Staring into the public sector pensions abyss
by Emma Boon
13 April 2012
Leaving taxpayers on the hook for growing liabilities runs the risk that we may not be able to afford to pay the pensions that have been promised - or further cuts to public services - claims campaign group
If you have ever worried about not paying your credit card off at the end of the month or lost some sleep over an overdraft, then spare a thought for the poor soul in charge of Birmingham City Council's pension fund, in the United Kingdom, which currently has a deficit of £1.3 billion pounds. That deficit is not quite the same as an overdraft. It is the difference between the amount they are expected to need to pay local government pensioners in the future - their liabilities - and the assets they hold to pay them. But, in the end, the same rules apply. At some point, you need to have enough to pay your debts or you will get in real trouble.
The council tops the table of pension deficits held by each local authority in the UK, published by the TaxPayers' Alliance today. Birmingham is not alone. The pension assets held by local authorities across the UK are dwarfed by the size of their liabilities, with a total pension deficit of £54bn, for which taxpayers are ultimately liable. The report is a stark reminder of the need to make changes to these arrangements, to make them sustainable for the future. For too long, politicians have stuck their heads in the sand. They wanted to believe that these deficits would eventually disappear as the stock market recovered, improving the value of assets held by council pension schemes and narrowing the gap between the assets and the liabilities. But there are still terrifying deficits, they are worse than they were two years ago. And it increasingly looks like those deficits are not going anywhere.
Since measures for wide ranging reform of public sector pensions first hit headlines, we have seen several strikes organised by public sector unions resisting these much needed changes. The trade unions claim that they are protecting the interests of their workers by resisting moderate measures to make the unfunded public sector pension schemes more affordable. But actually reform is needed in the Local Government Pension Scheme, or LGPS, as well. But that means leaving taxpayers on the hook for growing liabilities and ever-increasing deficits, running the risk that eventually we may not be able to afford to pay some of the pensions that have been promised - or taxpayers having to make big additional payments or cut frontline services
The Organisation for Economic Cooperation and Development described the LGPS as "severely underfunded" by international standards. Schemes in the Netherlands and Sweden – which has generous provision - and Canada all do so much better than the UK at ensuring assets meet liabilities. Of course, not all of those LGPS liabilities will have to be paid out in one go. But that does not mean we can ignore the gulf between their estimated long run assets and estimated long-run liabilities. The liabilities represent pensions that taxpayers now or
in the future will have to pay. Unless the value of the assets these schemes hold dramatically improves, they will have to be reformed and local government workers will probably have to pay more for the relatively generous provision they enjoy.
Local government pensions are more sustainable than other public sector schemes, which are unfunded. However, the LGPS is still a defined benefit scheme and much more generous than most defined contribution private sector provision. That places a heavy burden on local taxpayers. With an ageing population and a crisis in the public finances, generous defined benefit schemes are inflexible and can be very expensive. Our previous research has shown the considerable burden they place on the taxpayer. The equivalent of £1 in every £5 of council tax was spent on employer - taxpayer - contributions to the LGPS .
It is not just the ageing population that will put a strain on the existing scheme, as more retirees live longer and draw a pension for longer. There is a worrying trend of local authorities inviting councillors, not just staff, to enrol onto schemes. This not only adds to the liabilities, but raises questions over the ability of those councillors to really represent the interests of taxpayers - and is at odds with the traditionally voluntary nature of the role.
Trade unions will undoubtedly use the same tired and flawed arguments to try and defend these schemes as their deficits are exposed. It is easy for them to say to their members "the government wants you to work longer and pay more for your pension, fight these changes". But they are not willing to put forward a credible, affordable alternative, or admit to their members the consequences of maintaining the status quo. Previous attempts at reforms were watered down, with politicians kicking the can down the road. Further changes are now needed. It is right that public service workers are helped to save for their retirement, but it is unfair to ask taxpayers - who are struggling to pay for their own retirement- to contribute towards a pension that is far more generous than they can afford for themselves.
UNISON frequently makes the disingenuous claim that the average public sector pension is just £4,000 a year, but they know that this figure is seriously misleading. A teacher or a dinner lady or a bin man, who has worked a lifetime in the public sector, will get a far better deal than that when they retire. A teacher who retires on £50,000 after a 30 year career can expect a pension of £25,000 a year. The average figure that UNISON quote includes people who have only worked for a very short time in the public sector and who, therefore, have accrued very little - and obviously aren't entitled to a big public sector pension. They should have accrued other pension rights in other jobs in the rest of their career.
Taxpayers and politicians alike are waking up to the reality that these deficits are not going to go away. We are all staring into the pensions abyss and to step back from the edge will mean unions accepting reasonable reforms, which provide fair pensions for public sector workers but also a fair deal for the taxpayers who will pay for them. The only other option is to fall further into the pensions black hole.
