Busing the pensions jargon

Submitted by Matthew on 23 November, 2011 - 12:09

Already the Government has changed inflation-uprating for pensions from one price index, RPI, to another, CPI, which on average is about 0.8% lower each year. That’s an accumulated cut of 15% in your pension after 20 years of retirement. Or if, say, you work as a teacher for 20 years, and do other work for a further 20 years, then the value of the pension you claim from your teaching work will have been cut by 15% even before you retire.

The Government wants to increase workers’ contributions to public-sector pension schemes; to raise the age at which pensions can be claimed; and to change public-sector pensions from “final salary” to “career average”.

The RPI-to-CPI change applies to all pensions: public-sector, state, and private-sector schemes too (unless their terms state explicitly that inflation-uprating means RPI: the Government talks of legislation to override the terms for those schemes).

The Government wants to raise the age at which both the state pension and public-sector pensions can be claimed. The women’s pension age will be raised to 65 by November 2018. The state pension age will then increase to 66 for both men and women from December 2018 to April 2020. Chancellor George Osborne has talked of further increases in pension age which could push it up to 70 before the middle of the century.

The Government says the public sector pension schemes are “unaffordable” because people are living longer, but its own Hutton Report shows that existing public sector pension schemes can balance their books up to about 2060, which is as far ahead as anyone can see.

The extent of “living longer” varies enormously with social class. Men in the Parkhead district of Glasgow have a life expectancy of 59; they will be lucky to claim a pension at all. In well-off Kensington men’s life expectancy is 84.

In any case, economic output generally rises over the decades, so a greater share can be allocated to pensioners without having to cut down standards for working-age people or children.

The problem is not that economic output is insufficient in general. It is that over recent decades private employers have almost entirely opted out of contributing to pensions; that governments have been unwilling to tax private wealth; and that pension pay-outs are large for the very well-off and meagre for workers.

Most private-sector pensions for ordinary workers (as against top managers) have been trashed. According to the Financial Times, the Government’s planned changes in state pension provision will now push the “diminishing rump” of private-sector employers with decent pension plans to scrap them. The answer is compulsion on private-sector bosses to contribute to decent pension funds for their workers, and have those funds controlled by the workers. The unions should be campaigning for that, and for better state pensions, as well as defending public-sector schemes.

In early November the Government ballyhooed some “concessions”. That shows action, and the threat of action, can make a difference. But those first concessions were like telling someone you’ll break her or his arm, but that’s all right because you’d planned to bruise their fingers too.

The Government offered to keep pension age unchanged for those within ten years of retirement (but they will still suffer from the CPI/RPI change, and still have to pay increased contributions). It offered to keep the “accrual rate” (the portion of full pension you accrue for each year spent in a job) at 1/60 (but that is what it is now: it’s not an improvement).

The Government claims that “career average” is fairer than “final salary”. It’s true that managers and the like get many promotions in their working lives, and end up on much higher pay than routine workers, and so inequality during working lives is magnified in retirement under “final salary” schemes.

There is a very big hitch. A calculation of your “career average” pay depends on the inflation-uprating applied to the pay you got 30 or 20 years ago. If the inflation-uprating is at a low rate, or if the “accruals” rate is not improved (since, even for the less-promoted, “career average” will still be less than “final salary”), then a “career average” scheme ends up worse than “final salary”.

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