Hutton's pensions report: The Deal and the reaction

This morning Lord Hutton of Furness published his report in to public sector pension including his Deal for public service workers and taxpayers (see above). With 200 pages of recommendations and analysis but few surprises, the report arrived in time for the Radio Four Today programme.

On Today Dave Prentis of Unison responded to the report in very reasonable terms. It appeared that he was more concerned about the hikes in employee pension contributions starting in 2012 than the actual report. He did express concern that the government might cherry pick the report at the expense of public sector workers.

(I have blogged a few times about the 3% pension levy and its potential implications for the local government pension scheme. The 3% levy followed Hutton’s interim report which pointed out that increased contributions allowed short-term savings. In the interim and the final report Hutton deftly handed over the issue of contribution rates over to the government.)

There is a more militant and wider-ranging response from the Public and Commercial Services union. PCS have warned: “any increase to contributions and the pension age for civil and public servants would be an unfair and unnecessary tax on working in the public sector and will be fiercely opposed”. (Of course, the threat of less take home pay in just over 12 months is more potent in getting the brothers and sisters out and around the picket line brazier than the prospect of a year or two or three of work possibly several decades hence.)

It does look likely that there will be co-ordinated strikes over pensions - perhaps even a million strong strike. However, I suspect that Hutton is playing almost a cameo role.

The final Hutton Report on public sector pensions – more signs of unrest

On Thursday Lord Hutton publishes his final report on public sector pensions. (Strangely, the publication date was only announced at the end of February.) A shift away from final salary to average salary pensions is likely to be proposed. The increased employee pension contributions advocated in his earlier interim report are already meeting union opposition.

In yesterday’s Observer a report pointed out:

Strike laws dictate that workers can only call action over a change to their pay or conditions and pensions are the only single reform that affects all public sector workers, justifying a general walkout. Some unions are already agitating for such a move.

At a time of pay freezes pension contribution rises are particularly painful for the “squeezed middle”. To the extent that lower paid workers are protected, the greater the rises for their better paid colleagues.

In a portent for the future, last week the University and Colleges Union voted at 67 universities by two thirds for strike action and 82% voting for action short of a strike. A series of rolling strikes will take place from 21 March if a resolution cannot be found to a dispute over changes to the Universities Superannuation Scheme.

LGPS – mounting opposition to increased contributions

I was doubtful that the Coalition was retreating on public sector pensions when it was announced that the consultation period for the 3% pensions levy on most public sector workers would end three months later than previously planned. However, I think there is now a real chance that the Coalition may U-turn on the planned increase in employee contributions Local Government Pension Scheme.

There is mounting opposition to the suggestion that LGPS members should pay an extra 1% each year from 2012 for three years. First a group of London pension “administering authorities”. Then the Conservative leader of the Local Government Association. These concerns are on top of and different from the unions’ resistance.

The new opposition are concerned about the effect of the 3% pensions levy on the sustainability of the LGPS if it triggers a “mass opt-out” and spiralling contributions as the contributing membership shrinks.

The alternative advocated by some of these opponents is a paring back of pension entitlements within LGPS. There case makes a lot of sense. However, the savings will be over decades – George Osborne’s Spending Review was looking for about £3billion for the LGPS employers and the rest of the public sector by 2015. How can that gap be filled if the Coalition does another full or partial U-turn?

The IFS Green Budget: public finance challenges and public sector pay premiums

Much of the media coverage of the Institute for Fiscal Studies’ (IFS) Green Budget (press release and full document pdfs available) has focused on the message that George Osborne should resist the temptation to have a giveaway Budget. A quick look at Google News suggests that there are fewer headlines about the Green Budget on desirability of a Plan B.

The IFS forecasts that the government will borrow slightly less in 2010/11 than the Office for Budget Responsibility (OBR) forecasts. Will the Chancellor splash out or even give a gentle stimulus when the recovery stalled in the fourth quarter last year?

There has been speculation that the Chancellor may delay the planned fuel duty rise. I had wondered if he may find some loose change for 16-18 students who lose the EMA grants.

The IFS’s warning against a giveaway on 23 March arise from two downside risks for the public finances.

1) the economy might not grow as quickly as the OBR expects, and even if it does the public finances might not bounce back as strongly as it forecasts.

2) the planned spending cuts might prove formidably hard to deliver.

Other commentators have suggested that the cuts may be hard to stomach. The IFS warn that the success in reducing public spending in the 1990s is of limited relevant. This is “the tightest five-year period for public spending since at least the Second World War”.

The IFS notes that

Spending plans set out in the October 2010 Spending Review imply a significant public pay freeze and large employment cuts.

Controversially it goes on:

Before the financial crisis, public sector employees were, on average, paid at levels roughly in line with their private sector counterparts once observed differences in skill composition were taken into account. Since 2008, a significant public pay premium has appeared. We do not therefore believe that the planned two-year pay freeze will lead to widespread recruitment problems in the public sector in the near future. However, the average pay differential hides large variations in relative pay between different areas of the country. Consequently, some public sector vacancies, especially in London and the South-East, will remain hard to fill.

