Friday, 1 July 2011

More on Pensions

I have been away for most of the week, in Bruges (which t seem to prefer to be called Brugge) so I'm missed most of the debates and comments leading up to yesterdays strikes. What little I have heard has not caused me to change my views as expressed in an earlier post. However, I'd be interested in further and better particulars on several aspects of the situation:

1. Pensions for retired local government employees are "funded", which I understand to mean that their contributions were invested (doubtless much of them in the National Debt), and that the funds are in credit and projected to remain so, so there is no immediate question of these pensions being unaffordable or a burden on the taxpayer (except for the issue of contributions being free of tax, which I'll comment on later.) Why therefore, does the government have to interfere? Surely it is up to the fund managers to make any adjustments necessary as a result of great longevity.

2. Pensions for teachers (and for civil servants too, I believe) are "unfunded." Our contributions were used to finance current expenditure (and thus reduce taxes for all, not just the teachers)and our pensions are paid out of current taxation. Everyone, private sector included, has benefited from the lower taxes this has made possible in the past. It is not, in my view, and ideal scheme, but I believe the Hutton Report estimates that the amount of current expenditure required to finance the scheme, will, as a proportion of GDP, peak soon and then fall.

3. In the good times private sector pensions could be far more generous than the maximum of 40/80ths of final salary we teachers receive. (I believe civil servants get a higher ratio.) Is one of the reasons so many private sector pension schemes are no longer viable that they took "pension holidays" when the stock exchange prices were soaring, and now find themselves short when the boom has come to a halt.Are not their problems of their own making?

4. However, I do feel that, especially at the higher levels, many in the public sector have broken the "public service covenant": that we would work for relatively modest salaries for which we are compensated by relative job security and a comfortable pension (and, if you are at the top of the tree, some fancy title such as a KCMG) This covenant has been broken by public servants at the higher levels demanding remuneration equivalent to the private sector but without the risks.

5. In addition to paying teachers' and others pensions directly, current taxpayers fund pensions by forgoing the tax on pension contributions. According to a letter from a Declan O'Neill in yesterday's Guardian, in 2009 this tax relief cost the treasury £37bn of which 60% went to higher rate tax payers , with 25% going to the top 1% of earners. Surely there should be some limits. We need to get "back to basics", recognise that pensions are to avoid penury when one's earning life is over. Thus I have no quarrel with pensions based on average rather than final salaries, and in my view tax relief should be allowed on pension contritions only up to the amount that would provide a pension pot which would pay out the equivalent to the median wage.

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