We sit down with one of the architects behind the current public pensions system and discuss whether it is sustainable or needs further reform.
Paul Johnson
Hello, and welcome to this edition of the IFS Zooms In, I’m Paul Johnson director of the Institute for Fiscal Studies, and today I’m joined by Carl Emmerson, Deputy Director here at the IFS and I’m delighted to be joined by John Hutton, formerly a cabinet minister in the last labour government but more importantly for todays conversation, John was asked by David Cameron’s government to look at public service pensions and indeed chaired the public service pensions commission which reported about a decade ago now.
As you may have guessed from that, today we’re going to be talking about public service pensions, that is the pensions that are paid to a retired civil servant, teachers, nurses, doctors, police and the armed forces, and so on. These are often in the news because they are significantly more generous and therefore more expensive than much you can get now-a-days in the private sector. So, let’s start by just getting a little bit of background on where we are with public service pensions, and then I’ll come to the question of reform. So, Carl do you want to start just by giving us a sense of how public and private sectors compare in terms of the pension arrangements?
Carl Emmerson
I think there’s three main differences between the two sectors. The first is simply coverage, in the public sector about 90% of employees are a member of their workplace pension scheme, in the private sector it’s about 75%. So, in the public sector it’s a bit more common to be a member of the scheme on offer. The second difference is really about how the schemes operate, in the private sector, the vast, vast majority of schemes are what’s known as defined contribution schemes, so by that what we mean is we do a measure of how much money is going into the pot and what an individual gets out at the end will depend on how successfully that moneys invested and then how they draw that money down through their retirement.
But in the public sector it’s quite different, what we do instead is we have a formula that tells people with more clarity what benefits they’ll get from the scheme, so it’s a defined benefit scheme. So, the amount of pension you will get will depend on how many years you’ve been in the scheme, and a measure of your earnings. And you’ll get that much money every year through the rest of your life. So, the benefits are defined, how much money that’s going to cost the employer to provide is much more uncertain. And people often focus on that difference, but I think the really, really big difference is in terms of the generosity, the schemes that are available in the public sector are just much, much more generous than those that pretty much anyone can get in the private sector, so to give you one statistic on that, according to the Office for National Statistics, half of people who are in a public sector scheme are getting an employer contribution that’s worth 20% of their salary or more, that’s true of just 3% in the private sector. And I think it’s worth saying, there are some out there who would disagree with those numbers and say that actually, that understates how generous the public sector schemes really are.
Paul Johnson
So public sector schemes are much more generous than those in the private sector, but John I think it’s fair to say that when you were looking at this a bit more than a decade ago, they were even more generous than they are today?
John Hutton
They were substantially more generous ten years ago than they are today. But I think the fundamental challenge really with pension reform, I mean you’ve got to try and make sure as many people as possible are saving for their retirement, you’ve got to make sure the pension they’re saving in are valuable pensions so they will actually be able to sustain them during the course of their retirement, which we know is much longer than anyone previously thought was going to be possible. And of course, in terms of the public sector they’ve got to be sustainable over the longer term, because as Carl has said, there’s a lot of money being invested into these schemes. So that was the sort of context for my review, I didn’t want my review be a race to the bottom, it’s very easy to just go in and say, “right we’re just going to follow it,” what’s happened in pension policy in the last twenty years in the private sector, we couldn’t have done that. Although incidentally of course one of the consequences of doing that in the public sector schemes would have been a very substantial immediate hit to the treasury, because most of these schemes are pay as you go schemes. So, if you say from some point in the future, that money has to be put into funded schemes, you’re probably going to create a £30 billion a year hit, instantly for the chancellor of the exchequer. And I think really that is something that often some of the enthusiasts will what I would call a race to the bottom tend to sort of conveniently sort of skate over, because there is one benefit in the pay as you go schemes, that predominate in the public sector, in that the cash is used as you go along, I mean quite literally, there isn’t a fund into which these contributions are going.
