Sunday, 2 January 2011

Promises made; promises broken

About five years ago, I read an online advert for a job in the UK civil service. I can't quite remember the job title, but it was one of those cultural transformation positions that were so popular during the Blair years. You know the sort of thing; a smoking suppression adviser, an anti-alcohol campaigner, or a you-should-treat-your-kids-more-humanely consultant.

There was one aspect of the job description that I remember with crystal clarity. The job came with a non-contributory pension that was worth 16 percent of the advertised annual salary.

In these days of budget austerity, public sector pensions seem unduly generous. State pensions, on the other hand, will be insufficient to maintain a dignified standard of living. Likewise, private pensions will also be pitifully low, due to declining stock markets and near zero interest rates.

This generosity also sits uneasily with the reality that public sector pensions are running large deficits. The civil service pension system illustrates this point (see chart above). According to the Office of Budget Responsibility, this scheme ran a deficit of £1.2 billion in 2010. By 2016, this operating deficit will rise to £2.7 billion.

Other public sector pensions, such as the NHS and Armed Forces schemes are running similar large operational deficits. And don't even try to think about the deficit numbers these schemes will start to run up by 2025.

With operational deficits running into the billions, it is extremely unlikely that public sector pensions will survive in their current generous form. Nevertheless, I keep thinking about that job advert. The person who successfully applied for that job signed a contract with Her Majesty's Government. In return for their labour services, they were promised a generous pension. The government will, in all likelihood, renege on that contract.

The accounting necessity for reducing public sector pensions is compelling. Yet, one must feel uncomfortable about political system that repeatedly promises things it cannot deliver.

Extravagant commitments have been the main characteristic of modern British government for at least four decades. It is reflected in bloated public sector employment, unrealistic pension provisions, and above all, in the unsustainable rise of public sector debt.

The hallmark of future public policy will be quite different. It will be one of broken commitments, deteriorating services, and deep disenchantment.


Hamish said...

Yeah, yeah, yeah, but I say cut them now.

Anonymous said...

Good to see you back Alice, the way you left I honestly believed that something terrible had happen to you.

Unfortunately those receiving these generous pensions don't realise how pig headed they're being, and the politicians don't have the backbone to take a large section of the public sector.

As a poster on HPC pointed out, the pensions issue is going to turn into the new coalminers' strike. Only we're desperately lacking another Margaret Thatcher.


Alice Cook said...


Thank you for the kind words.

I did a bit of traveling. However, it meant that keeping the blog going proved impossible.


dearieme said...

The least bad way to deal with the problem is to honour the pension promise for the job someone is in, but to move them into a defined contribution scheme if they are promoted, with the old defined benfit pension right being preserved as a deferred pension. Since nearly everyone will accept any promotion offered, the problem will diminish rapidly.

Similarly, anyone who leaves the civil service for a few years and then returns has to join the DC scheme on their return; they may not rejoin the DB scheme.

Problem solved. Next!

Sureseam said...

My understanding was that, in some parts of the public sector, pension draw down was an unfunded liability against the tax take.

Am not questioning your perspective but I do just find this area about as clear as mud; and suspect that successive governments have hidden unfunded liabilities in this area.

Civil Servant said...

Hey! You are talking of my future!