OVER the last few weeks the Advertiser and Examiner has printed a number of letters about public sector final salary pension schemes. Many are from members of the public evidently scanning the web and regurgitating data which they obviously don't understand and thus comment inaccurately and out of context. Thus your paper is nurturing a theme which is deviating from the truth.
I lay no claim to the following article which recently appeared in the FT and in my professional view, as an Independent Financial Adviser, succinctly covers many of the misconstrued points which have appeared in your paper. If you wish to either reproduce the article or use the data, that is up to you.
I accept that in a democratic society, your letters page allows people to freely express their views. The problem is you have no ability to confirm the accuracy of the data conveyed.
A scandal that threatens to bankrupt us
By Luke Johnson
Published: June 4 2008 03:00 | Last updated: June 4 2008 03:00
Here is a true horror story: the black hole in the UK's public sector pensions. This colossal hidden deficit will starve British industry of investment and impoverish the wealth-creating portion of the economy for decades to come. While New Labour likes to talk about equality, a vast gulf is opening up between the retirement rules and provisions in the public and the private sectors. And the private sector has to fund the lot.
More than 5m state workers participate in open final salary pension schemes; thanks to the decline of defined benefit occupational schemes, only half a million private sector workers are members of plans that remain open. Local and central government run their schemes for National Health Service workers, teachers, the civil service, the army, police and fire service on an unfunded basis. This means none of these vast liabilities is provided for in national accounts. Contributions are not saved and invested, but spent. This is far worse off-balance-sheet hanky- panky than that carried out by the banks, which have been so heavily criticised by the prime minister for shoddy accounting.
Independent estimates prepared by the think-tank IEA suggest the total liability to the taxpayer is more than £1,000bn - much more than ministers admit. It has roughly trebled in the past seven years, thanks to increases in the state payroll, generous public sector pay increases, falling interest rates and rising life expectancies. In the past it might have been argued that defined benefit pension schemes were compensation for lower public sector salaries. But these days many state workers earn more than their private sector cousins.
I chair the Channel 4 final salary pension scheme, where the ultimate sponsor is the taxpayer. But at least ours is fully funded, rather than an imprudent "pay-as- you-go" system. Like almost every other private sector plan in the country, we have had to make significant changes to the terms and benefits to ensure the scheme remains solvent and does not bankrupt the sponsor. These involve compromise on both sides - employer and employees.
Following various scandals in the 1980s, the laws regarding private sector pension schemes have become increasingly draconian, and many companies have been forced to divert huge sums to fund pension obligations. Inevitably, this is siphoning off cash that could be used to invest, create jobs, maintain our competitiveness and sustain our overall standard of living. The long-term economic consequences of this drain on industry are yet to be really understood.
Britain is not alone in facing inter-generational conflict over pensions. France, Italy, Germany and even the US have unsustainable systems that require tough trade-offs. But the response of Britain's political leaders has been instructive.
During the term of this government, the provision of occupational pension schemes in the private sector has collapsed. Gordon Brown hastened their demise by ending dividend tax relief in 1997. Yet this administration has failed to deliver reasonable adjustments - like extending retirement age from 60 to 65 for existing members - to the principal public sector schemes. Alan Johnson, an ex-union official, backed down in the face of public sector union intransigence, because the near- bust Labour party is so in hock to them as paymasters, and was petrified of strikes. Already more than a quarter of council tax receipts are needed to fund public sector pension costs, and this proportion will rise remorselessly.
Unsurprisingly, MPs as a whole are massively conflicted in this matter. Their pension scheme is one of the most generous in the world, which experts calculate is equivalent in value to 50 per cent of an MP's salary, using proper measurement techniques. No wonder they are not overly keen to tackle pension disparity.
This year David Cameron said he wanted to modify the "gold-plated" House of Commons scheme to help restore trust in politics. It cannot be right that the 17 per cent of the workforce in the public sector own almost 40 per cent of the nation's pension scheme rights.
The current structure of public sector pensions is unsustainable. As Labour has expanded the state, so the long-term retirement burdens have mounted. A weak economy and rising wage inflation will only compound the problem. We are living beyond our means - firm political action is needed to fix things.
lukej@riskcapitalpartners.co.uk The writer is chairman of Channel 4 and runs Risk Capital Partners, a private equity firm
Copyright The Financial Times Limited 2008
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