We need to address the pension benefit apartheid

AS WE are all treated to an ongoing hissy fit by some of those in power (both those democratically elected and those who effect to serve them) who failed to get their way on whether, by the introduction of GST, we should be taxed as we spend as well as when we earn, I and my colleagues at the Guernsey Policy and Economics Group (Gpeg) are becoming increasingly concerned at the current situation.

One of our biggest worries expressed during the public GST debate was that once all the mechanisms for charging and collecting a sales tax are in place, it is the easiest thing in the world for politicians to avoid the difficult decisions going forward, take their eye (again!) off the ball, carry on spending on everything everywhere and when (as those of a certain political bent tend to do) they’re running out of money (again!) just tweak the dial and raise the rate of GST.

The difficult stuff, running the show on less money raised from the public, is avoided (again!).

The current sulk (isn’t democracy’s exercise such a pesky irritant?) involves cancelling big projects and neglecting future investment.

There appear to be several of those we elected who do not understand the difference between structural and current account deficits, who see recruiting more and more public servants and paying for more and more consultants as a necessary way of being in charge and avoiding blame.

I am sure Messrs Ferbrache, Helyar and co certainly ‘get it’ but they are hamstrung by there being no executive government on the island and by an inordinate amount of power being vested in the civil service.

Yet there is a huge elephant in the room that needs dealing with in rather short order, which if successfully reformed would go some way to removing the angst, would create a level playing field, restore fairness and would leave a beneficial legacy for future generations.

But it won’t be easy…

There is a very damaging apartheid growing in our society, which has slowly developed over some years, creating two distinct groupings in the world of work; far less obvious than earnings disparity, far more difficult to quantify than ‘who earns what’.

The very mention of its name bores people. Its complicated formulae turn people off immediately.

And because it’s a difficult subject that grabs little or no time in the political sun, today’s politicians can afford to ignore it, kicking much-needed reform into the financial management long grass where it can lie until some other lot of politicians have to shoulder the burden and, disgracefully, another generation has to pay for the inaction of today.

Ladies and gentlemen, I give you public sector pensions…

I am the son of a self-employed shopkeeper in Birmingham. I was born over the corner shop and brought up understanding the business, from cash flow to customer care. But when ‘the supermarket’ arrived in the Sixties, Mum and Dad sold up. They both retrained in their forties, with Mum becoming an assistant hospital physiotherapist in the NHS and Dad becoming a probation officer. I remember so clearly them both telling my sister and me that ‘the pay’s not so good but the pension is marvellous’, the latter being the absolute antithesis of what retirement held for a self-employed shopkeeper. And so it proved.

But thankfully, over the decades, pay in the public sector has grown level with comparative jobs in the private sector and in many cases overtaken them. Add in more favourable working conditions (guesses at how many still enjoy WFH on a postcard please) and the deal in the public sector (excluding those at the front-line of serving the public) is very often more favourable than private sector opposite numbers. And that’s before we add on those pension benefits.

Dad’s observation is still half right – the pension is still marvellous. But his first premise is now wrong. Median private sector pay is now £42,000 while the States’ accounts state that the ‘average pay expenditure’ for a States employee is £59,000 (and remember that this year staff in the States received a 7% increase because their pay is linked to inflation – and so up automatically goes the amount needed in their pension pot so it can shell out the required defined benefit pension in the future… and that will happen every single year going forward).

The taxpayer is paying for it. Those of the taxpaying class who earn their living in the private sector haven’t a hope of building up a pension pot that will give them as well a remunerated retirement as those in the equally-paid public sector… and to add insult to injury they’re creating the wealth that generates the tax that pays for this unfairness, this social dislocation, this apartheid of disparity.

Consider (using general actuarial calculations) that:

n A civil servant whose £20,000pa inflation-proof pension is paid for out of present and future taxation when a deficit arises, requires a pension pot of £700,000 to deliver it. Imagine how many in the private sector currently on £30,000pa can dream of having a pension pot of £700,000 to dip into upon retirement to give them a pension of two-thirds of their current pay.

n UK civil service pension rates for those paid between £23,000pa and £45,500pa constitute a pension contribution of 5.45% from employees and (are you ready?) 27.1% from employers.

n Some of the highest-paid public administrators on our island don’t even contribute to their pension pot. The norm of the level of pension contributions in the private sector is 8% of salary but if this isn’t enough to provide the defined benefits in the civil service pension scheme, guess who foots the bill? The wealth-creating, tax-generating private sector who saw their defined benefit pension schemes closed to new entrants and others many years ago.

The employees of the States are members of a scheme that provides benefits on a career average revalued earnings (Care) basis up to earnings of £106,000pa. A small minority approaching retirement enjoy the final salary scheme benefits, even if they earn more than £100,000 a year.

Pension benefits for all public administration employees get a rate of inflation-based uplift every year (imagine a small private sector pension being increased by some 8-10% this year) and if this produces a deficit in the required pot, the taxpayer (thee and me) foots the bill… every year (GST anyone?).

A member of Care can surrender part of their pension entitlement to provide a pension for a financial dependant, payable following the member’s death. While a union negotiator or deputies of certain political persuasions may see that as wonderful progress on the road to social equality and public sector pay nirvana, not only does it add enormously and unquantifiably to the ‘we have no idea’ school of responses to the ‘how much is this all going to cost?’ question, but it is selfish arrogance of the worst kind to pass the bill for all this down to the next generation, which this automatically does.

So, as the deputies cut this and cancel that in the Great GST Sulk, what are they doing about looking at this pension benefit apartheid? What are they doing about making sure that this generation takes responsibility for its own actions and inactions?

They’ve asked a committee to look at some aspects of pensions and report back in a couple of years. Shades of Harold Wilson’s royal commission ploy or what?

‘Got a tricky one, Harold? Appoint a royal commission to investigate and report back in a few years… by which time memories will have faded and frustration subsided.’

But memories won’t fade because this ticking time bomb ain’t going anywhere anytime soon.

The problem, the sheer huge and unknown cost, just gets bigger by the day. And if you are still with me in wading through this article, you are (thankfully!) unusual. Pensions ain’t sexy. Talking about Care and pension pots can be firmly put in the can marked ‘kick me down the road’. It doesn’t resonate in the way cancelling the building of a hospital ward does.

Why doesn’t someone (anyone!) close the entire scheme to new entrants right now? At once. ‘Action this day.’ Such action harms no current employee at all, although, in a separate move, the base used to calculate accruals for future service could be reformed as well.

Why doesn’t someone (anyone!) start negotiations to end some of these amazingly beneficial bells and whistles in the island’s civil service’s pension scheme?

Reform and change is never popular.

But politicians aren’t elected to be popular. They’re elected to lead. Leading the island as it changes its deal with the civil service is vital for the future of all of us.

We can’t afford, fiscally and societally, for one group to be so above and beyond all the others. Sorting that out will be to the long-term benefit of the civil service as well.

Politicians will be amazed at how popular such action will be with those thousands who work and earn and pay tax within the private sector. The popular uprising against the imposition of GST would be as nothing compared with a public outcry to restore fairness, plug a hole that gets deeper every day and remove a massive damaging legacy for our children.

Change isn’t in the interests of those whose job it is to sort this out since turkeys are not on the record as voting for Christmas.

So much better for them just to get GST introduced and then flick the dial upwards every time the hole needs plugging… and all the time the pensions apartheid just keeps, almost silently, getting worse.