Public Sector Pensions

Debt_Free_Chick

Arcaine wrote: »

Just a quick poll on Public Sector Defined benefit pension scheme funding.

An interesting question, but I'm not sure what I've voted for (against, actually!)

Do you think public sector pension deficits should be made up with tax reciepts?

There is much debate on the estimates of "Public Sector Pension Deficits" with a figure of £1.3 trillion being bandied about. This is the estimate of the pension promises made to those public sector employees where there is no separate pot of money put aside to provide those pensions. Any debate on that topic is, IMHO, pointless ..... and here's why.

Leaving aside public/private sector differences, looking at pensions (and any other similar promise that amounts to a commitment to pay out money in the future), there is actually only one reason why pensions should be funded in advance, at all. That is security.

If one is confident that a debtor can meet their future obligations, then there is no need to "securitise" the debt. Security is only an issue when there is reasonable cause to doubt the debtor's ability to pay, in the future.

In the case of Public Sector pension promises, it's "taken as read" that the Government (all layers, including Local Authorities) has the power to raise revenue to meet its obligations. The resulting taxes may be unpalatable and may well threaten the general economy, but if the money has to be raised, it will be raised - by fair means or foul!

For this reason (mainly) there is no need to fund Public Sector promises, in advance. Some may argue that if "the country is bankrupt" then the money can't be raised, but "the country" will not cease to exist if bankrupt, so the money will be raised somehow. The pension promises are contractual obligations and - unlike some other services - can not be cut (at least those already built up can not be cut). So, if the taxes cake is to be sliced up, then the cost of paying out pensions for former Public Sector employees is one of the first (if not THE first) to be dished up. Effectively, a priority charge on the taxes collected.

Given that there is no advance funding, what is the deficit? Arguably, it's "nil" - or 100%, but nothing in between. The deficit is nil if you accept that the only money to be paid out next year is the sum total of the pension instalments due to be paid to ex-Public Sector workers who are now retired and entitled to recieve their pension. "Nil" because the only money that needs to be found is that to pay out the pensions to retired workers, in the next year only. The deficit is 100% if you believe that there should be a separate fund which contains sufficient cash to pay out the sum total of all the pension instalments ever likely to be paid out in the future i.e. including the pension promises made to those who have not yet retired.

Putting a figure on unfunded pension promises is futile IMHO. One might just as well put a figure on unfunded refuse collections; unfunded healthcare costs; unfunded public sector pay. These are all costs that will have to be met in the future, but for which there are no pots of money lying around. However, taxes will be raised to pay for them, when the time arises.

It's one of the reasons why public bodies produce accounts in a completely different format to limited companies. The money can be raised - or (certain) services can be cut according to the money that can be raised.

The current debate in the Press is just "politics".

What we need is a debate on the question of "whether we should continue to make those promises and leave the cost of paying them to future generations". Or .... should DB pensions in the Public Sector be abandoned?

It used to be the case that the gold-plated Public Sector pension was necessary, in order to bring the total remuneration of a Public Sector employee up to the level of its Private Sector comparator - when Public Sector employees were paid a lower salary. However, that is no longer the case and it seems that the total remuneration of a Public Sector employee now exceeds that if his/her Private Sector equivalent.

But that's a different question.

Regards



(p.s. I work in pensions and remuneration in the Private Sector)

Debt_Free_Chick

I've voted "no" on the basis that there is no need to build a separate fund, from which the pensions promised to Public Sector workers will be met.

harryhound

I'm sorry this government is already well on its way to lumbering me, my wife, my two children and my grandson with a "mortgage" of 35,000 each.

Why ? Because they want to buy votes.

I had a father who could not cut his coat according to his cloth and he left his family with a house and debts almost to the value of the house, with me the only breadwinner on a trainee salary..

I cannot see the difference in what happened to us as a family and what the government (and the banks) have done to the country.

We worked our way out of the mess and the pensioners of this country should prepare to do the same.

The difficulty that retired bureaucrats face in retirement is "What are their skills worth"?

marklv

harryhound wrote: »

I'm sorry this government is already well on its way to lumbering me, my wife, my two children and my grandson with a "mortgage" of 35,000 each.

Why ? Because they want to buy votes.

I had a father who could not cut his coat according to his cloth and he left his family with a house and debts almost to the value of the house, with me the only breadwinner on a trainee salary..

I cannot see the difference in what happened to us as a family and what the government (and the banks) have done to the country.

We worked our way out of the mess and the pensioners of this country should prepare to do the same.

The difficulty that retired bureaucrats face in retirement is "What are their skills worth"?

