The Pension Game

A report by PriceWaterhouse suggests that the public sector has a very generous pension scheme. Well that was money well spent to find that out.

However, it isn't as simple as it seems. The average annual retirement income for an NHS worker is only £6,500 and the average local government worker gets around £3,800. The reality of all pensions is that only 4% of the retiring population get the nirvana of two thirds of their final salary income when they retire. That's because most people do not stay in a single job long enough, even in a final salary scheme, to qualify for full benefits. The vast majority either change jobs or enter public service late or leave early. So PWC's assertion that is causing a block to talent moving from the public to private sector and vice versa is a myth. You have only to look at some of the salaries on offer in public service jobs to understand that they are very generous pay packets to be earned as well. True, below management grade the salaries are lower but when you look at the incredible pension scheme, the draw to public sector can be strong. Private business salaries do tend to be higher and this keeps the lure of this sector going but that is because Britain has become a society of low savings and even lower planning for the future - we are a live-for-today society.

It is believed that as much as 35% of salary contribution would be required to match the generous public sector pensions for private sector workers - that is because they are back-ended. We accrue on average 6% of our salary at any time to toward our pension but our salaries grow and we pay the higher contributions for a proportionally shorter period and that is why we have huge shortfalls on what is required to live on even if we are diligent savers. In the public sector, this disparity is taken care of by the generosity of the taxpayer - we pay disproportionally more for public sector pensions than the pensioners themselves. That's a simple fact. In other words, we probably pay as much to fund other people's generous pensions as we do for our own over the course of our careers - you would have to check the sums but it cannot be far off the truth with nearly 1 in 4 jobs in the public sector.

There has been controversy lately as companies like Barclays and especially RBS have cut the payouts from their pension schemes after culling staff in the wake of the financial crisis. For RBS workers, it was particularly galling after the fabulous payout and topping up of ex-CEO's Fred Goodwin's pension which he can draw early anyway. At Barclays it comes as a hard blow as staff have been cut and traders are again courting controversy with more bonus payments worth the pension saving in a single year while new teams of 'talent' arrive with amazing packages worth the salaries of hundreds of low end staff individually. It seems very curious that these companies are not saving cash on bonuses and putting it into pensions schemes or, indeed, why have they not been doing this in the past?

Pensions is a looming time bomb for us all and the Government. Our good friend Lord Turner found time between his many jobs to put his name to a report that someone else wrote, I dare say, as he has to earn multiple salaries, which urged pension reform in public service and a potential switch to average not final salaries as the basis for pension entitlement calculation, which would make sense. Pity he doesn't look at other problems with such diligence but as with many high level business people they are great at cost cutting but poor on working out how best to deal with profit as most of it goes to a very narrow band of people leaving little to be invested in pension funds for staff.

It is a question in the private sector that the Government tried to address with the pathetic implementation of the dreadfully poor and ill-thought out stakeholder scheme. It got us nowhere but hit the soundbite machine as usual. Reading Niall Ferguson's Ascent of Money, it shows how our Welfare System has been so badly thought out compared to even under developed nations in South America as we are the most highly insured nation in the world by individual cover yet we have so little benefits at the tail end. It seems the money just goes into a massive sump - much of which and more was consumed in the bail out frenzy but a great deal of which funds a very uneven balance toward the public sector remuneration.

There isn't a great deal of time to sort the issue out. This year the population grew to 61.4m in Britain and for the first time in a long while it was births which accounted for the growth rather than immigration as mothers gave birth, on average, slightly younger than usual to far more babies than the rate of deaths in the UK. The old are growing older.

The problem of pensions, benefits and, now, unemployment are issues which are right at the head of the agenda but no one can see it.

Cut Tax and Tax Collectors - Good Strategy?

Okay, I wasn't at all sure about the strategy to spend your way out of a recession and all the juicy tax giveaways were somewhat perplexing as we hit austere times, but that's what the Keynes Theory said so that's what we'll do.

In fact the Government were so committed to this that they said they would not cut spending on major enterprises and in fact bring them forward. And to try and help businesses not cut jobs, it would encourage banks to led more freely.

So what's this about 3,400 jobs going at HMRC? As tax gets more complex and the Government faces a hole in collections in the near future, plus its commitment to keep jobs, why is a major Government Department shedding staff?

Public Sector Jobs - The Reality

Well over a year ago, 1 in 4 jobs were in the Public Sector as New Labour's focus on bureaucracy created a job bonanza. For the sole purpose of pandering to the philandering John Prescott, the previously non-existent Department of The Deputy Prime Minister sprang up to insert itself as an extra layer of fat in an already top-heavy planning regime. As the economy grew, Public Service Departments and layers of Government swelled with the New Welsh and Scottish Assemblies buying themselves brand new buildings ignoring the plentiful empty office space in their countries in order to provide much needed shelter for all those important and expenses-rich politicians. The good times rolled in.

But as the downturn and Credit Crunch bites, unemployment in the Private Sector has risen sharply and so that proportion of jobs in the Public Sector grew and it was once again obvious to the man in the street something had to give. For all the Big Talk about rescuing the economy, the reality is that Gordon Brown is not King Canute. Jobs will have to go and that's an economic fact.