But clearly, and I made this clear ten years ago when I published my report, the path we were then on, I didn’t believe was sustainable, I didn’t think the risks and costs were fairly shared between taxpayers and scheme members. And I think if you’re going to command any kind of public support for this investment in the terms and conditions of the public servant, you’ve really got to show the public I think that you’re doing all that you can to keep the costs in some reasonable sort of contained fashion. And so, I think if you look at the schemes now that sort of came from my report, scheme members are paying much more, their contributions are up by about 40%, its quite significant shift in the balance there between scheme members and taxpayers. There is still a significant cost to the tax payer, but again you know when I was doing my report, I’d go around the country and I’d talk to a lot of people about it, and they say, “well, obviously we want the police to be looked after because they’re keeping us safe, oh yeah and we definitely want the nurses looked after because they do such a brilliant job, and yeah armed forces absolutely make sure those guys are fine too.” And the political rhetoric around well, “we need to cut pension costs we have to cut cut all of this,” admit the reality of well actually no, that’s not where in my experience a lot of taxpayers actually were. So, my report fairly quickly honed down on trying to find a way to keep these defined benefit schemes going in a more sustainable way in the future.
And I think you know we don’t know - I don’t know for sure - I can’t say no, that you know these reform schemes are sustainable over the longer term, I don’t know. I think we’ve got a better chance of making them sustainable, but still it’s entirely open to any government in the future to say, “no we want another look at this because these costs haven’t come down as quickly as we thought,” and it is genuinely difficult in the current economic circumstances to look ahead twenty thirty years, and say well we’re pretty sure that’s where these reforms schemes are going to land in terms of their final costs, I think all of that is still open, it’s still a bit fluid. I think we’ve got a better chance of making these reform schemes sustainable, but I wouldn’t rule out, I think any government in the future is entitled to say, “no we want to have another look at this to make sure, you know the things that we can control we are controlling and the future burdens to the taxpayers aren’t insurmountable. But I do say, Paul, that you know you’ve got to tread carefully in this space. You know I think at the moment there is quite serious difficulties in recruiting people to a lot of jobs that are vacant in the public sector and pensions in my view have always paid an important part in helping us to recruit the public servants that we need. So, I think you’ve got to, you’ve got to tread carefully here, it’s very easy to do the wrong thing, maybe for the right reasons, but in the process make it very hard to run the high-quality public services that we all want and expect to have on offer.
Paul Johnson
So, you think there’s a case for rebalancing though between pay and pensions, because we know that pay in the public sector has come down even before taking count of what you’re saying about increased pension contributions, and similar calculations suggest actually there are some groups in the public sector who will actually be better off after they retire than they were in work, if you’re a low paid NHS employee for a long period of time, add your state pension and your NHS pension and you’ll have probably a bit more in retirement than in work. So, do you think that’s actually a case for you know being more direct about rewarding people for jobs in the public sector?
John Hutton
I think there’s a very strong case for government looking at how we can recruit and retain good quality people in the public services, and we don’t really do enough of that in my view. Yes, there are statutory pay boards, all the rest of it, but we’ve never sat down, to my knowledge and actually thought serious about this balance between pay and pensions. You know what is the best way to recruit and retain, what is the best way to ensure people have reasonable standard of living. The only thing I would say of course is that if you take a sort of negative look at pensions say, right we’re going to shift some of the cost from pensions into pay or whatever, but then of course once you retire, you’ve got very limited means of boosting and supporting your income over and above your pension. When you’re in work you have options, you might be able to do other jobs or move career or whatever, once you retire, all you’ve got pretty well is your pension. So, I think by all means have a look at this, and let someone should do a proper piece of work around that in my view, but I would again, I’m a little bit cautious about saying, “well it’s a vey easy thing, we just move some of the money from the pension pot into current wages,” I think that needs careful thought.
Paul Johnson
So Carl, coming back to the structural, the generosity of these schemes, two things that moved after John’s report, I think the two big things, or possibly say three big things, one is that the pension age in these schemes rose from sixty to, on the whole, state pension age, and the other is instead of being based on final salaries for most of these schemes, the pensions now based on your average salary over your life, there something else we might not want to talk about so much, which I think was part of your report John, which is they go up every year in line with CPI inflation now rather than RPI inflation. I mean looking back now, Carl, what’s the scale of those changes and actually what, I mean, can you give us a sense of what is the generosity of these schemes, your average teacher or nurse or whatever public servant you wish to explain?
