No great surprise that last week’s strike by local government workers in defence of their gold-plated pensions failed to generate much in the way of support, either from council staff or the general public.
This is an issue wide open to misrepresentation by trade union leaders, who are relying on a general ignorance about personal finance to stir up opposition to Government reforms which when implemented will still leave their members with the sort of retirement packages the rest of us can only dream of.
Union leaflets distributed at a rally outside Birmingham Council House were full of “misunderstandings”, to put it mildly. The truth of the matter is that final salary pension schemes of the type operated now almost solely by the public sector were only ever affordable during the days when moderate inflation kept stock markets moving steadily upwards.
Even then, the final salary gamble which puts all of the risk of paying future pensions in the pockets of the employer, made the gold-standard pension schemes too expensive for most private sector firms to bear.
Add to that a steady increase in longevity – local government workers retiring at 60 today can expect to live 10 years longer now on average than was the case 20 years ago – and even someone with a rudimentary knowledge of mathematics can see that offering a council worker an inflation-proofed pension worth two-thirds of their finishing salary after only 40 years at work is a ruinously expensive proposition.
And let’s not get started on Gordon Brown’s infamous raid on unit trusts tax relief in 1997, which had the effect of finishing off many private pension schemes.
Incredibly, even the better informed local government staff appear not to understand the amazing deal they are being offered by the Government. In return for agreeing to pay three per cent a year more in contributions and giving up the option of retiring on a full pension at 60, millions of employees will keep their final salary schemes, albeit switched to a fairer system based on career average pay – something that will benefit those on lower salaries.
I bumped into a middle-ranking council executive the other day who was moaning about having to find an additional three per cent of his salary every month. Let’s assume he is earning £60,000, which is not unreasonable, so he has to find an extra £150 a month, which might necessitate fewer visits to the pub and cutting down on the cigarettes.
He wants the Government to agree to phase in the extra three per cent payment so he doesn’t feel the pain. Bless.
It would be helpful to understand the actual cost of providing a £40,000-a-year pension to my friend, were his retirement to be funded by the money-purchase schemes that most people have to contend with.
In order to generate that kind of income, with built-in inflation increases plus wife’s pension and death benefits, it would be necessary to create a fund worth about £800,000, and even that would not provide £40,000 income if the full 25 per cent tax free lump sum of £200,000 was taken at retirement.
The way that public sector pension schemes work means that staff do not have to buy annuities to provide retirement income.
Their employer, that’s you and me the council tax payer, has to make good any shortfall in the West Midlands Local Government Pension Scheme, which obviously enough is currently showing a projected deficit although the trustees strongly denied claims a year ago that the funding gap was set to hit £60 billion.