Talk of a 6% public sector premium for men and over 10% for women could well show up in this spring’s debates about pay and pensions.

Government “retreat” on public sector pensions levy?

Yesterday Guardian readers who work in the public sector may have been pleasantly surprised to learn: “Treasury retreats over public sector pensions reforms”. The article went on:

The government has retreated over reforms to public sector pensions, saying it will not have proposals ready until the summer rather than pressing ahead with planned higher contributions in the March budget

In plain English: this means is that the consultation period for the *3% pensions levy on most public sector workers will end three months later than previously planned. This is hardly a U-turn. It could be seen as a tactical move to avoid industrial action on pensions before the May local elections.

More significantly this week it became clear that the extra pensions contributions for public sector workers would be the rallying cry for co-ordinated industrial action. Strikes really should start featuring on risk registers across the public sector.


* The 3% may actually be significantly more for some if lower paid workers’ contributions are kept constant.

A spring of disgruntlement? Strikes, pay and pensions in the public sector

Today the teaching union ATL announced that it would be balloting its members on industrial action over the proposed increase in teachers’ pension contributions. Meanwhile in colleges and universities UCU is doing likewise on the issues of jobs, pay and pensions.

Beyond schools, colleges and universities are we facing a spring of disgruntlement?

How will public sector unions respond to the austerity that is affecting their members’ jobs, pay and conditions?

Headlines may inflame matter when they highlight the remuneration packages of se senior management. The Daily Telegraph this weekend reported on pay rises enjoyed by university vice chancellors. (The paper’s survey found that three-quarters of vice chancellors saw pay packages, including salary, pensions and other benefits, increase during the year to August 2010. Eleven of the 87 surveyed benefited from rises of more than 10 per cent.)

The issue of pensions is likely to be a highly sensitive one. The Hutton Commission final report on public sector pensions is due in March 2011. The exact date has not been published but the 2011 Budget is on Wednesday March 23 – this would be an obvious candidate. The final report is likely to recommend pension entitlements based on a career average salary rather than “final salary”.

Public sector pensions are not “gold-plated” but public sector pension schemes do give workers a certainty about the timing of retirement and a level of entitlements that most private sector workers lack. I suspect that not all public sector workers recognise the full value of their pension schemes. Unions have not mobilised against the change in inflation indexation introduced last year. However, the increased pension contributions likely to kick in across the public sector from 2012 will be harder to swallow - as seen in the case of ATL members in schools - when pay is frozen for most of the public sector. Whether unions will enjoy public sympathy is another issue.

Public sector pensions as a business risk - no need to panic?

Tomorrow morning I am attending a briefing for colleges and other organisations who are part of one of the local government pension schemes (LGPS) in the north west. I suspect that the content on long-term developments may be a little vague as we await that final report from Lord Hutton.

How big a business risk is the LGPS now for colleges, transfer housing associations, etc? I do not often sound overly optimistic but I have started to wonder if the pension risk has started to recede.

While the viability of some weaker organisations will still be threatened by the costs of keeping promises, in general the shift to CPI indexing and the 3% pensions levy will have both lowered entitlements and shifted the costs towards employees. (It is worth noting that the indexation change will - according to Hutton's interim report - reduce entitlements by 15% - which disproportionately reduces the burden on employers as they are the ones who underwrite the scheme bar a degree of burden-sharing on life expectancy.)

When I recently suggested that the pensions risk may have slightly abated, the risk of industrial action was drawn to my attention. We have seen industrial action at the BBC - and we may see it elsewhere. But unions have accepted the CPI indexation surprisingly quietly even though it has taken away existing entitlements.

Pay and productivity: freezes and unforeseen consequences

On the Civil Society website there is a short article on XpertHr’s annual review of pay trends. It finds that for 2009-10 the highest median basic pay award was in the general manufacturing and food, drink and tobacco sectors with median pay rises of 2 per cent. However, in the charity sector the median pay rise was only 1 per cent. The median pay award for housing associations was nil.

On the Viewpoint blog of Centre for Market and Public Organisation a Bristol University there is a discussion of where public sector productivity is likely to go in the age of austerity.

Interestingly it suggests:

With the prospect of public sector pay freezes, quality decreases may arise through talented staff leaving for the private sector. Research suggests that remuneration over the lifetime is roughly similar in the public and private sector with a small public sector premium. Hence there is a risk, with public sector pay frozen, and if jobs become available, that quality will decrease if some of the most able employees go private.

This impact has been overlooked and/or ignored in the debate about public sector pay. Of course, the pay freeze is accompanied by the pension levy which will amount to a 3% pay cut for most public sector workers. Voluntary redundancy programmes may well allow some of the best staff to leave - the "muppet retention scheme" syndrome.

Whether deteriorating quality is reflecting in productivity yardsticks hinges on how accurately public sector productivity is and can be measured.

