I haven’t finished transferring all my CD collection over to my iPod yet. I came across “Modern Life is Rubbish” by Blur when I was doing this the other day. I couldn’t believe it was released in 1993. It’s a frightening thought that in another 18 years time I’ll have been collecting my pension for 4 years: or will I? Perhaps not if changes to public sector pensions currently proposed by the UK Government are made.
Industrial action is looming at the end of the month and it seems that the Library will have to close to the public on that day. This is part of a national dispute with the PCS union, the main part of which is to do with pension rights.
As far as pensions are concerned the Library, which comes under the definition of “central government”, is in an unusual position in that it has its own stand-alone defined benefit final salary scheme that was set up in 1975. It isn’t part of the Principal Civil Service Pension Scheme (the PCSPS), which covers the vast majority of central government institutions.
There are some similarities with the PCSPS:
· “Defined benefit” means that the pension is promised on the number of years that members pay in
· “Final salary” means that it’s based on the salary that the member earned when they finished working at the Library
· Pensions in payment are increased by inflation
However, there are crucial differences between these schemes:
· staff contributions at the Library of 6% have always been higher than the 3.5% in the PCSPS, and these are being increased to 9%; getting on for 3 times as much.
· the Library is a “funded” scheme managed by a board of trustees. The trustees collect pension contributions from the Library and members in a fund (which is completely separate from the Library). The money is invested and used to pay members’ benefits. The PCSPS is “unfunded”: although members of the PCSPS pay contributions, as far as I can see the Treasury treats this as income and spends it (or there is less need for public borrowing). There aren’t any assets set aside specifically for the PCSPS and the benefits are paid from taxpayers’ money (that’s you and me).
There are other public pension schemes that are funded (e.g. Local Government), and others that are unfunded (e.g. Teachers). Funded and unfunded schemes are fundamentally different animals, and it does strike me as odd that they can be grouped together as “one big problem that needs sorting out”. This may be for reasons of political expediency, who knows?
To be fair you can see why politicians talk about the problem with pensions in the public sector because the unfunded schemes are obviously a massive liability hanging over taxpayers of the future, but the Library’s funded scheme is different. What the solution is for unfunded schemes isn’t necessarily suitable for the Library: one size doesn’t fit all. About three years ago the Library weighed up the pros and cons of increasing contributions, increasing retirement age and reducing benefits through measures such as average salary or accrual rates. Why then, would we need to go back and revisit these?
Strangely, when the outlook for the Scheme was a lot less optimistic a few years ago, we did see if we could join the PCSPS, but it’s fair to say they didn’t exactly welcome us with open arms and the bid failed. Frying pan and fire spring to mind … or perhaps The Great Escape.
It also strikes me that some of what we are hearing in the press at the moment may be just part of the negotiation process: does the Government really think that to get unfunded schemes back on track they need to raise contributions, increase the retirement age to 66 and move to career average earnings all together? Or would some of this do? Also, if they are going to raise staff contributions, why don’t they start investing these to build up some kind of reserves? At the moment PCSPS members’ contributions are merely used to reduce Government borrowing: you can understand why the members would be unwilling to pay more in – it’s almost like an extra tax revenue raised on PCSPS members.
Let’s be completely up front on this: the Library’s Scheme does have a deficit. Fact. But 95% of the liabilities are covered by the assets and the remaining deficit is due to be cleared, possibly within as little as 3 years if all goes well. So where’s the massive liability on future taxpayers?
The answer is that there isn’t one. However, there are risks of running the Library’s Scheme of which we are well aware, and these are mainly in 2 categories:
· demographics – we’re all living longer, but we can only guess how long. This is good news for you but it means the Scheme needs to pay pensions for longer, which costs money.
· investment returns – these aren’t what they used to be (the Scheme used to be able to recover tax on dividend income, but this was stopped at the end of the 90s, and the economy isn’t doing too well at the moment)
At the moment we think that the risks are being managed within the parameters as we understand them. There’s no ticking time bomb under the Library’s Scheme, but that’s not to say that everything in the garden will be rosy forever.
There used to be a big deficit of £6M or more in the Scheme, but this has been carefully managed and the deficit is now far smaller than it was: about £1.8M on the latest estimate. The Library recognised the problem with the pension scheme a long time ago and has taken action to address it. This means cutting down the cost of running the Scheme and having both the Library and the staff paying more in contributions. All this adds up to a Scheme that is working its way out of trouble, hopefully sooner rather than later. It would be a shame therefore, to have to change the Library Scheme following an edict from the UK Government which is really aimed at pension schemes with different problems where there doesn’t seem to have been any effort to sort them out. Of course, things might not go as expected and one day we might need to change the Library’s Scheme. Nobody can be completely certain about the future, but it doesn’t seem at the moment that we need to raise the retirement age of our scheme to 66 or move to an average salary basis to make it sustainable, but will we be forced to do this? These kind of changes would make the Scheme more complex to operate and would certainly increase the cost of administration, so a step backwards in many respects.
There’s no doubt that the Library’s Scheme is, in comparison to a typical private sector defined contribution scheme, a good one to be in – but the Library and the staff foot the bill for this privilege. Pensions envy from the private sector is understandable, but before Scheme members start planning a retirement in the lap of luxury, a couple of interesting statistics about the pensions in payment at the moment:
· The average pension is £9.5K per annum
· The median pension is £6.5K per annum
What this tells you is that there are a few relatively generous pensions in payment, but not many. Most of the pensions are worth relatively small sums. If you want the chance to live the high life in retirement, “keep on buying the lottery tickets” is my advice. Statistically speaking you won’t be making a mint out of your pension from the Library. Modern life may be rubbish, but perhaps we don’t know how lucky we are?