Separating spin from substance

3rd November 2011

For the first time in many months of talks the government has made a genuine change in its position. This was recognised in the joint statement agreed by all the unions involved in the negotiations.  This last-minute shift is a tribute to the determination of public sector workers to make their case and the growing support for the TUC day of action.

But there have also been some extremely unhelpful claims made about the government’s new position. There may have been movement but is it not as big as the government’s spin operation want people to think. let’s see why.

First this cannot be a final offer, as each pension scheme is different and offers can only be made in individual schemes, after a detailed analysis of all the figures.

The government has made genuine moves in two areas: accrual rates and protection for older workers approaching retirement.

But how these overall issues will be dealt with by each scheme requires detailed negotiations on a scheme by scheme basis. Unions are of course keen to pursue these talks, but no-one can yet say what the shape of each scheme will be in the future.

In addition ministers have also said that they want a settlement to last for 25 years across all schemes. Again this is welcome, but it is very hard for any government to make such long term commitments, and we do not yet know how this will be guaranteed.

Second the government is over-egging their offer. There are three long-standing objections to government proposals:

  • the shift to CPI indexing for pensions in payment and the calculation of deferred pension benefits, which chips away at the value of peoples’ pensions in retirement. The government has made no moves in this area.
  • the increase in contributions by 3.2 per cent of salary on average at a time when pay has been frozen. For many people this means paying 50% more than they do now, and the money will go straight into the Treasury rather than improving the schemes. The government has made no moves in this area.
  • The government’s plans for implementing the Hutton report proposals to redesign pension schemes to increase the pension age in line with the rising state pension age and move to a career average scheme in all public sector schemes (career average already exists in the civil service NUVOS scheme).  This is where the government has moved.

A cost neutral switch from final salary to career average pensions requires a better accrual rate. If the switch is made with the same accrual rate, almost everyone gets a lower pension. The government is now offering a higher accrual rate than they were before. This new accrual rate is not for the actual schemes but for the hypothetical ‘reference scheme’. This reference scheme is used to determine how much money scheme negotiators have to design the new arrangements.

In addition they are offering transitional protection for people within ten years of their pension age so they do not lose out from the change in scheme design. This again is a genuine change in their position but not all the details are yet clear. These people will still have to pay higher contributions and will still have their pension cut during retirement by the switch to CPI indexation.

Third misleading claims are being made for the new package.

The Prime Minister said yesterday:

“I can tell the House that low and middle-income earners will actually get more from their public sector pensions.”

Danny Alexander, the Chief Secretary to the Treasury said:

“First, for most low and middle income workers, the new schemes should generate an income at retirement that is at least as good as the amount that they receive now.”

These are both misleading statements, particularly the Prime Minister’s.

Let’s start with the more carefully phrased remarks of Danny Alexander. The trick here is the phrase ‘at retirement’.  In any pension scheme the longer you work or the older the age at which you start to claim your pension the bigger it will be. All pensions are paid on some estimate of how much longer you are likely to live. Therefore if you work longer any scheme (within reason) can “generate an income at retirement … at least as good” as any other scheme you choose.

You can’t therefore make a comparison between pension schemes unless you take into account years of service. So let’s translate this sentence into plain English:

“If you want to start your retirement with the same pension as under the old scheme, you will have to pay higher contributions while you are working, work longer (and thus make extra years of contributions) and then when you retire even if you start with the same pension income it will reduce as CPI indexing knocks a little off its value every year.”

And we can replace the words left out by the Prime Minister:

“I can tell the House that low and middle-income earners will actually get more from their public sector pensions … if they are prepared to work many years longer, pay a lot of extra money and understand that they have to work long enough to start their retirement with a much bigger pension payment to ensure that they get as least as good value of pension during retirement because of our switch to CPI indexing.”

Danny Alexander also said:

“The lowest paid … will be protected”

This is also misleading. The government is proposing pension contributions that vary with salary, and this will mean the highest paid will pay very high contributions and they have repeatedly said that those who earn less than £15,000 will not see an increase in their contributions at all. But they are measuring pay not in the common-sense way of looking at the size of someone’s actual pre-tax gross pay. Instead they are using what someone’s pay would be if they worked full-time.

In the real world someone who earns £14,000 a year working half-time because of their child-care responsibilities is pretty low paid. Other parts of the government when seeing if they were eligible for tax credits or benefits would think their pay was £14,000 a year.

But for pensions purposes their pay doubles to a ‘full-time equivalent’ of £28,000 and they have to pay the same percentage contributions as someone who really does earn £28,000. The vast majority of part-time workers of course are women.

The government has tried to back up some of these claims with some examples. But not only do they don’t properly consider that people will be working for longer and paying more, they are artificially bumping up pensions payments because they are based on average career paths that exaggerate what people are likely to earn through their careers.

Arrangements such as Agenda for Change in the NHS mean that, if people continue to work roughly the same hours, they generally have a progressive rise in salary across their career, and the salary they have when they retire is their highest salary. In a career average scheme, of course, this has an important effect, making the final pension look higher than it would do in reality.