Tuesday, 15 June 2010

Budget II

Not long before Budget II: The Revenge.

No doubt the Labour benches will be cat-calling and boo-hissing George Osborne as if he's a pantomime villain, rather than the Chancellor of the Exchequer bequeathed with the unenviable task of restoring order to the public finances.

 George Osborne*

I have noted that he will be using forecasts from the newly-formed and independent Office of Budget Responsibility, instead of the Treasury's own, thus eliminating an ancient conflict of interest. However, I have noted that it's independence is not all it's put up to be. For example, Sir Alan Budd, the OBR's chairman, was appointed to his position by George Osborne. The OBR actually work in the Treasury building. Hmmm... not too independent, then, are we? Perhaps simply having the public finances audited by a firm of accountants may be better. You know. Like companies do.

Interestingly, though, the OBR have come up with the suggestion that perhaps public sector pension schemes are about to get considerably more expensive. Now, pensions are things I know something about.

Public sector pension schemes are incredibly generous, being final salary schemes, which basically means that, based on your length of service, you will receive a proportion of your salary at retirement (i.e. your 'final salary') regardless of the prevailing economic conditions at the time. This is a rather formidable guarantee.

Now, there are some public sector schemes where the guarantee is not heavily subsidised by the taxpayer  - the Police Pension Scheme is an example of this, where members have to contribute a whopping 11% of their salary into the scheme every year. Admittedly, the Police Scheme is better than your average bear - early retirement, enhanced benefits build-up and superior death benefits, but the point still stands.

On the other hand, the Civil Service Pension Scheme still provides a guarantee, albeit with a standard retirement age, death benefits and benefits build-up rate, but members are only required to contribute 1.5% of their salary!

Contrast this with the private sector. Final salary schemes are no longer the norm - many of them are poorly funded, e.g. British Airways, or closed to new members. Some are being wound up completely. The pension scheme of choice in the private sector is money purchase, where contributions are invested. The actual pension benefits you receive depend on investment performance up to your retirement, prevailing economic conditions at retirement, and what options you choose.

Of course, proponents of money purchase schemes argue that they're more flexible, easier to administrate, blah, blah, blah... they're cheaper. There's a limit to the employer's liability. The employee will be asked to pay typically 6%, which is usually matched by the employer. So that's it. The employer will never be called upon to bail out the underfunded pension scheme. The liability for losses is shifted firmly onto the shoulders of the employees.

That's not fair, I hear some people moan. People deserve a guarantee!

To that I answer this: rubbish. It is completely fair. You get what you've got, and what you do with it is up to you. Seems perfectly fair to me.

I hope that George Osborne announces the immediate closure of all final salary public sector schemes, with new money purchase schemes being set up to replace them. Pension contributions should be an average of 6% of salary, which will be matched by the State as employer. Only people in special occupations, such as the Police and Fire Service, should get anything better.

*Not actually George Osborne, but Simon Callow as Capt. Hook.

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