Monday, 20 June 2011

The Big Pensions Lie - Part 2

In Part 1 I explained why the idea that we all have to work longer for our Pensions because we are living longer is a Big Lie. But, shooting from this Big Lie are a load of other lies, particularly aimed at Public Sector Pensions.
The aim is to divide workers in the Private and Public Sector, and in the process divert attention from the real issues surrounding Pensions.

The Government talks about Public Sector Pensions as though they were all the same. They are not. Some Public Sector workers, in the Civil Service, for example, pay into what is termed a non-funded scheme. The term “non-funded” itself can be used to give the impression, which many people have, that Public Sector workers do not, in fact pay into their Pension Fund, but that it is all funded by the taxpayer. Of course, ALL Public Sector workers pay contributions towards their Pensions, and in fact, in Local Government, for example, those contributions can be quite a significant sum.

What a “non-funded” scheme is, is one where the workers contributions, taken from their wages each month, are not paid into a Fund, which accumulates, earning income through investment in Stocks and Bonds, and out of which future Pension payments are made. Instead, the Government simply takes the workers contributions, and swallows it up in its overall Revenue.
That means that in the past, when payments made by workers, and the income that would have accumulated on it, were greater than was needed to pay out those pensions, then far from these workers being subsidised by Taxpayers, it was these workers that were subsidising Taxpayers. In fact, when looking at the “subsidy” that has to be made to cover these pensions, rarely is it properly taken into account that had these payments been paid into an accumulating Fund, then it would have been earning income from Dividends, Interest and Capital Growth. In fact, by simply taking the Civil Service workers contributions, the Government secures for itself what is essentially an interest free loan.

Other workers, such as in Local Government, do pay into a “funded” scheme. Their contributions, alongside those of their employers go into a Fund, which is then invested. These investments then can achieve Capital Gains if the prices of the Shares and Bonds in which they are invested rise. Similarly, each year they earn income in interest on the Bonds, and dividends from the shares.
Most of these Local Government schemes during the 1990's were doing so well that they had more than enough money to cover the pension payments from them. In fact, so much, that, at a time when Councils were being asked to save money, many Councils stopped paying the employers contribution into the scheme. In other words, again for getting on for ten years, Local Government workers were subsidising the local Council Tax payer.

Of course, this previous situation is never mentioned in talking about current deficits on these schemes. But, in fact, even the figures produced by Hutton, themselves undermine the argument that action needs to be taken to reduce the Pensions.

As the BBC set out,

"While the average in 2009-10 was £7,800, once you factor in pensions paid to dependents, the figure fell to £6,500. Half of workers received less than £5,600 a year while 10% got less than £1,000 a year. There was also a big difference between men and women - with men receiving on average about £8,000 and women £4,000."

They continue,

"The Hutton report found the average pension payments - including workers and dependents - in 2009-10 were as follows:

Local government worker: £4,052
NHS worker: £7,234
Civil servant: £6,199
Teacher: £9,806
Member of armed forces: £7,722

It concluded that 10% of public sector workers received annual pensions of £17,000 or above, with retired policemen and fire officers most represented in this category compared to other sections of the workforce. It found that 1% of workers got payouts of £37,000 a year - two thirds of those were NHS doctors and consultants."

As the TUC point out,

“The Treasury does indeed produce estimates of the cost of paying public sector pensions as a proportion of GDP (not taking into account contributions). They show an increase from 1.5% of GDP to 2% by 2027-28. After this projections show a slight decline in the proportion of GDP taken up by public sector pensions.
It is not surprising that there is some cost
increase in the next few decades as we live in an ageing society. Either the cost of pensions will increase or many more pensioners will live in poverty. But public sector pensions take up a much smaller share of GDP than state pensions and long term care – also both set to increase in the face of longer lives.

The second claim made is that the cost of public service pensions is “out of control”. This is not the case. Not only is the share of public sector pensions in the country's wealth less than 2% of GDP every year in the Treasury's projections, the changes negotiated in many unfunded schemes caps employer costs with employees picking up the bill if people live
longer than expected and pension costs rise more than expected.

Another way of looking at the cost of pensions is known as the “net public service pensions” net public service pension cost. It is the difference between benefits paid out to today’s pensioners from unfunded schemes and current contributions paid by current staff. In the current financial year this is estimated to be £4.1 billion or about 0.3% of GDP.”