Carl Emmerson
So, before John’s report the normal pension again in many public sector schemes was sixty, it was actually sixty-five for new entrants but there would be existing workers in that scheme who have a normal pension age of sixty, and as a result of the reforms that was implemented, that was changed to be the state pension age. I think that people under state how big a change that is, it involves people having to pay in for more years to have the same pension for fewer years, and I think it’s pretty coherent having the same normal pension age as state pension age and it means as government tackle more generally the challenges that come with an aging population, with rising longevity and older ages, they may well naturally be pushing up the state pension age and that would automatically feed through into public sector workers having to work a bit longer if they want to get a full pension. So, I think that’s a very nice feature of the reforms and I think it really does help secure financial sustainability.
The other big shift as you say, was to move away from saying the pensions going to depend on a measure of your final salary, to saying we’re going to make the pension depend on how much you earnt on average through your working life. And I think there’s much justification for doing that, it’s not clear why people who get a promotion towards the end of their career should get a bigger pension in respect for their service throughout their entire career. Something that the independent review that John held recommended, was that your earnings in the past should be uprated by what’s happening to average earnings overall, and when the government didn’t do that, instead they fixed it to be what’s happening to inflation plus a set number. Now, the problem with that is if you have then an experience where productivity growth really takes off and average earnings are growing very strongly, the scheme will be much, much more affordable. But of course, we haven’t had that, we’ve had a decade in which productivity growth has really disappointed, with that average earnings growth has really disappointed. Which really means that the way in which the government is revaluing these historic earnings, that CPI plus say 1.5%, really looks rathe generous in I think an unintended way.
Paul Johnson
That’s an interesting bit of unintended policy, isn’t it, so the government was trying to be a bit meaner, I think, than John was suggesting, like relating pensions to not the value of the earnings uprated by earnings over your working life, but uprated by a bit more than inflation. But it’s turned out that earnings in the public sector have actually risen by less than inflation over the last decade, but in terms of pensions its going up much more quickly than inflation. But for pulling back again and looking at as it were the sustainability of the system, Carl you sometimes hear, one sometimes hears, people say that look, these public sector pensions they’re just going to eat up more and more of national income over time, they’re absurdly generous, is that right? Are they sustainable, or is that over doing the point?
Carl Emmerson
I think if we’re looking at them from a public finance point of view and we just say what share of national income are these pensions costing us? Well, its about 2% of GDP, at the moment on this pay as you go basis that John mentioned the projections suggest that actually that’s going to fall over time, and it’s going to fall over time essentially because I think public sector workers are having to pay in for more years to get the same pension out for fewer years. That increase in the normal pension age is a really big change. The change that the government made just prior to John’s report starting, when they’ve moved from RPI indexation of payments to CPI indexation of payments, so that’s a better measure of inflation but one that typically is lower, also saves them rather a lot of money. So, in terms of pure financial terms, yes we can afford these schemes if we want to.
Paul Johnson
So, it’s completely wrong, isn’t it? Those who say this is unaffordable, if they don’t like them, that’s not the route to go down, because we afford them at the moment and they’re not going to get more expensive, in fact they might get a bit cheaper.
Carl Emmerson
It looks like they’re going to get a bit cheaper, so they’re affordable if we want them. I think the challenge really is about what is the best way to recruit, retain, look after the public sector workers that we want and need, and what is the right mix of pay, versus pensions, versus other benefits, and getting that balance right, and if we have our providing pensions making sure the balance between how much the employer is putting in and how much the employee member is putting in right is so critical. And actually, you can see the government over the last few years making more effort when it's advertising these jobs to stress how valuable the pension really is. Perhaps, you know, by using them as a recruitment tool in a way that just wasn’t the case previously. I think that’s really the argument, are they, are they the best way of getting the workers we want, or could we reconfigure the package in a way that perhaps would make public sectors happier and also the taxpayer better off?
Paul Johnson
And one of the changes of structure that’s happened partly because of this move to career average earnings being what determines your pensions rather than final salary is that I think it’s fair to say that where we’ve ended up is a situation that actually for some public sector workers is if anything more generous than we used to have and certainly it’s tipped the playing field towards lifetime lower earners and away from the higher earning public sector workers.
