The pension carousel is simply unaffordable

The public sector has become skewed and divorced from the economic reality. No government can afford the generosity of the public sector unfunded schemes

7dc746be3105b18ec20e57b034a63cb8e53564ae
A slight difference of opinion...
F64191118568e16d131da2cc7fcff8345ae62ce3
Simon Miller
On 27 April 2012 12:27

Since the government has been using 1984 and Judge Dredd as guidebooks in the art of statehood, health and surveillance in the past few years, it is hoped that it will not be inspired by another science fiction classic as the expense of pension provision is set out.

In Logan’s Run, when you reached the age of thirty you went to the carousel after your crystal went black. Looking at the latest pension obligation figures from the Office of National Statistics, I hope the government doesn’t look to the film for guidance.

All western governments are aware of the problems in ageing populations but the figures bring a stark relevance to not only the pressures and risks of pension provision but also how the two-tiered pension gap is widening.

According to ONS figures out today, UK pension providers have to find £7.1trillion to meet the total accrued-to-date pension obligations up to the beginning of 2011, nearly five times the UK’s gross domestic product.

And when you break down these figures, the amounts become even more staggering. The private sector has a total £2.1 trillion in obligations while the state has to find the rest.

For the private sector, battered by regulation, recession and, in some cases, victims of credit hoarding, this is bad enough but then you look at the public sector.

Of that £5 trillion obligation, the UK government has to find £3.8 trillion for state pensions (263 percent of GDP) and £1.2 trillion for workplace place pension schemes.

Now, of course obligations – like the now-disputed FRS 17  accounting rule – are the cost of all pensions being paid as if it was today but the figures are a good illustration of the tale of two workplaces in this country and the cost one of these worlds brings us.

Private pension provision has changed completely over the last 30 years to the extent that open defined benefit schemes are nigh on extinct and we have to look at the usual culprits to see who’s to blame.

Fearing that companies were using pension schemes as tax avoidance vehicles, the Inland Revenue restricted funding levels to 120 percent of the fund. As a direct result of this, companies took contribution holidays as they had to get funding down to 120 percent by law. Instead of being allowed to build up these funds for the bad times – which would come in the late 1990s/early 2000s – the revenue told them to take a break.

The second deceit was when the Tories lowered, and then Gordon Brown scrapped in a fit of pique, the advance corporation tax which is estimated to have potentially costs £5bn a year to pension funds.

The third piece of brilliance was the aforementioned FRS17. This accounting rule took a snapshot of the health of a pension fund on one particular day leading to ‘BA in deficit’ type headlines ignoring that pension payouts are in essence smoothed over by the makeup of the scheme members.

As a result, we saw a fantastic spiral where a stock-listed company was hit in the share price, another company’s pension scheme investments go down – hitting its balance - and so on.

In turn, a vast majority of companies turned off their DB schemes and switched to defined contribution where the scheme member carries the investment risk and not the company. But at least they are funded.

Since the “austerity” plans were announced, petty politics has seen essential services being hit – rather than non-essential things such as outreach officers – and members of public schemes going on strike over pensions.

But there is a very good reason why the government is looking at this. Unfunded public sector schemes account for around 60 percent of public pensions. Like national insurance, the money put in today is paid out today.

There is no investment fund and the guarantor for these pensions is the government. Any shortfall has to be met either through borrowing or you and me: the tax payer.

As an aside, yes public sector you are a tax payer but who pays your wages? In fact, there are decent efficiency savings to be made by just paying you your pay net rather than faffing around with tax deductions in the first place.

Anyway, these workplace unfunded funds are showing an obligation of £0.9trillion, that’s 58 percent of GDP - where is this money going to come from?

It used to be said that public sector pensions were a thank you for the low-paid status of these jobs but with pay vastly outstripping the private sector this is no longer the case.

The argument is simply one of affordability. No government can afford the generosity of the public sector unfunded schemes. Any government of any persuasion will have to look at these figures and work out what to do. This is the truth behind the numbers.

And it is also a reminder about how skewed the public sector has become and how divorced from the economic reality it seems to be.

Union-sponsored attacks on the very financial system that private pension members rely on to generate future income is all the more galling when you consider what benefits the taxpayer is paying for in the public sector.

The carousel we see in reality is in stark contrast to that of fiction. As the public sector spins around trying to grab the golden hoop, it is the private sector that still has to pay the fair but now with no chance of enjoying the ride.

Simon Miller is a Contributing Editor to The Commentator and the Editor of Financial Risks Today. He tweets @simontm71

Comments
blog comments powered by Disqus