Of course this makes public sector pay even more outrageously higher

EU rules would double cost of British pensions
“Reckless” new EU rules could double the cost to British companies of providing “gold-plated” final salary schemes, new figures show.

Public sector pensions are inflation proofed, guaranteed and largely final salary (although that is slowly changing to average salary I think?).

And it\’s certainly possible to work out the cost of them by looking at what government has to spend to provide them.

However, when we\’re looking at the difference between public sector pay and private sector pay that isn\’t the way to do the comparison. How much pay now does a private sector employee have to give up to get the deferred pay of a final salary pension as against how much does a public sector employee have to? That\’s the correct way to measure the two sets of pay.

And if providing final salary pensions has just become vastly more expensive as a result of EU rules then obviously that pay gap has widened.

Therefore, the correct result of these EU pensions changes should be that public sector pay, the current pay, should be cut to reflect the increased value of those pension promises, that deferred pay.

17 thoughts on “Of course this makes public sector pay even more outrageously higher”

  1. Surreptitious Evil

    Not “slowly changing” – will change to ‘average salary’ en mass when the Public Services Pension Bill passes, although existing rights will be largely preserved in many cases.

  2. Public sector workers have a contract with their employers – if we allow the government to tear up every one of those we are abrogating the rule of law. Do you *really* want to do that?
    You could advocate all *new hires* to the public sector being paid a wage/salary reflecting the value of the pension or just not getting a pension if you want another confrontation with the public sector unions. [Those promoted would get the higher of the grade salary at new rates or 5% more than their old salary].
    Or just require every local council to tell every ratepayer the cost of pensions when it send out is demand for council tax including the individual cost of those for every head of department (in line with the legal requirement for every public company to reveal the salary and pension of every director).

  3. @ SE
    That only applies to future service – all pensions for past service are preserved *and will be inflated by any future pay rises* and civil servants due to retire by 2022 are still on the old scheme – so “slowly changing” is fair.

  4. Cyprus showed that the government can tear up the rule book, confiscate funds in bank accounts, do what ever it takes in the interest of the NATION.

    So John77, rule of law my arse, if it is in the NATIONAL interest to cut civil service pensions, and salaries, I am all for it, and stuff the overfed, mollycoddled, bloated, interfering, wankers working in the civil service!

  5. TheJollyGreenMan

    “overfed, mollycoddled, bloated, interfering, wankers working in the civil service”

    That’ll be me then. You seem to think you know me really well, which is strange as I can’t recall ever meeting you.

    john77 & Surreptitious Evil, you have between you summed up the positon as I understand it regarding my pension pretty well. Thank you.

  6. Well, you could do the next best thing to tearing up the rule book and just not give pay rises.

    Anecdata alert – I think I read somewhere that the Bank of England pension fund is fully funded, and, in order to be sure of remaining so, all in index linked gilts. That apparently involves a payment in equivalent to 75 per cent of salary (made by us I guess).

    So that is what a guaranteed inflation linked final salary pension is worth.

  7. @ Ironman
    I think TJGM means those in the Police and Fire Services who get the most generous pension arrangements. That is why he has installed sprinklers throughout his castle drawing water from his moat and coated the 50 foot high walls surrounding his estate where his serfs grow enough food to support the population with perfectly-slippery coatings impervious to pitons.

  8. No, that is what THAT particular guaranteed inflation linked final salary is worth.

    On a point slightly removed, did anyone read Ritchie’s fabulous analysis on private sector pensions, taxes and deductions for contributions. Amongst other statisticlly irreproachable techniques is a year-by-year comparison of payments to retired members with contributions by working members, from which he claims that schemes are all making losses by wasting their funds on UK business. He then concludes that it is the tax relief alone that is providing value to pension schemes, the taxpayer is being fleeced and so only the Courageous State should be in the pension business. Apparently pensions are not taxed on receipt!

  9. Public sector workers have a contract with their employers – if we allow the government to tear up every one of those we are abrogating the rule of law.

    This is an interesting one, though. Is a contract enforceable when one of the parties was in no condition to make the commitment in the first place? I could enter into a contract with somebody to pay them GBP1m next week, in the full knowledge that I couldn’t afford this, and make a weak argument that I *might* get a job as a premiership footballer. But taken sensibly, questions must be asked of the fucking idiot who in all honesty thought he was going to get 1m off me next week – when I will be bankrupt – even though legally he is entitled to it. Strictly speaking, the contract is enforceable, but it is also largely pointless as it will never be honoured.

