Out in the real world beyond the Houses of Parliament there is growing alarm at the next tsunami threatening to engulf our beleaguered economy – the inequitable state of affairs between public and private pensions.
Businesses faced with the prospect of lean times or liquidation are being forced to look upon their pensions obligations with a more discerning gaze. In December, the Pensions Protection Fund revealed that Britain’s final salary schemes’ pensions deficit increased to £195 billion as companies struggle to raise funds. Meanwhile this week it was reported that more than half of those defined benefit pension schemes still open to new members will be closed due to the current economic situation. This came hot on the heels of a warning from the National Association of Pension Funds that we are likely to see final salary schemes being closed even to existing members.
The scrapping of pensions benefits, falling equity and bond yields, lower interest rates, increasing life expectancy and even the risk of employers’ default on pensions provisions all now combine to create a sobering economic outlook for those reliant upon occupational or private pensions. The government should take heed.
For amidst all this private pension gloom, the taxpayers’ bill for public sector pension provision seems to grow exponentially. People retiring from the wealth creating sector with inadequate, money purchase pensions – or in fact none at all from their failed employers – are not going to watch happily as folk from the public sector, whose wages they have paid over many years, retire on guaranteed index-linked final salary pensions. The greatest vitriol will no doubt be reserved for MPs whose gold-plated pension scheme will be even harder for people to stomach amidst private sector woe and further controversy over parliamentary expenses.
Collectively the House of Commons has failed to show itself in a good light over allowances but we now have a real opportunity to display some leadership in these difficult times. As a matter of urgency we need to change the structure of our pensions and lead the way for the entire public sector. Failure to grasp this nettle risks serious social unrest – with society being economically divided as never before between those in the public and wealth creating sectors.
Pensions are vital to everyone’s aspirations. But our expectations – especially in the public sector – must be made more realistic in the light of this country’s financial plight. Now that public sector workers are paid on a par and often above private sector equivalent levels, the time when final salary schemes were seen as compensation for low levels of public sector pay are well and truly over.
MPs, whose pension arrangements are invariably regarded as the most generous of all, are the right people to show they are not immune from the turbulence of the British economy. For new entrants to the contributory parliamentary pensions scheme, there must be a defined contribution (not final salary) outcome. Existing MPs should set an example by voluntarily agreeing that future contributions should be on a 1/60th rather than a 1/40th basis (which means that MPs would have to make full contributions for forty, rather than only twenty-seven, years to qualify for a full pension).
Only by agreeing to such a one-third reduction in the benefits of our generous pension scheme, can MPs look the rest of the public sector in the eye when asking for similar sacrifice and restraint.