PENSIONS (3)

Pensions are probably the most difficult financial thing for people to get their brains around. The core problem is that they require you to take a view of events 20, 30 or even 40 years hence; and although you can get an actuary to help you, predictions that far into the future are tough. 40 years ago, when I was 12, there were no computers, mobile phones, i-pods, internet, blogs etc etc, so you get my point.

There are essentially three types of pensions. The first type are work-related, where they are, economically speaking, deferred pay. In bargaining between workers and employers (including Governments as employers), workers accept less money today in return for money when they stop working. This is true, whether the pension is contributory or non-contributory, that distinction merely changes the amount of the deferral, not the principle itself.

Adding to the complexity, Governments (at least in rich countries) bolt on minimum pensions in order to protect old people from becoming destitute. In general, these are not deferred pay, but welfare payments; though access to those payments may or may not be dependent on previous work. Finally, there are private arrangements made by individuals who save money today in return for (hopefully) more money tomorrow. Often it is attractive to save in the form of a pension, since many Governments give tax breaks for that kind of saving.

Yesterday, at least 1 million (and possibly more) public sector workers went on strike for a day in the U.K. in protest at proposed changes to their pensions. The details of those changes are complicated; but the basic features are that employees would have to work longer, and pay higher contributions than under the old system. Was it reasonable for them to go on strike?

The first thing to note was that this action was about the first type of pension, namely ones where the U.K. Government (or its agencies) is the employer. The affected workers are teachers, doctors and nurses, local government employees, civil servants etc. As such, the second thing to note is that the U.K. Government, as employer, wants to change the details of the employment contract it has with its employees, in particular cutting the amount of current pay (since contributions will rise). Thirdly, although the cut in current pay is clear and definite, changes in the deferred pay element are not clear and not definite, since they depend on a host of assumptions about the future, and the particular circumstances of the individual employee.

The employees are saying that without more clarity about the future, the proposals amount to a unilateral pay cut, and that ain't on. The U.K. Government says that it has to make these changes, since public sector pensions will otherwise become unaffordable. However, the main reason for that is a decision made by successive U.K. Governments in the past not to set money aside in order to pay for these contractual obligations, but to fund them out of general taxation (the so-called pay-as-you-go method). Companies are not allowed to do this, since there is no guarantee that they will have sufficient future revenues in order to pay as they go; but Governments can get away with it, since they have the unique ability to tax people. In other words, the U.K. Government has blurred its roles as employer and welfare provider, and given itself a problem.

It is not alone in doing this (U.S. states have terrible problems in this field); and it is also commendable that it is at least making a start in trying to disentangle this blurring. Having said that, I can understand the frustration and opposition of the employees. Changes to employee contracts should be a matter for negotiation; and they should not be unilaterally enforced merely because the employer happens to have more clout than a single company. That is particularly true, when - as now - the changes will involve a current pay cut. That is, in general, only accepted when the situation is really dire (eg looming bankruptcy). The U.K. has economic problems, but they are not yet in that league.

Walter Blotscher