Dear Listener

Public sector pensions (or public service pensions as the Government calls them) have been in the news this week as huge numbers (say the unions) or a small minority (says the Government) of teachers and civil servants downed whatever they use for tools nowadays and marched to demand better, or at least not worse. pensions.

I was called onto BBC Breakfast, World at One on Radio 4 and the News Channel on Thursday to give some background to what is an increasingly bitter dispute.

Public sector pensions do cost taxpayers money both as an employer and as a guarantor. There are eight major national public sector schemes which are not funded. So instead of having an invested pension fund which employer and employee pay into to meet the pension promises, the pensions of these public sector schemes are paid out of the contributions as they come in. So this year’s pensions are paid by this year’s contributions.

In the private sector – and some of the public sector such as Local Government – there is a pension fund and if it is assessed as being too small to meet the pension promises (‘in deficit’) the sponsoring company has to inject money into it over a period of time to bring it back to an adequate size. In the public sector the employer is the taxpayer and the Treasury stands behind the pension promises. So if there is a year by year shortfall that is made up by the Treasury.

The latest forecasts show that in 2010/11 unfunded national public sector pensions will cost £26.1 billion and the income from contributions will be £21.5 billion leaving a shortfall of £4.6 billion to be made up from general taxation. This shortfall is expected to grow to £7.2 billion by 2014/15.

See p.128 at http://budgetresponsibility.independent.gov.uk/wordpress/docs/economic_and_fiscal_outlook_23032011.pdf

But the Government now plans to reduce this by putting up contributions from public sector employees by 3.2%. For a teacher that will mean a rise in contributions from 6.4% to 9.6%, a 50% increase. And many civil servants who pay 3.5% now will see that amount almost double to 6.7%. That change is projected to raise £2.8bn in 2014/15 to reduce the £7.2 billion subsidy to £4.6 billion.

Nevertheless – and before that change – the cost of public sector pensions is forecast to fall as a share of our national income (GNP). The peak cost of 1.9% of everything the country makes and takes in 2009/10 is expected to fall to 1.4% by 2059/60. See pp.22-23 and table 1.B

http://cdn.hm-treasury.gov.uk/hutton_final_100311.pdf

So it is a moot point whether we can ‘afford’ public sector pensions as they are or not. The public seems divided and politicians have to come down on one side or the other.

There is also a fairness point. In the private sector barely one in ten employees pays into a good pension scheme which will pay out a proportion of their salary at retirement. In the public sector that proportion is well over eight out of ten. See http://www.statistics.gov.uk/cci/nugget.asp?id=1277. So is it fair for everyone to pay to give that advantage to our public sector employees?

These are difficult questions. But made easier by knowing the background.

***IN MONEY BOX THIS WEEK***

Four months after Money Box broke the story of insurers paying fees and passing on customer details to everyone from car hire companies to personal injury firms, the print media and our colleagues on the Today programme took the story up. They were responding to this week’s complaints about the practices by former Home Secretary Jack Straw. Now one insurer has broken ranks and said it will change its ways. Axa will be live on Saturday.

FSA boss Hector Sants has given us a long and interesting interview on the new and tougher regime that will police financial services from some time in 2013. The Financial Conduct Authority will take over many of the functions of the Financial Services Authority but with more powers and a strong remit to protect customers – sometimes from their own foolishness. We will be putting a longer version of the interview on the web. It is that good.

We return to the Tesco Bank fiasco after a major IT failure meant its ‘instant access’ savings account was anything but. Last week thousands of customers were locked out after two breakdowns which took the computers offline for 18 hours. Many tried to call Tesco but when we tested the helpline on Saturday we were kept waiting for 54 minutes. Two weeks on and some customers – perhaps as many as 800 – are still locked out of their accounts. We tell the inside story.

And the 8 pence overdraft that cost one man more than £200 in charges.

Sorry to say the story about 55 year olds and their access to pension funds – which was squeezed out last week – has not found its place this week either. I won’t make another promise in case I have to break it again.

But we do hope to squeeze in a brief item for all those listeners who have a Habitat gift card and wonder if it is worth anything now that Habitat is in administration.

Find out if we do get that rare collection into our 24 minute exhibition by listening on Saturday just after noon or the repeat on Sunday at 9pm or any time to the podcast www.bbc.co.uk/podcasts/series/moneybox. Check out our website www.bbc.co.uk/moneybox to follow links, download transcripts, send us stories or ideas you want us to look into and Have Your Say on overdraft charges.

This newsletter is available at bbc.co.uk/moneybox/newsletter around the time it hits your inbox (tell your friends who don’t subscribe) and you can also join more than 8600 people who follow me on Twitter to read my random but timely thoughts on money – and a few other things – whenever I’m awake at www.twitter.com/paullewismoney .

Best wishes,

Paul

PS Don’t forget the trail for the programme on BBC1 Breakfast just after 0845. And I am back on breakfast on Monday this week talking about the Dilnot commission on paying for long-term care.

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