Public Sector Pension increases

Lots of things to cover today …

The BBC is reporting that Public Sector employees will have to contribute up to an additional £3k  / year.

This has nothing to do with shortfalls in their pension fund. Because they don’t have one. Public sector pensions are funded from this year’s contributions. Or tax income. Or any cash they have lying around – they don’t differentiate.
The Unions are very clear. This isn’t going into a pension fund. This just goes into the Treasury.

So, as I say, this is nothing to do with the workforce, or the pension fund. It’s about deficit reduction.

The private sector had to give up this scam years ago. The Robert Maxwell scandal – where he was using a pension fund to prop up his company share price – highlighted the dangers to pensioners – both present and future – when a fund is not run in their interests.
And more recently, the failure of Marconi (formerly GEC) left many ex-employees with much less than they had been led to expect.

That led to an important principle that pensions should be independently administered – so they can’t be jeopardised by the incompetence or immorality of the employer.

Of course, every 6 months or so, we hear about the size of the private sector “Pensions Black Hole”. But why would a company let it’s pension scheme get into surplus ? That would then just provide another pot for the government to raid again in the good times – and then when times are hard, it’s the employer (or the pensioners) who has to top it up again.

Or not. Because ever since Gordon’s inspired move, companies have steadily shut down final salary (“defined benefit”) schemes – which we all used to have – and move to defined contribution schemes instead.

Which leads us to today’s announcement.

If I were the unions involved, I’d be campaigning on the basis that no government is fit to administer their pensions. That these funds should be ring-fenced and administered for the benefits of the pensioners – present and future. And that the government should make appropriate employer contributions.
Because the contributions to be made shouldn’t be dependent on whether or not we have a competent administration. Who apparently now looks on these pensions only as an annual cost to be managed down.

Of course, there’s no way this ring-fencing can ever happen in one go. The liability will be so utterly enormous that it could never be funded even over five very good years. It’s certainly not something that can be undertaken in times of austerity.
But it would be a start if there were cross-party agreement that this is a Good Idea. And if they could make a start by creating a fund with these extra payments, then it would be an important move in the right direction.

Now the unions agree that at the moment, these pensions represent good value for money.
But if things don’t go too well for the nation at any time in the rest of your life, then there’s nothing to actually back up all of those contributions.
Especially if the overall size of the public sector (and the contributions which flow from it) is reduced.
On an individual level, you want certainty that your pension is secure. You don’t want an employer that feels they can change their commitment when things aren’t going too well – because they may do the same again in the future when it’s inconvenient.
You especially don’t like possibility that the rule book could be rewritten after you’re too old to work and make up the shortfall.

Now a lot of the pension fund companies got their fingers burned after Thatcher’s promotion of “private pensions” – which  basically just created commission for financial advisers. Many pensioners had to be bought back in to the final salary schemes they’d been persuaded to leave. So those companies are going to be very wary of getting involved again.

But there’s a possibility that a large number of public sector workers could decide to “make their own provision” – or, at least, opt out of the government “scheme” and rely on a state pension.
An area where the government also sees the rules as flexible.

That exodus might accelerate if there was a tangible fund that had the support of the major unions, invested by professionals and valued by actuaries.
Such a fund would have enormous clout in the market.
Government wants to get an ever-increasing pension cost off its books.
So the unions should start negotiating now to make sure this happens through a planned, considered, cross-party process, rather than through successive knee-jerks of the ratchet.

Although, of course, that would mean that there would be less contributions to pay pensioners of the existing scheme…

[Edit 18:42]

The Punchline

After writing all of the above, I realised that there’s a much more succinct way to express the issue.

These public sector pensions have a 100% risk exposure to sovereign debt – that of the UK.

The Unions and the employers have a duty to start to mitigate this risk – or else if the IMF does ever move in,  those pensions could be rolled in as part of the negotiation.
Not just under this administration, but at any time until the rest of your life.

The only way to do this is to build a fund completely separate from the government’s clutches.

I’ve thought a bit more about this as well. The fund should be mutual, and should be (in general) managed for value. But it could reserve the right to publicly disinvest in any company which doesn’t treat it’s employees fairly and ethically.

Now that would make things interesting …

The UK Energy cartel

Ofgem, the UK energy regulator, has told UK energy companies to simplify their tariffs. Interestingly, the BBC’s Robert Peston (if I read him correctly) suggests that perhaps the consumers should do more shopping around.

But nobody seems to be questioning the fundamental point. The principle of free enterprise is surely that capital is invested so that the investor can earn a future return on that capital.

In the case of the energy market the customers are being expected to fund the required growth in capacity – so there’s no risk to the energy providers. Yes, we’re paying more – but when that capacity is available it’ll still be the energy companies who reap the profits on that investment.

I bet it was a civil servant who dreamed that one up. And he’s probably an energy consultant by now.

Public sector accounting (1)

The Daily Mail has reported that a quango (UK Trade and Investment) was asked to spend £1m, so that the Foreign Office (FCO) could keep its budget for the next year (and it does genuinely grieve me to agree with the Mail ..)

So why wouldn’t the Foreign Office want to reduce its costs, at a time when the nation is being told to “tighten our belts” ? Why couldn’t this money be used to help fund higher education ?

Well, it really shouldn’t come as any surprise to anyone that this goes on – it’s a result of the dysfunctional way in which government accounting operates. Not just in the UK, but (I’m sure) in other bureaucracies (including large organisations).

Empire building

At the heart of this is the way in which managers in these organisations are rewarded. One such structure is the “Hay-MSL” evaluation mechanism (which was used where I used to work). The more points you have, the more important your job, and the more you get paid.

This sort of system is really useful, because it makes it easy for HR teams to pass responsibility  …

So how do you get points ? Well, the easy ways are to employ more people or be responsible for a bigger budget. Shouldn’t your boss pick up the fact that you’re padding the budget ? Well, maybe, but his budget is bigger because it includes yours. so his job is more important as well. So he gets more points, and more money.

So the net effect is that the system actually works to promote people who are good at empire-building, rather than those who perform effectively and efficiently.

And the mandarins will try their best to make sure that the spending cuts take effect outside their bailiwicks (aka areas of budgetary responsibility).

No surprises

The second factor is a culture that values managers who “meet expectations”.

If they spend their budget (ideally to the penny) then that’s evidence that they’re really good at setting and/or managing budgets.

So spending to meet your departmental budget helps you to demonstrate that you can do your job (and really, probably, deserve a bonus).

I’m sure there will be more examples …