Pensions, programmes, Paul Mason and public services

It is great that normal service has been resumed at the BBC. But the NUJ’s strike may be a foretaste of pensions disputes to come.

I was surprised to read Paul Mason – the Economics Editor on Newsnight – quoted in The Guardian suggesting a solution to the pension dispute would be for the BBC to sell assets, securitise them (as some local authorities are doing), or spend less on programmes. While asset disposal and securitization may be appropriate, I doubt the idea of spending less on programmes will be popular – will that be making staff redundant or opting for cardboard Crossroads-style sets?

I am sure that some people will be posing the issue of public sector pensions in terms of pensions versus pupils, pensions versus patients, etc but I was strange for a union activist to suggest that a trade-off should resolved at the expense of public services.

The Spending Review and public sector pensions

In all the media coverage of the Spending Review there has been little on the extra 3% of pension contributions implied that public sector workers will have to bear.

I did a highly unscientific piece of research. By putting the words SPENDING REVIEW PUBLIC SECTOR PENSION into Google News Search I got 834 results, whereas SPENDING REVIEW got 23051. Does that mean that less than 4% of news articles do not mention the new 3% “pensions levy”? Perhaps. I found one mention in yesterday’s 10 page Spending Review special in the Financial Times. It is perhaps inevitable that the media coverage should focus on the broad macroeconomic impact and the implications for public services and those who rely on them.

The pension levy is not a surprise. In Ireland they have had introduced one as part of the austerity programme. (Their levy rates go from 5% to 9.6%.) Lord Hutton’s interim report on public sector pensions passed the issue of employee contributions over to George Osborne rather than deferring it to his final report on structure and entitlements.

Nevertheless, the pension levy is significant. It will ease a small part of the frontline impact of the real spending cuts being applied across the public sector outside schools, overseas aid and (arguably) the NHS.

The impact will be felt by public sector workers – many of whom face a two year pay freeze.

How will the trade unions respond? The UNISON press release on “For CSR read Cuts Strange Recovery” omitted all mention of the pension levy. Maybe the public services union realises that public sector pensions is not an issue that will win hearts and minds. Perhaps UNISON did not spot the rather unclear references in the speech and report.

I think this issue will gain profile in the Spring when the government acts on the Hutton Report. By then the imminent local government pension scheme valuations may have pushed public sector pensions further up the news agenda.

Spring of discontent?

I might have been a bit too busy to blog recently but I have been reading other people’s postings. As we see outbreaks of industrial unrest, it is worth having a look at Rene Lavenchy’s blog.

Rene Lavenchy writes for Tribune and appears to have excellent sources. Last year the blog was ranked ninth in the Guide to Union Blogging (pdf available). A few weeks ago I was doubtful when I read that a deal was set to be agreed between the Royal Mail and the postal workers’ union – then a modernisation deal was announced yesterday.

As public sector pay, pensions and jobs are in the line of fire, how unions are able and willing to respond will be a vital issue for all of us.

A pre-election fix for the local government pension scheme?

This weekend’s FT reports that the government is thinking about allowing the local government pension scheme to have more relaxed funding levels than private sector schemes - as local government has “constitutional permanence” ie it does not have the same risk of going bust. This resolves a thorny problem – it makes the next actuarial valuation (and coverage of the funding black hole) in spring 2010 less of an issue in the run-up to an election.

What is less clear is how this would leave entities outside local government – notably some housing associations and all FE colleges – whose support staff are members of the local government pension scheme. These entities do not have the same permanent. Perhaps they will still face increased pension costs in 2010 and into the foreseeable future with implications for both their finances and their services.

Tortoises and hares: public sector pay and pensions in the news

Yesterday several newspapers carried articles about a PricewaterhouseCoopers study of relative pay and pensions in the public and private sector. The good or bad news – depending where you sit – is that public sector pensions are shifting balance of advantages towards he public sector.

The PWC study assumed the private sector Hare and the public sector Tortoise both started work in 1981 at age 21. The Hare earned and spent more up to the stock market peak in 2007. Thereafter, a more broken employment history and a much less secure and generous private pension meant that the Hare ends up losing. The accumulated non-pension wealth of the Tortoise is higher from around age 55 and, by the time both die at age 80 in 2040, the Tortoise has accumulated non-pension wealth of around 30% more than the Hare to pass on to his descendants.

We can all query some of the assumptions but the delicate issue of public sector pay remains.

I would be interested in the relative positions of the Tortoise and Hare’s female equivalents. When the affordability of public sector pensions is queried, the unions (quite legitimately defending their members’ perks) point out that many public sector pensions are looking forward to “tinfoil” pensions rather than “gold-plated”. The reasons for the small size of pensions reflects the structure of public sector pensions – with their final salary basis which favours full-time career civil servants rather than those female members who are often part-time and passing through the public sector. It would be good to see the unions promoting the interests of their female works in the debate about the fairness and affordability of public sector pensions.