The Government also make a big deal out of the fact that Public Sector pensions are “Final Salary” schemes as opposed to “defined contribution” schemes. What this means is that having paid into the scheme, you have some idea that the pension you get out will have some relation to your income when you retire. In a “defined contribution” scheme you have no such guarantee.
The money is paid in, and what you get out, ultimately depends upon how well the Pension Fund Managers perform. All those Private Sector schemes SHOULD have higher payouts, or else what are the Fund Managers being paid huge salaries and bonuses for??? Of course, given that for the Civil Service the Fund Manager is the State itself, it does not have the risk that a private or company pension Fund has, so there is no logical reason why those drawing Pensions from it should also face uncertainty about what the level of their pension is!

In a recent TV News programme it was said that, in fact, 25% of private sector schemes are still “Final Salary” schemes. It also gave figures showing that, despite the Governments statements, and the rantings of the gutter press, the average private sector pension is slightly HIGHER than the average Public Sector Pension. According to the TUC, only 15% of people in the Private Sector are in a Final Salary Scheme. What the statistics for these private sector schemes hide is who is in them, and who really benefits. Only 20% of workers earning between £100 - £200 a week in the private sector are in a Pension Scheme. It is mostly, the well-paid, and the top bosses who take advantage of these schemes, and many of the top bosses, have kept their Final Salary schemes. AS the TUC say,

“The real inequality exists in the private sector, where highly paid executives receive the real gold-plated pensions. The TUC’s 2008 Pensions Watch study of 346 directors from 102 of the UK's top companies found that they are set to earn a yearly pension of £201,7003. This is 25 times the average workplace pension that ordinary workers receive (£8,100).
The study also revealed that the most senior directors of these firms had average pension funds of £5.2m, with an annual pension forecast of £333,400. In reality, most directors of the UKs largest private sector companies can look forward to retiring on a full pension at age 60, accrued on generous terms in a final salary scheme.”

Of course, even these payments hide the massive “golden handshakes” that many of these top executives are paid, running into the millions of pounds. The Pension of Sir Fred Goodwin, was just one that was highlighted, because of his role in the Banking crisis.

The other lie related to this is the idea that it is only Public Sector workers whose Pensions are subsidised by the taxpayer. In fact, nearly all Pensions are subsidised by the taxpayer in one form or another. If you pay into a Private Personal Pension, or an AVC, then you are entitled to receive tax relief on your contributions. Suppose you are a 50% rate Income Tax Payer.
Out of your monthly income you decide to make a Pension contribution of £1,000. However, because you get 50% Income tax relief on this payment, what you actually pay is only £500 a month. The taxman pays the other £500 a month for you. And, of course, the higher paid you are, the higher contribution you can make each month, and the higher the subsidy the taxman gives you!

I also came across another useful means of getting the taxman to make a significant contribution to your pension. It involves what are called Self Invested Personal Pensions or SIPPS. These are usually only viable if you have a lot of money to invest as a lump sum (more than £400,000) or a lot of income, because the charges of scheme managers are high.
I found this in reading a book about Tax for people moving to Spain. Suppose you were going to buy a Villa in Spain (or anywhere else in the EU), and were going to spend say £500,000. You can place this Villa into your SIPP. Then, you set up a Bank Account into which you make payments, which are in fact equivalent to an imputed Rent for the Villa. That is Rent that you are paying to yourself to cover your residence in your house that you have placed in your SIPP. As with contributions into a Pension Scheme, these payments are eligible for Tax relief. So again, if you are a 50% taxpayer, the taxman would essentially be paying half the cost of you buying the £500,000 villa!

So, it is totally untrue to say that it is only Public Sector workers whose pensions are subsidised by the taxpayer. In reality, the reasons our Pensions are so bad, in both the State and Private Sectors has nothing to do with people living longer. The State Pension is bad, because the Capitalist State has a Monopoly over its provision, and like every Monopoly, it is able to dictate the level and quality of service provided. Unlike a Private Monopoly, the Capitalist State can also dictate to you how much you will pay for it! The Capitalist State is able to confiscate money from workers wages to cover Pensions and so on, but that money is not then earmarked for the provision of those services. So, the State can use the money for whatever it likes.
Private Pensions are bad, because they too operate via a near Monopoly, because the money is channelled out of the pockets of millions of individual workers into their Pension Funds, at which point they lose all control over it. The money then becomes controlled by the Pension Fund Managers, which are themselves largely controlled by the Big banks. As I've shown elsewhere, these Private Pension Funds draw off ridiculous amounts of money in Commissions, and Charges.