    Basically, you have a group of people who are legally entitled to a generous sum of money promised to them by a government who is hoping to be able to extract it from a future electorate. Whilst they have the legal right to the money, I’m not convinced they have a moral right to it, and this standpoint might prevail with a future electorate. The moral of the story is not to base your future on the ability of a government to shaft future generations.

  10. The “cost” of providing the pensions isn’t affected by this at all – at the end of the day the same amount of pension is being paid to the same people.

    All this is doing is working out how much capital should be hald today by those promising to pay that pension – much of the public sector gets by on holding no capital, and funding the pension out of current expenditure.

    All it can do is affect the timing of payments, and by moving money from one pocket to anoter.

  11. The devil really is in the detail here: do the rules apply to all acruing pension, only to defined benefit schemes or only to final salary schemes? It could be that the rule changes make an employer’s relative costs of a defined contribution scheme cheaper compared with a defined benefit scheme – assuming the same expected pension. That employer will then make the change – those that haven’t already. Using Tim’s rationale, however, those cost movements will have caused the employees salary first to increase, then to decrease again following the change. It isn’t necessarily the easiest thing to be certain you are comparing like with like.

    P.S. My understanding is the big switch to defined contribution has been more to do with carrying the future liability of defined benefit schemes on the balance sheet, together with the uncertainty caused by fluctuating values of scheme investments. Does anybody know how right I am in that, if at all?

  12. “the correct result of these EU pensions changes should be that public sector pay, the current pay, should be cut to reflect the increased value of those pension promises, that deferred pay.” I disagree. We should move the civil servants off defined benefit schemes onto auto-enrollment and then use pay – i.e. pay rises if needs be – as the means to attract and retain. That would be a far more honest way to do things and would be a boon to young civil servants looking for a mortgage and so would accord with the government’s policy of inflating the housing market.

  13. “rule of law my arse, if it is in the NATIONAL interest …”: the rule of law is in the national interest you stupid sod.

  14. @ #11 Ironman
    The report is 78 pages long and it is difficult to sort everything out from a quick skim but
    (i) The report states that it is only DB schemes, not DC ones
    (ii) The Telegraph headline is wrong; what is increased is the reported deficit: not the actual cost. They estimate liabilities using a risk-free interest rate (currently negative) instead of the expected return on assets and add in a “risk factor” for the risk that pensioners will live longer or interest rates may decline prior to cash flow going negative or rise after it does so the price of assets being sold falls short of expectations.
    For the same pension the cost of a defined benefit scheme is lower than a defined contribution scheme.
    The reason why companies have abandoned DB schemes is partly due to the liability on the balance sheet and its variation, more that governments monkeying about with the rules have dramatically increased the cost of past commitments and the artificially depressed interest rates have inflated the value of liabilities forcing many of them to put more money into the schemes at the worst possible time [you should buy gilts when yields are high and prices low not when yields are low and prices high]. The admin cost of preserved and index-linked pension for short-term ex-employees is almost as much as the the cost of the pension. In a lot of cases finance directors have said “enough is enough”.

  15. john77

    Thank you, very helpful.

    One little point from a possition of pure self-interest: even though the cost of my DB is lower than the equivalent DC it doesn’t mean I’m earning less, any more than the opposite outcome would mean I was earning more. My total comparable ernings are my present salary and benefits plus a NPV measure of my expected future pension.
    P.S. Studies of car plants in different territories showed a marked divergence between wages earned/received by employees and costs to the employer, this divergence caused by tax, social securty etc.

  16. “Public sector workers have a contract with their employers – if we allow the government to tear up every one of those we are abrogating the rule of law. Do you *really* want to do that?”

    Quite. So the obvious solution is for the public-sector workers to voluntarily give up the benefits they should never have been promised in the first place, or face social ostracism. Whatever anyone thinks about ‘the rule of law’, even the most brass-necked of the public-sector leeches don’t dare try and tell the country their promised plunder is actually earned – just that it’s promised to them so we’d better pay up.

    There are some interesting hybrid solutions, though. The government could, perhaps, declare the Civil Service bankrupt, as they would if it was a company that had incurred these crippling costs. It would make it harder for the Civil Service to be trusted financially by those it was contracting with, but have little effect on confidence in the government meeting its promises in general.

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