Carl Emmerson
Absolutely, and I think that’s really a question of final salary schemes perhaps as I mentioned earlier, I think, oddly, really rewarding people who get big promotions later on in their career, because it gives them a bigger pension, not just for those years in which they were doing the more senior, higher paid role, it gives them a bigger pension for the respect of their entire career. So, if you make it to head teacher, you’re going to get a more generous pension in the final salary scheme, even for the years when you were working as a teacher, not as a head teacher. In a career average scheme, that’s not the case, you take a measure of the earnings over their whole lifetime. So, it means that high-flyers, if you like, are not getting such a good deal, low flyers can get a much better deal in these schemes. The other thing to note is this makes it much less like the private sector, actually, where there are a few people still able to get into final salary schemes.
Paul Johnson
Not many though.
Carl Emmerson
And they really are high earners typically who are doing very, very well. So, for middle earners in the public sector, if they were to go and work in the private sector are really not going to get anything like this kind of pension arrangement.
Paul Johnson
Yeah, I certainly know some retired senior civil servants who are really very comfortable thank you very much. So, John, was that part of your intention to sort of shift the playing field as it were away from the high earners and towards the low earners?
John Hutton
Yes, it was. And that design feature that Carl has just described about how final salary schemes, which trade unions have always described as the gold-plated schemes they wanted to defend, actually only served to really benefit those at the very, very top who had this sudden career promotion towards the end of their working life. And those inflated pensions that those people were getting, were paid for in the main by those who were not getting such generous pensions from those schemes, in other words, those on lower wages. And that fundamental design feature of the final salary scheme I was absolutely determined to try and remove because I regarded that as a flagrant injustice.
But I think Carl’s wider point though, and it’s something I wasn’t tasked to look at, was this bigger debate, and we looked at it earlier, about what is the role that pensions should or do play in recruiting or retaining people into some of these vital jobs. The thing that worries me at the moment about the public, the sector public service pensions is this, is that there’s growing evidence that despite these reforms, or maybe because of these reforms, fewer people are paying into these pensions. And that is something we do need to keep an eye on, because there’s precious little point in having a scheme like this if you can’t get as many people into it as you possibly can. Because the whole purpose of this pension provision is to ensure decent standards of income in retirement. And if we can’t do that through a pension process, we know what else we will have to do, much more bureaucratic, much more I think less decent support that’s available in the welfare state, which is much more intrusive by the way because it’s quite heavily means tested and everything else. And I didn’t really want that to be where we ended up either, because if you do end up in a situation where retirement income is substantially reduced because of you know lack of generosity or other reforms that you’re making, you often passport those costs through to other parts of the welfare state and in an undignified way, in a way that a lot of older people find very difficult to handle.
But I really do think this point about now taking stock of the role of pensions pay and recruiting and retaining people in the public sector is very important one. But I think if I was the pensions minister, if I was still in government in treasury, I’d be looking very carefully at the numbers now that are coming through, that seems to suggest that people are opting out of joining these schemes in the first place. Because that is going to cause significant problems if these people are not paying into a pension when they come to retirement, and there will be a significant cost to the taxpayer, and all the bureaucracy that’s involved in administering means tested or other welfare state benefits.
Paul Johnson
And I guess that’s part of the issue with providing a lot of public sector workers, if you’re a young public sector worker earning, I don’t know, on £25,000 a year, you’d like to save up to buy a house you’re contribution to the pension might be relatively modest, but another 5% in your income may mean a lot more to you today than thinking about what you’re pensions going to be in forty years’ time.
John Hutton
Yes, indeed, and I think that’s something that the minister should keep a very close eye on at the moment.
Paul Johnson
Do we know much about how much is going on of that kind, Carl? People actually opting out of public service schemes?
Carl Emmerson
We know that about 10% of public sector employees are not a member of their scheme, so we know that by doing that they’d have slightly higher take home pay but their forgoing usually quite a considerable employer contribution. So, I think it is right that we should be worrying about it. We tried to do some work to look at the housing issue and see whether there was evidence that there might be people who were sort of young public sector workers perhaps really saving hard to get a deposited together. We found a little bit of evidence that maybe some higher earning public sector workers who are quite young were doing that, but it was pretty modest to be honest.
