Wielding the axe on pensions will cost country dear

As the CBI makes another attempt to undermine public sector pensions hot on the heels on the 3 Chancellors, will anyone benefit from all these proposed cuts?

Naomi Cooke is the GMB National Pensions Officer

As the CBI makes another attempt to undermine public sector pensions hot on the heels of the statements of Alistair Darling, George Osborne and Vince Cable, the question being dodged is simple – will anyone benefit from all these proposed cuts?

The Institute for Fiscal Studies published a report last week showing reforms to public sector pensions over the last few years will keep the main unfunded schemes for the NHS, teachers and Civil Service affordable over the medium term.

The largest scheme, the Local Government Pension Scheme, already incorporates many of the changes “experts” advocate: a retirement age of 65 for all existing and new entrants; graduated contributions that mean the higher paid pay more for their pensions than the lower paid; and a scheme agreed by members and employers for the future that has reduced the cost of all benefits built up since April 2008.

Reforms rightly continue and a report published by the GMB earlier this year outlined a number of options available to ensure continued sustainability. The proposals many mainstream politicians put forward steer clear of this objective and instead focus on appeasing those who wish to reduce everyone’s pension to the lowest level possible. This short-termism is blinkered to the long-term pressure this puts on the taxpayer of the future.

The majority in the public sector earn pensions of under £5,000 a year, dragging down the average occupational pension of the population as a whole. To fund this for the future, employees in the main schemes (covering the local government, health and education sectors) contribute on average 6.5% and their employers around 14% (again less than the comparable private sector figure).

In local government this amounts to 5% of council tax while the local government scheme itself takes in £4-5bn a year more in contributions and investment returns than it pays out in pensioners’ benefits. This should be seen as a sustainable state of affairs in any sensible assessment.

Political parties make much of their assurance that pensions that have been built up will be protected, a basic legal principle rather than an act of political generosity. The danger is that this merely signals excessively harsh cuts to future service as politicians try desperately to make impossible savings from the future to compensate for actual and perceived deficits from the past. In this rush to the bottom vital provisions could be cut with devastating long term consequences.

Aside from setting fair and affordable member contribution rates, two benefits are key. The accrual rate, the rate at which pensions are built up, must stay at a level that makes a pension worth saving for. Once in payment, this pension must retain its value through proper indexation. Workers throughout the economy need these provisions and the country would be better served if pressure groups like the CBI worked on ways to raise the level of these benefits in the private sector.

Asking low earners in the public sector to pay more for pensions that will not provide an adequate income in retirement will not solve the UK pension problem. Any appeasement of the right wing press these changes afford will be short lived as tales of increasing depravation among Britain’s pensioner population escalate. Reform of public sector pensions can be achieved but not if those who should know better continue to think arbitrary cuts to these workers’ pensions will make others better off.

Aside from the recruitment and retention problems this will exacerbate in key parts of the public sector, reducing the pensions of low and median earners simply means higher taxes to fund greater demands on state benefits and public services. This debate is a serious one and needs to move beyond newspaper headlines into the realm of informed, honest debate.

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