Overheads and packages

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For decades, pension provision was seen and treated as part of an overall remuneration package.  Employees didn’t just get a salary, they got a package, and people thinking of changing jobs were encouraged to compare the total package, not just the headline salary. 

I’m aware that some employers even implemented flexible arrangements under which employees could, within agreed limits, sacrifice part of their salary for higher employer pension contributions, or even reduce the contributions for an increase in salary.  Such arrangements suited employees, who could vary the elements of the overall package at different points in their lives, and they were generally cost neutral (other than administration costs) for employers.  Above all, they encouraged people to think package rather than salary.

I’m not entirely sure at what point ‘part of the package’ became an ‘unaffordable overhead’ apparently provided by the employers out of the goodness of their hearts, but the perspective certainly changed.  Factors such as increasing longevity come into the equation, but I have a feeling that the crucial event was the raid on pension funds mounted by Gordon Brown when he was Chancellor.

I’ve never felt that he was wrong in principle; the previous tax treatment of pension funds gave disproportionate benefit to the most well-off rather than the least well-off.  But he was wrong, and badly wrong, in practice, by introducing the change without warning and with no transitional period for both employers and employees to adjust to the significantly increased contributions which would be required from both if previous pension provision was to be maintained. 

Overnight, an approach to occupational pension provision which had been so successful over decades was rendered unviable.  The pensions crisis may be coming to the fore under a Conservative-Lib Dem coalition, but the seeds were sown by Gordon Brown and New Labour.

The sleight of hand by which pension contributions have come to be regarded as an ‘overhead’ disguises the fact that employers reducing the benefits or increasing the level of employees' contributions are, in effect, reducing the total remuneration package of their employees as certainly as if they were simply reducing wages.  The wrath of those being hit by this attack is easily understandable.

The surprising thing to me is not that public sector employees are protesting so strongly, but that private sector employees did not protest more when the changes impacted them.  It underlines, perhaps, the extent to which economic power has become increasingly unbalanced in favour of capital and against labour.  However, the mere fact that private sector employees have already had to suffer the closure of final salary schemes and the prospect of reduced income after retirement is no basis at all for arguing that public sector employees should meekly accept the same fate.

It’s also often overlooked that not all public sector pension schemes are the same; some are much more actuarially sound than others, and there really is no need to treat them all on the same basis.  There are some serious problems though, particularly in those services where pensions are paid from current revenue rather than from a properly funded long term savings scheme.  Arguing that all schemes can just continue as they are is as disingenuous as arguing that they all have to change fundamentally.

What is surely clear overall is that we have a choice between reducing the size of pensions after retirement and increasing the amount saved before retirement.  The position we’ve got to seems to be that public sector employers are determined to make that decision unilaterally, just as private sector employers have already done.  It’s a short term decision though; it saves money today at the expense of potentially creating a bigger problem for pensioners in the future.

The government is giving conflicting messages as well.  On the one hand they say – quite rightly – that we need to save more to make provision for retirement, and on the other they seem likely to further postpone auto-enrolment in the new pension scheme because they want us to spend not save in order to boost the economy.  Long term needs conflict with short term ones, and as is usual with politicians, short term considerations are likely to win out.

Seeing pensions as part of a remuneration package rather than as an overhead puts potential industrial action by employees into its proper context.  There will have to be changes to the package in many cases, of course; but change should be negotiated not imposed, and public sector employees are right to insist on that.  That surely is at the heart of what trades unions are about.