Paul Johnson
If you look at this tilting of the playing field away from the high earners and towards the low earners, is there any evidence that that’s had a negative effect that the top end of the public sector of the labour market in terms of actually being able to recruit head teachers or your judges or your senior civil servants?
Carl Emmerson
Well I think we know that thinking about what’s happened to public sector pay over the last decade, where on average public sector workers have not seen pay increases often keep pace with inflation let alone what we’ve seen in the private sector. We also know that those public sector pay awards were often tilted towards lower earners, so your lower earner not only potentially got a relatively good deal and perhaps absolutely a good deal out of the public service pension reforms, they were also often being spared the brunt of some of the pay restricting the public sector. So, I don’t know what this is causing problems in recruitment and retention of higher earners in the public sector, but I think it’s worth noting that they’ve not only perhaps for very, very good reasons, lost out from the pensioner reform, they’ve also experienced a decade where their pay has been squeezed by much more of the average.
John Hutton
I’m not aware of any data that suggest that the top ranks of the civil service of the judiciary that there’s a difficulty in recruiting and retaining people. I mean these are very, very significant jobs that come with all sorts of other benefits as well, prestige and public recognition and so on. But I do remember being very heavily lobbied by the judges that under no circumstances was I allowed to touch their pension scheme. But of course, for most of the judges, most of the judiciary, their career average scheme would have made practically zero difference because the salary structure is actually very flat. Now there are obviously judges in the supreme court and so on who are paid more, but the vast majority of the judiciary are paid within a very narrow salary band, and they are throughout their career on the bench. So, I think a lot was made, at the time, that this would sort of make it very difficult, and don’t you understand how difficult it is, these barristers giving up their very lucrative practices to take on fixed salary job as judges. And to which my response then and now was then, “well they had the opportunity, didn’t they, for many years when they were earning millions of pounds a year to make proper pension provision, they can’t now turn to the tax payer and say its now your job now to make sure we can have the lifestyle we want in our final four or five years on the bench,” that’s not the deal, that is absolutely the opposite of what’s fair and reasonable to the tax payer.
Paul Johnson
Absolutely, one should l never underestimate the lobbying power of judges. I was actually in the treasury in the 2000s and one of my responsibility was public sector pay and pensions, the only time I got a visit from another permanent secretary was to talk about judges pensions, or maybe it was judges pay, I can’t remember, certainly judges and they seem to be the only group who’d get a permanent secretary to once and lobby the treasury on their behalf.
John Hutton
It’s quite a memorable experience being summoned to the Royal Courts of Justice to appear before the master of the roles and the Lord Chief Justice to account for myself about what I was doing.
Paul Johnson
It sounds terrifying.
John Hutton
It felt like a trial. And it was done in the most charming of ways urm, but there was none of that at all, I was being thoroughly cross examined with a view to sort of being sentenced in due court. But I think with the exceptions of the judges’ salaries, I mean in the main, I’m glad to say that actually after my report was published and people had the chance to see the detail of it, it was I think, it landed in a way that did make these reforms possible. I think the beginning of my report I think there was a lot of concern that actually I was going to do things that would have guaranteed you know national industrial action and strikes that would have gone on in perpetuity, and to be honest, Paul, I was mindful of that as well, but I started the review with a generally open mind, is there a better way of doing it, and I think, I noticed the other day that the pensions minister, bless him I think he may have been one of the ones that resigned.
Paul Johnson
He resigned and came straight back.
