has been pulled.

On the same note, I read today that Warren Buffet says NEVER invest in long term bonds. He said excess inflation is endemic and they always fail to keep up with real inflation. Peter Schiff says something similar - excess inflation (above the official index rate) is simply how govts pay for public spending.

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On the same note, I read today that Warren Buffet says NEVER invest in long term bonds. He said excess inflation is endemic and they always fail to keep up with real inflation. Peter Schiff says something similar - excess inflation (above the official index rate) is simply how govts pay for public spending.

Excess inflation (above the official index rate) is simply how govts reduce their debts.

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When will common sense prevail.

The Public Sector over the past few years have got comparable salaries, without the same risks, bonuses and great terms and conditions, making life so so soft and easy. AND they get us to pay for their pensions. They get their pensions paid through our taxes and from taxing the few final salary pension schemes around - Brown was the git that taxed dividends don't forget.

The cold wind of change must blow and that means a change to ALL future pensioners not just new entrants, perhaps even some of the existing ones too!

Come on let's get it sorted.

You're right of course Blue but sadly perpetuating something the country cannot afford is the only way Zanu will get any votes at all next year so don't expect them to do anything more in their last 'bunker' days than make the whole thing worse........... :angry:

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Alan Johnson did not have the balls whem B-Liar wanted him to do it. Brown stood in the way of it too.

The last strangle hold of the Trade Unions is in the Public Service where membership goes from top to bottom. There is therefore a lack of will to make it happen. This government will leave this ticking timebomb for the next government who will have no option, but deal with it.

We have a spineless, celeb infatuated, popularist, incompetent Government, who care not for the people of this country.

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