Connected Research

Union policy research in the 21st century

CBI on public sector pensions

leave a comment »

The CBI has put out a report today on public sector pensions (press release; report).

The CBI claims to speak for businesses which ’employ around a third of the private sector workforce’ and to ‘communicate the British business voice around the world’. So, I’m almost tempted to ask ‘what has public sector pensions got to do with you?’ – except, of course, that decent quality public sector schemes highlight the decline into sheer inadequacy of pensions provision across much of the private sector and may also – in somewhat better times – act as a source of pressure on the private sector to improve its own levels of provision. So, the ‘voice of business’ has indeed a very clear reason to intervene in the debate on public sector pensions.

Aside of the usual prejudice in the report – for example, the continued misuse of the total size of the deficit in public sector schemes, as if bill had to be paid now rather than amortised over a period extending well into the future – what is the CBI actually saying should happen to public sector pensions?

No changes to existing accrued rights – that’s clear. But, for the future, what it wants to see is higher retirement ages for all staff, not just new joiners, and for all public sector workers to be moved off defined benefit provision (including career average schemes). Funded schemes (within this context) would be able to choose their own route, while those in unfunded schemes would be shifted into a new type of provision called ‘notional DC schemes’. Here, contributions are built into a series of personal accounts but, instead of being invested in the stock market, are revalued in line with rises in earnings or prices before being used at retirement to buy an annuity.

The CBI doesn’t state what sort of pensions it expects these personal accounts to buy. Over time, and taking a long-term view of pensions investments, simple revaluation is, however, likely to lead to much smaller individual pots than even a ‘conventional’ DC scheme invested in a range of types of investment commensurate with an individual’s age and risk profile. Consequently, notional DC schemes are likely to lead to much smaller pensions.

This leads me to a couple of points:

1. Why does the CBI expect public sector workers in unfunded schemes to have retirement pensions which are substantially poorer than existing DC provision?

2. As a society, do we really want the burden of paying additional state benefits to people unfortunate enough to be in such schemes? The switch to DC schemes in the private sector is already loading the state with additional, and unpredictable, burdens in the future as a result of the pensioner poverty that will be the result; do we really want further burdens from forcing public sector workers into even poorer schemes?

Having a majority of public sector workers in these sorts of schemes would certainly alleviate the potential comparative pressures on private sector employers. Establishing poorer pensions provision into the public sector increases the relative attractiveness of private sector employment – and at no extra cost. It also underpins the removal of the ‘burdens’ on business of decent pensions provision, since it helps to establish existing ‘conventional’ DC provision as the standard. (The burdens on the taxpayer of having a greater number of pensioners reliant on the state for income, and the concomitant reduction in available money to spend on CBI members’ goods and services, is perhaps a concept too far removed from the CBI’s preoccupations and thinking.)

Whether this would lead to private sector employers following suit is uncertain – and perhaps unlikely, since private sector employers are largely interested in containing costs, and switching to ‘conventional’ DC provision tends to do that within existing arrangements establishing pension contributions at fixed levels. So, this move is unlikely to form part of a further general spiral of decline on top of that already in motion. If employers did follow suit, however, it is interesting that the prospect of such poor pensions in comparison with even existing DC schemes is likely to increase pressures on those employers who had gone down such a road to raise contribution rates, since this is one of the few variables that could be changed to improve the eventual outcome.

[Same day edit: The FT‘s report of the story carries a reference to there being a cash balance element to the CBI’s proposals (in which the lump sum that members receive on retirement prior to conversion into annuity reflects a percentage of pay for each year worked, revalued in accordance with prices or earnings). If true, this would alter some of the emphasis of the last half of this post – since the pensions thus generated would be better than it envisages (while remaining poor). However, while the CBI report refers to cash balance schemes at an earlier point in the text, I can’t see there being a cash balance element to the way it writes up its proposals for a notional DC scheme (and, anyway, if it’s intended to be a cash balance scheme, why call it ‘notional DC’?]


Written by Calvin

06/04/2010 at 12:42 pm

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s