John Hutton
Oh excellent! Actually, he’s a very good minster, I’m glad he’s back. But I noted that he was saying that he didn’t think the pensions reforms in the public sector would survive the next twenty years or so. And it was very much part of the deal at that time when these pensions schemes were changed that this was a twenty-five-year settlement. Now I think he’s entirely within his right to say there’s a better way of doing it, I’m not entirely sure I would volunteer a better way of doing it, considering all the other considerations you’ve got to keep in mind. However, since then of course, the notion of collective defined contribution schemes has gathered quite a few supporters in the UK and legislation as recently gone through parliament to allow such schemes to be created. Now the collective defined contribution scheme has essentially all the characteristic of defined contribution scheme, in that there’s no final income or promise made to the scheme member, so you don’t know for sure what your pension is going to be, but there’s an attempt to link it to your earnings in the best way that is possible during the lifetime of these schemes. Now if you were going to think about an alternative, I would start there, I don’t think they’re as good as defined benefit schemes, quite clearly, they’re not DB schemes, but it’s a sort of halfway house. There are complicated schemes to describe, and I think one of the beauties of defined benefit schemes is the simplicity of them. And the huge value as an employee of knowing, pretty all through your working life, if you stay in the scheme for a certain number of years, that the pension you’ll get.
Paul Johnson
My one regret about leaving the civil service is that I lost that completely.
John Hutton
Well you have your accrued rights.
But it is a real benefit in pension scheme design and I think it’s one of the reasons why pensions schemes are not as attractive in many ways as defined benefit schemes because you never know you just can’t be sure what you’ll get when you retire. And the lack of certainty, and the comfort and peace of mind it brings, it can haunt people all the way through their working lives.
Paul Johnson
Absolutely, and the uncertainty is one of the things that I think worries me about the state of pension in the private sector which is all done through defined contribution schemes, they’re not adequate on the whole but equally it’s the individual bearing all of the risk and they’ve got no idea really how much they’re going to have at retirement, and indeed they don’t have to annuitize either, in fact most people don’t buy an annuity so really these are just savings pots which then people need to manage for an unknown period of retirement which may be five years but maybe twenty-five years to the point to which they get the state pension. I think that difference between the public and private sectors is much more stark, isn’t it, Carl, than it was say thirty years ago. I mean thirty years ago quite a lot of private sector employees would have had an occupational defined pension scheme similar to something in the public sector, and now they’re pretty much dead.
Carl Emmerson
They are, and as you say it’s not just the fact that the private sector has moved almost entirely away from offering defined benefit arrangements, the defined contributions schemes that are now common place in the private sector aren’t really defined contribution pensions schemes, they’re defined contribution savings pots, once you get to retirement you have to think about how to continue to invest that money, how to run it down, clearly if you’re well placed to do that around pension age, that’s great but you also have to worry about how well placed you’ll be able to do that in ten, fifteen, twenty years’ time, right the way through your retirement. So, there’s a whole set of risks that individuals face about their ability to manage their money right through retirement. Which I think in a defined benefit scheme or in a defined contribution scheme where you’ve bought an annuity is actually relatively simple. I mean bluntly you can basically spend all of your money that you get each month and you’ll probably be fine.
Paul Johnson
I think lots of people getting to retirement are going to find this a real challenge to manage and this is a challenge that people in the private sector are going to face, but those in the public sector aren’t. John, coming back to the very first thing that you said, you said you were going around the country and you’re talking to people about the nurses and the police and the so on and people you spoke to were saying we need to look after those groups. I mean in your report I mean it’s noticeable there are a couple of groups who you singled out as it were for special treatment in the sense that for the big groups, public sector workers let’s move the pension age to the state pension age, which is sixty-six at the moment, sixty-seven in a few years’ time. But for the police, and the fire fighters and the armed forces, you recommended I think moving just to age sixty. Can you take us through just why you feel there are some groups who should be able to get a full pension seven-year earlier than others?
John Hutton
I think historically both the police and the fire services have had those earlier retirement ages for their people and I think that’s largely a reflection of the particular nature of the work that they do and the trauma and the stress of those jobs. And I think I did look, and I seriously looked at whether we should say for all public service schemes there should just be one retirement age and common retirement age linked to the state pension age. And I think going into the final report I had literally two versions of it and I used to look and read them and see if I-
Paul Johnson
Very Boris-like…
John Hutton
Well, I think you’ve got to look at what all of this actually could look like, so I put the arguments in favour of having one pension age and another argument of having differentiated ages to reflect the nature of the work that people do, especially, particularly the uniform services. Because we do something else with people in those uniform services, it’s not just the trauma and the risks that they run, but you know we ask them to necessarily put down their life to save us and others. And I think as a society that’s got to be reflected, that has got to be valued somewhere in the system. Now its not reflected mind you in pay, can we reflect it somewhere else? I mean there were pension ages, retirement ages increases for the uniform services, but I tried to reflect that unique contribution that the uniform services make in the life of the country in the way that I think urm was reasonable and fair.
