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Sums for local councils don't add up ... but reform could benefit taxpayers and staff

Professor Philip Booth, editorial and programme director, Institute of Economic Affairs
Eveneng Standard 24th March 2009

IT USED to be said that local authority workers received their gold-plated pensions as a reward for poor pay. Not any more. Public sector workers - including those employed by London's local authorities - now receive levels of pay comparable with or better than private sector employees. In addition, the risk of redundancy in public sector jobs is much less than in the private sector.

Of course, we would all like to have good pensions when we retire. But, the private sector is closing down its final salary pension schemes because it cannot afford them: the sums do not add up. What applies in the private sector applies in the public sector too. We cannot expect to start work at the age of about 22, work for 40 years - significantly less for many people who take career breaks - and then be retired for about 20 years. If we are to spend less than half our life working how will we generate the money to support us in the rest of our life?

Unfortunately, the costs of providing pensions to public sector workers are hidden by a series of complex accounting tricks. Calculated properly, a contribution rate of about 40 per cent of salary is necessary to provide a full teacher's pension.

A staggering 65-70 per cent of salary would be necessary to provide a policeman or policewoman with their pension, due to their early retirement.

It is because contribution rates have been kept lower than the true cost that the deficits have been ballooning in local authority schemes.

Although there are investments backing London local government schemes, the difference between the value of the liabilities and assets is widening. By not recognising this, we are simply kidding council tax payers while passing the burden on to our children.

So what should we do? Firstly, we should get the accounting on a proper footing. Local authorities need to start paying the proper level of contributions into their pension funds and they need to recognise the true level of the deficits. They will then have to reform the schemes, implement a huge increase in council tax bills or make swingeing redundancies. I suspect they will reform the schemes. In fact, reform could lead to some quite interesting outcomes.

Trades unions could play a constructive role in managing a new style of local authority pension scheme - perhaps based on defined contributions with various insurance benefits attached. And some employees will probably benefit from pay increases to compensate for part of the lost pension benefits: so it might not only be council tax payers who gain from reform. But, every time I write about this issue, I receive correspondence from council workers who are still low paid about their meagre pay and pension. They have a point. Current schemes benefit council workers at the top of the tree who stay in their job for a long time and receive rapid pay increases.

The schemes are elitist: the biggest gainers are not the cleaners but the chief executives. No wonder reform is so difficult to achieve.


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