I would tax the wealthy pensioners more. There are plenty of the 'silver haired brigade' driving around in Jaguars on Sunday afternoons in the area where I live. It makes me wonder why these idle ex-senior managerial people (of both private and public sector) are living the life of riley while many ordinary pensioners struggle to survive on £7,000 a year or less. I say: tax them more - they can afford to pay. Some of these people have such good pensions that they have actually taken out new mortgages to buy luxurious retirement homes. Incredible. I know of one 80 year old ex-lawyer who lives in a £10M house on the river Thames! What the hell is this guy living on???

marklv

Debt_Free_Chick wrote: »

An interesting question, but I'm not sure what I've voted for (against, actually!)



There is much debate on the estimates of "Public Sector Pension Deficits" with a figure of £1.3 trillion being bandied about. This is the estimate of the pension promises made to those public sector employees where there is no separate pot of money put aside to provide those pensions. Any debate on that topic is, IMHO, pointless ..... and here's why.

Leaving aside public/private sector differences, looking at pensions (and any other similar promise that amounts to a commitment to pay out money in the future), there is actually only one reason why pensions should be funded in advance, at all. That is security.

If one is confident that a debtor can meet their future obligations, then there is no need to "securitise" the debt. Security is only an issue when there is reasonable cause to doubt the debtor's ability to pay, in the future.

In the case of Public Sector pension promises, it's "taken as read" that the Government (all layers, including Local Authorities) has the power to raise revenue to meet its obligations. The resulting taxes may be unpalatable and may well threaten the general economy, but if the money has to be raised, it will be raised - by fair means or foul!

For this reason (mainly) there is no need to fund Public Sector promises, in advance. Some may argue that if "the country is bankrupt" then the money can't be raised, but "the country" will not cease to exist if bankrupt, so the money will be raised somehow. The pension promises are contractual obligations and - unlike some other services - can not be cut (at least those already built up can not be cut). So, if the taxes cake is to be sliced up, then the cost of paying out pensions for former Public Sector employees is one of the first (if not THE first) to be dished up. Effectively, a priority charge on the taxes collected.

Given that there is no advance funding, what is the deficit? Arguably, it's "nil" - or 100%, but nothing in between. The deficit is nil if you accept that the only money to be paid out next year is the sum total of the pension instalments due to be paid to ex-Public Sector workers who are now retired and entitled to recieve their pension. "Nil" because the only money that needs to be found is that to pay out the pensions to retired workers, in the next year only. The deficit is 100% if you believe that there should be a separate fund which contains sufficient cash to pay out the sum total of all the pension instalments ever likely to be paid out in the future i.e. including the pension promises made to those who have not yet retired.

Putting a figure on unfunded pension promises is futile IMHO. One might just as well put a figure on unfunded refuse collections; unfunded healthcare costs; unfunded public sector pay. These are all costs that will have to be met in the future, but for which there are no pots of money lying around. However, taxes will be raised to pay for them, when the time arises.

It's one of the reasons why public bodies produce accounts in a completely different format to limited companies. The money can be raised - or (certain) services can be cut according to the money that can be raised.

The current debate in the Press is just "politics".

What we need is a debate on the question of "whether we should continue to make those promises and leave the cost of paying them to future generations". Or .... should DB pensions in the Public Sector be abandoned?

It used to be the case that the gold-plated Public Sector pension was necessary, in order to bring the total remuneration of a Public Sector employee up to the level of its Private Sector comparator - when Public Sector employees were paid a lower salary. However, that is no longer the case and it seems that the total remuneration of a Public Sector employee now exceeds that if his/her Private Sector equivalent.

But that's a different question.

Regards



(p.s. I work in pensions and remuneration in the Private Sector)

Good, intelligent post - which makes a change from the norm on this forum.

harryhound

vivatifosi wrote: »

I don't know what the ceilings of all schemes are (sounds like you got a better deal than me ), but I think the inflation that people are hoping for would be above this, of the order that was experienced in the 1970s and 1980s. Didn't it peak at something like 25%?

StevieJ wrote: »

That sort inflation level would require large wage rises to impose itself, it is not on the agenda as far as I can see.

marklv wrote: »

I would tax the wealthy pensioners more. There are plenty of the 'silver haired brigade' driving around in Jaguars on Sunday afternoons in the area where I live. It makes me wonder why these idle ex-senior managerial people (of both private and public sector) are living the life of riley while many ordinary pensioners struggle to survive on £7,000 a year or less. I say: tax them more - they can afford to pay. Some of these people have such good pensions that they have actually taken out new mortgages to buy luxurious retirement homes. Incredible. I know of one 80 year old ex-lawyer who lives in a £10M house on the river Thames! What the hell is this guy living on???