Now it was my view, I mean the government could quite easily have said “no, no, we’re not going to do that,” or “we’ve got a different age in mind.” But they did accept that and I think all the opposition parties accepted that as well as a reasonable compromise giving that you know the fundamentals of all these schemes which Carl has very well described which is you’ve got people probably not paying enough into these schemes and living for all these extra years, these costs were all coming back to the tax payer in one big sort of lump sum, and that had to change, because that is, that’s not I think a reasonably sharing of costs between public servants and tax payers. But I think this differential retirement age for the uniform services as I say was largely a reflection of the unique and special nature of the work that they do.
Paul Johnson
Fair enough. We’re coming to the end of this, in terms of when you survey the scene now, John, I mean in terms of a lot of what was in your report was essentially taken up by government, I mean do you feel you’ve touched on this a couple of times, do you feel we are in a steady state which actually its best to leave well enough alone, or do you think there’s actually now scope for another tranche of reform?
John Hutton
Well remember these schemes really have only been running of a few years now, my own sense is that I would give it a few more years before coming to any view. The government did legislate back in 2013 to restrict their absolute freedom of manoeuvre here. So Danny Alexander, promised, who was then the chief secretary of the treasury who ran this negotiation, said these schemes shouldn’t change for twenty-five years, and he legislated to really quite significantly restrict the freedom of manoeuvre of ministers to suddenly announce “we want to do something different, we’re going to change this.” There has to be quite extensive consultation before any substantial reform to the architecture of these schemes could be implemented. I don’t detect, Paul, any political appetite to reopen the work that I did. But it’s entirely right for minters, at any time to say, “no, no our judgment is this isn’t right, this has to be looked at again.” But in which case they need to tread carefully I don’t think they should rush into any sort of quick fix, there isn’t a quick fix, by the way. But there are new options, collective defined contribution schemes, those sorts of schemes are out there now which really didn’t exist in the legal framework of pensions in the UK when I was doing my report, they do now, they have been legislated for. But like I say there isn’t a quick fix and if you move to any kind of funded scheme, in the big pay as you go schemes, there’s a huge instant hit for the chancellor and I don’t think there’s a chancellor I’ve ever met who would readily sign up to taking £30 billions worth of extra costs onto his budget.
Paul Johnson
The chances of anyone deciding to double fund by paying out of current taxes for current pensioners and put a payment for future pensioners in a fund is, as you say, is pretty remote.
John Hutton
It’s pretty small so I think really, you’re only left with the two options you’ve got in any pension reform, you increase the contributions you ask people to pay, or reduce the benefits under the scheme. There really isn’t any other way to control and modify the costs of these schemes.
Paul Johnson
And as you say nothing quick here, I mean it’s quite, it’s quite something isn’t it when you think about pensions, I mean people who are joining the, becoming teachers or nurses or civil servants at the moment, joining schemes which have been put together broadly in light of your report, it could well be you know the end of this century that they are still deriving some pension at least from schemes which to some extent you designed. I mean your impact kind of runs across a century.
John Hutton
Well, the other golden rule here, and you’re absolutely right, is that you can only change future accruals everything you’ve earnt and paid for up to, up to that date is absolutely protected legally. So, any savings that you’re talking about, but by its very nature they aren’t going to show up for twenty or thirty years.
Paul Johnson
Yeah, its not so long since I think the last widow from the American civil war died with an American civil war pension because I think some of these veterans married very, very young women when they were in their eighties or nineties so that they could inherit their pension, so pensions do last an enormously long time. Carl last word from you, do you agree with John that we’re in a pretty steady state here, or do you think there is more need for changing some of these schemes?
