The claim
“The proposals actually lead to better pensions for low and middle income earners”
Chris Huhne, BBC Question Time, 24 November 2011
Cathy Newman checks it out
All the mud-slinging between the unions and the government tends to obliterate the facts. The unions are striking over government plans to make them pay more into their pensions.
But beyond that simple statement of fact, there’s a lot of murk, claim and counter-claim. The unions say the changes to the pensions will make them worse off.
Ministers say on the contrary, an improved deal on the table would leave many low and middle income earners better off. What’s the truth?
The analysis
The unions say the government is “misrepresenting” the new pensions deal, and that it is wrong to insist the deal is better.
What is the new deal?
It’s worth remembering the changes already made to public sector pensions, says the deputy director of the Institute for Fiscal Studies (IFS). The Labour government implemented a “substantial cut” in public sector pensions by changing the pension age from 60 to 65, says Carl Emmerson, “making people pay in for five more years to receive the same pension for five fewer years”.
The current government is making the pensions less generous still by indexing pensions payments in line with increases in the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI).
It also proposes a rise in pension contributions of £2.8bn by 2014/15, as well as pegging the retirement age to the state pension age of 67 and moving staff from final salary schemes to career average schemes.
So people are paying higher contributions and working longer. And they are being asked to pay more out of a salary that has been frozen for two years, and that from 2013 will rise by 1 per cent at the most.
Announcing the small pay rise yesterday, George Osborne said public sector pay had risen twice as quickly as pay in the private sector over four years. He said the 1 per cent rise was tough, but fair to private sector taxpayers.
Despite all this, the government still claims it has managed to carve out a better deal for low and middle income earners.
Public versus private sector
Paul Johnson, director of the IFS, told FactCheck: “The key point is that public sector workers have vastly better pensions than the private sector, and this is a remarkably generous offer.”
Indeed, figures from the Hutton Report show the average public sector pension payout is around £7,800, and the median is £5,800.
Most public sector workers are on defined benefits pensions, where the level of final pension is fixed. This is virtually extinct in the private sector, which is more likely to offer defined contributions (DC) – where the pension payment depends on the pot accumulated by the person when workers retire.
The National Association of Pension Funds (NAPF) says the average lump sum a newcomer to the private sector will accrue in a DC pension is around £20,000, paying out around £1,400 per annum.
A better deal?
While on the whole the public sector might get a better deal than the private sector, Mr Johnson said the government is wrong to claim it’s a better deal than public sector workers are currently on.
He said: “The combination of extending the age to 65 and increasing contributions makes people on average worse off. It wouldn’t be worth the government doing otherwise. The government will raise money in the short term.
“On the whole people will be worse off…Huhne can’t say that it’s a better pension (for low and middle income earners). It can’t be true, on average.”
The government could offer FactCheck no proof that the deal is better for all low and middle income earners, it only pointed us to the handful of cherry picked case studies they set out earlier this month.
You do the maths
Nick Clegg meanwhile has urged people to check it out for themselves on the government’s calculator. He said last week: “The only thing I ask them to do between now and next Wednesday is to sit at their desk, flip open their laptop, get on to the government website and look at what we are actually offering and compare it to what they are being told by their union bosses.”
He didn’t mention however – as the Cabinet Office admitted to us – that the calculator does not take account of the change in pension contributions, “because the government has yet to decide how to structure or tier contributions in the new scheme”. The reforms propose a £2.8bn increase in contribution payments by 2014/2015.
Despite this, the calculator still doesn’t prove that the new deal is better than the current one. The Public and Commercial Services union (PCS) goes as far to say that every example it has tried shows that the current pension scheme delivers a higher pension than the proposed pension scheme – even at the age of 68.
For example, a 35-year old admin officer who has worked in the civil service since 2005, and earns £18,300, and a 40-year old job-sharing manager on £12,000 with 10 years’ service – would both lose money under the new scheme.
The move to CPI alone lops £15,000 and £6,380 off their respective pension pots over 20 years. And under the new scheme, if the 35-year old retired at 60 she’d receive 25 per cent less per week than under the old scheme. And if she worked until she was 68, she’d get £361 less per year.
Meanwhile, if the 40-year old retired at 60 her pension would be 12 per cent lower under the new scheme, rather than the old. And if she worked another seven years, she’d still end up with £76 less per year than under the current scheme.
The Treasury however maintains that: “The government has been clear that because people are living longer, public service workers will have to work longer. Some will also have to pay more, so there is a fairer share of the cost between taxpayers and employees. But if they are on a low and middle income, when they reach their scheme pension age they will get as good a pension, or better, than before.”
Cathy Newman’s verdict
The government claim that the overhaul of public sector pensions will enrich many low and middle income earners is fanciful. Raising the pension age and increasing what people pay into their pension pots will make employees – from managers to admin officers – worse off on average.
Having said that though, public sector pensions, even after these reforms, will still be the envy of many a worker in private enterprise.
With the eurozone imploding, and the British economy on the brink of another bitter recession, there’s a risk that the unions are fighting the wrong war by striking over what still look like very decent retirement prospects.
The analysis by Emma Thelwell