Recession Hurts

There is no hiding from the effects of recession. As much as you can lower interest rates to stimulate a housing market that has some 15-20% of fall left in it, the corresponding effect is that Britain becomes less attractive for foreign investors and our currency takes a pounding (excuse the pun) as George Osbourne was reprimanded for pointing out. Over £200bn has drained out of the UK financial markets in less than a few months and that again creates another hole in invisible earnings as Britain fights to recover.

Desperate Schemes Lacking Execution Skills

Yesterday we saw an interesting move to help those facing mortgage difficulties. It is a fair assumption to make that someone losing their job does not mean they don't intend to pay so are not really a bad credit risk. However, the details are the devil as if the person cannot restart repayments after 2 years then their house is repossessed and if it cannot repay the outstanding mortgage at auction then the Government will underwrite the difference to the mortgage provider, i.e. the taxpayer.

Umm, so who pays the 2 years of deferred interest? Oh the mortgage company does - well that will serve them right for being so greedy in the past. You know the ones who actually tripped over themselves to give away money and stoked up the economy to its current heights without which the Government would not have had a 'stable economy' in the last 10 years. No wonder the Banks don't want to lend if they stand to lose out. Bail out the fat cats but leave the mortgage providers in the lurch.

The Lord Giveth and The Lord Taketh

As we absorb all this bonhomie of tax cuts and decrease in inflation, ignoring the job losses, it almost slipped our attention that Councils have been granted the right to add up to 2% on business rates in their areas in order to boost economic developments. So while there is some relief on tax it will be grabbed back again in another charge. Nice one - it should fund a few 'fact finding' mission to exotic places to see how its done on the beaches in Thailand.

Crazy, Crazy

I can't help feeling there is a forlorn belief by Mr. Brown that a 2.5% cut in VAT, a couple of snippets on tax and lower interest rates are going to blow away an economic downturn that has been pending for some years and get the housing market all stoked up a again. Repossessions are rising fast and the new figure is 75,000 this year and while interest is at its lowest since 1951, we are now back at the giddy heights of 1991 for repossessions. When the Conservatives were in power - so the clock has been reset after the boom time and we can no longer have the age-old argument about the last Government because we are now officially in a worse position. I wish.

You do not need to be a genius to work this out. If a mortgage company offers a mortgage based on 90% of the house value today and the market drops 20% in the next year, the householder will be in negative equity and the asset at risk. If there is a risk that householder will lose their job then the mortgage company would be barmy to lend money. In Germany deposits have to be around 40% of the value - at this rate in the UK a minimum of 80% deposit would be required here for break even after one year. It doesn't make sense.

At current values and forecast - the housing market will not save this economy and pouring more fuel into a broken engine will not make it move. As caring as it may have sounded, the Government is fast building up the liabilities of the taxpayer from bail out of banks to underwriting the housing market. With falling tax revenues to come, we face an almighty reckoning at some point. Why not retrench today, cut spending and focus on surviving not pretending a recession is not here and spending like obsessed gamblers?

Lost in Translation?

As a Welshman I can relate to this. The road sign reads fine in English but workers at Swansea Council, knowing that all signs should be bilingual English and Welsh, sent an email to a Welsh translation site asking what the Welsh was for the lorry warning sign.

As no-one spoke or read Welsh there or perhaps there had been one too many drinks consumed the night before, no-one spotted that the 'translation' returned was in fact an out of office email reply which read 'I am not in the office at the moment, please send any work to be translated'.

Priceless

We Welsh are used to such nonsense in a country where less than 10% of the inhabitants can speak Welsh as many jobs in the Public Sector mandate that Welsh has to be spoken by the applicants - Positive Discrimination. How that squares with the Race Discrimination Laws I am not sure as 90% of Welsh people cannot apply let alone other British people and let's not even start on other races who may all be equally skilled or more so than the limited number of people who may apply. Then you get the lunacy as above.

But then again, Wales can be a funny place. Since I left some 25 years ago, we have our own National Assembly courtesy of Tony Blair where there is a whole new layer of powerless yet well paid bureaucrats who consume vast amounts of expenses and some even get caught doing rude things on common ground - I shall say no more. That there was perfectly good office space aplenty in the major cities, these 'politicians' immediately voted to have a brand new building erected for themselves so they could walk real corridors of power not ones rented from sleazy landlords no doubt.

Nice one Tony - just a tiny fraction over the 50% of the voters who turned out actually voted in favour of it on a turn out less than the average weekly crowd at Old Trafford (slight exaggeration but you get my drift. Wales was not as enthusiastic about it as everyone thought).

Achievements

But let's not knock all they do. Wales is the only place in Britain where everyone has free prescriptions and all hospital car parks are free.

It is also the home of the Rugby Union Six Nations Champions who last year completed their second Grand Slam in 3 years. Not bad for a country whose human population is exceeded by that of the local sheep. No silly jokes please, we've heard them all.

As we say in Wales 'I am not in the office right now. Call me when the rugby's finished.'