Emma Boon is campaign director at The TaxPayers' Alliance, in the United Kingdom
If you have ever worried about not paying your credit card off at the end of the month or lost some sleep over an overdraft, then spare a thought for the poor soul in charge of Birmingham City Council's pension fund, in the United Kingdom, which currently has a deficit of £1.3 billion pounds. That deficit is not quite the same as an overdraft. It is the difference between the amount they are expected to need to pay local government pensioners in the future - their liabilities - and the assets they hold to pay them. But, in the end, the same rules apply. At some point, you need to have enough to pay your debts or you will get in real trouble.
The council tops the table of pension deficits held by each local authority in the UK, published by the TaxPayers' Alliance today. Birmingham is not alone. The pension assets held by local authorities across the UK are dwarfed by the size of their liabilities, with a total pension deficit of £54bn, for which taxpayers are ultimately liable. The report is a stark reminder of the need to make changes to these arrangements, to make them sustainable for the future. For too long, politicians have stuck their heads in the sand. They wanted to believe that these deficits would eventually disappear as the stock market recovered, improving the value of assets held by council pension schemes and narrowing the gap between the assets and the liabilities. But there are still terrifying deficits, they are worse than they were two years ago. And it increasingly looks like those deficits are not going anywhere.
Since measures for wide ranging reform of public sector pensions first hit headlines, we have seen several strikes organised by public sector unions resisting these much needed changes. The trade unions claim that they are protecting the interests of their workers by resisting moderate measures to make the unfunded public sector pension schemes more affordable. But actually reform is needed in the Local Government Pension Scheme, or LGPS, as well. But that means leaving taxpayers on the hook for growing liabilities and ever-increasing deficits, running the risk that eventually we may not be able to afford to pay some of the pensions that have been promised - or taxpayers having to make big additional payments or cut frontline services
The Organisation for Economic Cooperation and Development described the LGPS as "severely underfunded" by international standards. Schemes in the Netherlands and Sweden – which has generous provision - and Canada all do so much better than the UK at ensuring assets meet liabilities. Of course, not all of those LGPS liabilities will have to be paid out in one go. But that does not mean we can ignore the gulf between their estimated long run assets and estimated long-run liabilities. The liabilities represent pensions that taxpayers now or
in the future will have to pay. Unless the value of the assets these schemes hold dramatically improves, they will have to be reformed and local government workers will probably have to pay more for the relatively generous provision they enjoy.
Local government pensions are more sustainable than other public sector schemes, which are unfunded. However, the LGPS is still a defined benefit scheme and much more generous than most defined contribution private sector provision. That places a heavy burden on local taxpayers. With an ageing population and a crisis in the public finances, generous defined benefit schemes are inflexible and can be very expensive. Our previous research has shown the considerable burden they place on the taxpayer. The equivalent of £1 in every £5 of council tax was spent on employer - taxpayer - contributions to the LGPS .
It is not just the ageing population that will put a strain on the existing scheme, as more retirees live longer and draw a pension for longer. There is a worrying trend of local authorities inviting councillors, not just staff, to enrol onto schemes. This not only adds to the liabilities, but raises questions over the ability of those councillors to really represent the interests of taxpayers - and is at odds with the traditionally voluntary nature of the role.
Trade unions will undoubtedly use the same tired and flawed arguments to try and defend these schemes as their deficits are exposed. It is easy for them to say to their members "the government wants you to work longer and pay more for your pension, fight these changes". But they are not willing to put forward a credible, affordable alternative, or admit to their members the consequences of maintaining the status quo. Previous attempts at reforms were watered down, with politicians kicking the can down the road. Further changes are now needed. It is right that public service workers are helped to save for their retirement, but it is unfair to ask taxpayers - who are struggling to pay for their own retirement- to contribute towards a pension that is far more generous than they can afford for themselves.
UNISON frequently makes the disingenuous claim that the average public sector pension is just £4,000 a year, but they know that this figure is seriously misleading. A teacher or a dinner lady or a bin man, who has worked a lifetime in the public sector, will get a far better deal than that when they retire. A teacher who retires on £50,000 after a 30 year career can expect a pension of £25,000 a year. The average figure that UNISON quote includes people who have only worked for a very short time in the public sector and who, therefore, have accrued very little - and obviously aren't entitled to a big public sector pension. They should have accrued other pension rights in other jobs in the rest of their career.
Taxpayers and politicians alike are waking up to the reality that these deficits are not going to go away. We are all staring into the pensions abyss and to step back from the edge will mean unions accepting reasonable reforms, which provide fair pensions for public sector workers but also a fair deal for the taxpayers who will pay for them. The only other option is to fall further into the pensions black hole.
Emma Boon is campaign director at The TaxPayers' Alliance, in the United Kingdom
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