Carl Emmerson
Well, I think part of John’s point was also about the difficulty of doing reform here, because you have to go about it carefully and there’s lots of constraints put in the way for very good reason. I guess I do wonder whether the current squeeze in particularly through the cost of living crisis means that actually a deal that said, well maybe employees put in a little bit less, and maybe get a little bit less out would be something that they would welcome, it would help to get people in the schemes, it would give them more income now, in return for slightly lower pensions in the very long run. Of course, it would hit the exchequer now so perhaps the chancellor, whoever that will be a in a few weeks’ time might not welcome it. But I’d wonder if that kind of direction of reform would make sense, although is probably not a very easy thing to pull off.
Paul Johnson
Does it worry from a labour market point of view that these things are so different between public and private sectors now?
Carl Emmerson
I don’t think it does, I think actually in the public sector you can ask the question, is the public sector employer or is the worker best placed to bare some of these risks and I think the public sector employer in many cases is very, very well placed to bare there’s risks. In the private sector I think you can ask the question, is the individual private sector employer well placed to bare those risks, and for many employers, in particular small or medium sized employer, they’re just not well placed to bare risks about longevity trends over the next eight years. So, I think there are good reasons why the public sector might be interested in offering these schemes, because it might help them attract people in a very cost-efficient way.
Paul Johnson
And I think the question that obviously raises which we can’t get into here, is how can we make things better in the private sector where so many people have those, these minimal defined contribution savings pots and really nothing like the level of pension provision that their parents may have expected and certainly now what their peers in the public sector are getting. John, its looking like you want to come in for a final word.
John Hutton
I just want to really strongly agree with what Carl has just said. I think in terms of the public service schemes he’s outlined really the only realistic practical short to medium term option. But I think you are absolutely right, the real problem with pensions in the UK is actually not public service pensions, it’s the tens of millions of people who aren’t saving anything at all, or who aren’t saving enough. So that’s the focus, I think that we should all have as a country a pensions reform and not this hysteria that the right thing to do is to slash and burn the public service pensions.
Paul Johnson
Great, well that’s a fantastic note on which to end. I think a number of things that strikes me has become clear from this conversation, the first is that it’s just silly to say that we can’t afford public service pensions, this is a choice that we can make and have decided to make. Secondary public service pensions are much more generous than those in the private sector, but the thing we should probably be worrying about more, is that the private sector pensions really aren’t up to scratch. I think third, the sort of really pleasing bit of this conversation has been talking to John Hutton about how a fairly rational process for looking at these schemes resulted in significant reform and better balance of costs between taxpayer and public service workers. But I certainly take what both of you are saying, I’d be surprised if we get any substantial changes to these schemes for some time to come. Not least in the face of the current cost of living crisis and the problems that the government may in any case be having with trade unions, these public service pensions are probably with us to stay for some considerable period.
Well, thank you everyone for listening to this edition of the IFS Zooms In, thank you particularly to John Hutton and to Carl Emmerson, please rate and share this episode and to see more of our work do visit www.ifs.org.uk and if you do want to support us at the IFS further, please do consider becoming a supporter for as little as £5 a month, see you next time.
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In an era where those in the private sector have seen their pension provision decrease, pensions in the public sector continue to look generous.
But is this sustainable? Should we change the balance between pay and pensions for those in the public sector? What does the future hold for public sector pensions?
This week, we speak to Lord Hutton of Furness, cabinet minister in the last Labour government and leader of the Independent Public Service Pensions Commission, a review into public sector pensions commissioned by David Cameron, and by Carl Emmerson, IFS Deputy Director and expert on pensions.
Zooming In: discussion questions
Every week, we share a set of questions designed for A Level economics students to discuss, written by teacher Will Haines.
- On a classical labour market diagram, show the impact of generous public sector pensions on the supply and demand of public sector workers.
- How should the government balance rewarding public sector workers with healthy pensions whilst also managing their own finances?
- What impact will the 2015 public sector pension reforms have on workers in the public sector and on government finances?
Host
Director
Paul has been the Director of the IFS since 2011. He is also currently visiting professor in the Department of Economics at University College London.
Participants
Deputy Director
Carl, a Deputy Director, is an editor of the IFS Green Budget, an expert on the UK pension system and sits on the Social Security Advisory Committee.
John Hutton
The Rt Hon. the Lord Hutton of Furness
Podcast details
- DOI
- 10.1920/pd.ifs.2024.0057
- Publisher
- IFS
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