As I wrote in my blog Pensions – How Dare They?,

“But, in this case, as with the proposals for bureaucratic control over “High Pay”, or the Tories mangled proposals over Child Benefit it is not the truly rich who are being targeted, it is not the Capitalists who make millions of pounds from their Capital alone, each year, but the Middle Class, and the purpose of that is to cover the real attack, which is on the workers below them, who will lose out proportionately more, once again. Hutton himself had to admit that the average Public Sector Pension was modest, but that didn't stop him arguing for cutting it! It didn't stop him arguing that the one piece of certainty that Public Sector workers have – that they have some idea what their pension will be when they finish work – should be removed with the scrapping of Final Salary Schemes.

But, the BBC's Panorama on Monday, showed who the real villains are when it came to workers Pensions. It was, not surprsingly, the same Financial Institutions that caused the Financial Crisis, and which is the reason the Tories are now trying to load the cost of that on to workers with cuts in services, and in pensions.
It found that the investment of workers funds was almost like the kind of Ponzi scheme that others have recently been jailed for. It involved, workers money being taken in by Pension Companies, who then placed it with other institutions based on how much of a kick-back those institutions would give them, and a large cut in commission, and administration charges was deducted by each of these institutions. In total these organisations were deducting so much that workers pensions were being reduced by anything between 30%-60%.

“In one HSBC pension plan, £120,000 paid in over 40 years would result in fees and commissions totalling £99,900.

The company said its pension product is competitive.”

Panorama reported. They also compared this with the Netherlands where a scheme similar to the NEST (National Employment Savings Trust Scheme) proposed by the last Labour Government exists. That scheme provides its pensioners with pensions 50% higher, for the same contributions than the average UK Pension. Surprise, surprise, the Tories are proposing to scrap the NEST scheme.”

But, all of the Government's lies, and all of the lies perpetrated in the media, divert attention from this reality, that our pensions whether provided by the State or by Private Companies are terrible, and are simply slush funds being used by Private Capitalists, and the Capitalist State. All the while, we are being diverted as workers, whether in the Private or State Capitalist sectors, from the issue of the real reason for that. The reason is that we, as workers have no ownership and control over our own money in our own Pension Funds. In fact, as Mike McNair points out, in a comment on my blog, Worker Co-operatives and Pensions, the capitalists and their State have sown things up legally so that as soon as we hand the money over, it becomes legally no longer OUR money at all!!!

Yet, as I show in that blog, the truth about just how bad our Pensions are is shown by the Pensions paid to the workers in the Mondragon Workers Co-op in Spain.
There, the average pension for a worker is “Euros 17,000 a year (£13,600 pa.).” This is a Final Salary Scheme based on 60% of the best 30 years earnings. But, not only is the pension paid to workers in the Co-op far better than the pensions paid to the ordinary worker in the UK, the Pension Fund itself is thriving. Its revenues – the amount it receives in contributions and returns on investments – is DOUBLE the amount it is paying out in Pension Benefits. Given that wages in Spain are considerably lower than in the UK, just how good this pension is compared to here can be seen.

The reason this scheme can pay out these levels of Benefit to members is because it is owned and controlled by the workers themselves, thereby avoiding the problem of the State salting the money away for its own purposes, and of vast amounts being siphoned off by Banks, and Financial Institutions.

As I pointed out in my blog Why Won't The Unions Fight For Control Of Our Pensions, instead of limiting themselves to a defensive battle over the existing poor Pensions we receive, the unions should learn the lesson from the workers at Mondragon and demand control over our Pension Funds – both those invested by the Banks and Pension Funds, and those confiscated by the Capitalist State. We need Worker owned and Controlled Pension Funds, invested by our own Co-operative Bank and Financial Services company, under democratic workers' control. Then we will see how much we have previously been robbed. We will then have control over what the level of our pensions will be, and over when we decide to retire.

Back To Part 1

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