I seem to remember inflation peaked at about 25% in the 1970's - the Bank of England agree with us - see below.
Public workers have an unlimited guarantee, from the printing press.
Most private sector employees have a cap at 5%, but pretty useless if the fund goes bust. Pensioners have an index of inflation that is higher than the average, as pensioners need the basic goods, where world population is bidding up the prices.

Inflation is simply too much money chasing too few goods.
At the moment as a country we have managed to refund the banks. Print money to replaced that lost in bad debts, devalued our currency by 25%, run record fiscal (tax) deficits and run a balance of payments deficit for years.
What have we achieved? We have stopped it getting a whole lot worse??
As far as I can see we are reaching the end of the road, paying interest on interest -
the spiral is getting closer.
I expect the government workers of the previous countries which got caught up in the spiral of inflation all thought their terms and conditions would be protected and theri governments tried very hard to protect their front line vote.
But if trust in a currency goes - the government can continue printing the pensions and salaries but that just speeds up the spiral.
Henry VIII (Elizabeth had to reissue the currency) Inter war Germany ("We put down the basket full of our wages, turned round and it had gone - yes someone had tipped out the money and stolen the basket") Argentina, USSR, Zimbabwe ("best educated population in Africa") now Iceland and Greece.

I think reality will get home to even the seemingly wealthy pensioners, hard at work as members of the "Ski" club - spending kids inheritance now, while driving round in their Indian cars.

This is quite a fun web site:
http://www.bankofengland.co.uk/education/inflation/map/map.htm

vivatifosi

StevieJ wrote: »

That sort inflation level would require large wage rises to impose itself, it is not on the agenda as far as I can see.

Absolutely. Though those wishing for inflation to reduce deficits need to realise this is the order of inflation that would be required - ie above the normal ceiling.

However I can see what would happen if schemes reach this situation. Pensioners in much hardship would be asking if the trustees had the ability to make discretionary increases above the ceiling due to the extreme difficulties faced by them. This in turn would trigger more work for the trustees while they see what is feasible. Nothing is ever black and white in pensions (well away from the absolutes of the rules and regs) and the devil is always in the detail.

vivatifosi

Debt_Free_Chick wrote: »

In the case of Public Sector pension promises, it's "taken as read" that the Government (all layers, including Local Authorities) has the power to raise revenue to meet its obligations. The resulting taxes may be unpalatable and may well threaten the general economy, but if the money has to be raised, it will be raised - by fair means or foul!

Interesting point. I'm less concerned by underfunded schemes than unfunded ones. I'm not so interested in underfunded schemes as there are plenty of reasons why there could be a deficit (change in measurement of funding basis, changing mortality tables, etc as you will know). Most of these schemes will continue to pay out for exactly as they always have.

In terms of unfunded liabilities, my concern is a demographic one. Whatever happens to the economy, British people are getting older and having fewer children. Therefore, unless the workforce is supplemented by immigration, going forward there is likely to be a smaller workforce (as we all retire) paying taxes, getting less in return and resenting the amount they have to give to the state. An aging population may also be a resource-drain on the state. Furthermore, a high taxation regime may make the UK, which has traditionally been economically liberal, a less desirable place to locate as a business.

I don't think the UK is about to go bankrupt or that this is an issue for now, as much as say 20 years down the line, however I don't feel that this is a situation that can continue. Of course, a switch to DC schemes will be a start as will reducing entitlement, (eg average rather than final salary) but at some point, some government will have to face up to this problem.

StevieJ

vivatifosi wrote: »

In terms of unfunded liabilities, my concern is a demographic one. Whatever happens to the economy, British people are getting older and having fewer children. .

I don't think the increasing age profile of the population is a gimme going forward, it could be that due to the sedentary lifestyle now adopted eg more office jobs compared to manual, computers etc the middle aged of todays could start to die younger.

mrs_T

As a local govt worker I have been paying in to my pension for the past 25 years (probably another 20 to go) and I'm paying in an extra 170 pounds a month of my salary before tax in order to buy extra years to compensate for the years I worked part time when my kids were younger. I'm in a dead end job for an employer who not only isn't paying pay rises but is stopping increments for those not at the top of their scale (which they believed they'd get when they joined) and I'm in the second year of three year pay protection facing a 3k pay cut. Talk about breaking contracts and changing the rules as they go along!