Hutton's assault on pensions

Submitted by martin on 20 October, 2010 - 8:47 Author: John Moloney

John Hutton, former New Labour minister, has produced a stage 1 report on public sector pensions with stage 2 coming out next year.

For such an important report, a report that will impact on millions of people, now and in the future, this stage 1 offering is thin intellectual gruel indeed.

It is full of charts, numbers and tables, but the conclusions do not readily flow from the marshalled evidence.

He doesn’t show that public sector pensions are unaffordable - indeed he admits that, as a proportion of GDP, their cost is due to flat line and then decline.

He admits that the calculation of pension liabilities is fraught with difficulties and that very sensitive to even minor changes in the assumptions used in the calculations; in other words he doesn’t know what the world will look like in 50 to 60 time frame over which the calculations are made.

Yet despite this he knows that the cost of public sector pensions is too high and the country, long term, cannot afford them.

The report has gaping holes. Whilst stating that average life expectancy is increasing he doesn’t recognise or acknowledge that life expectancy varies greatly between social classes, nature of work undertaken (i.e. manual or office based), gender, race and geographical area. Thus solutions for addressing the increase in “average” life expectancy impact differently on different groups.

Moreover he seems to have a model in his head that public sector workers are healthy in work; retire; enjoy decades of health, and then die.

The reality is that again there are marked differences in health and well being between groups. Therefore generally speaking, staff in manual work or jobs where the worker is supervised and has low control over the work process tend to be sicker than say senior managers; they will be less healthy before and after retirement. Thus raising the retirement age means that such workers get to enjoy less time, whilst in good health in retirement, than those more senior to them. Of course given their lessened life expectancy they enjoy less time in retirement in any case be those years of retirement be spent in good or bad health.

Hutton has not acknowledged research in the USA that shows that life expectancy is decreasing for some i.e. working class kids brought up on fast foods and little exercise. He takes as a given that life expectancy is always increasing and uniformly for all.

In other words, what the stage 1 report lacks is an equality and social impact assessment which measures the impact of the report’s recommendations on real people and which marshals all the available evidence concerning changes in longevity. Of course if he carried out such an assessment the gross and disproportionate effects on manual workers and others would be exposed; so of course such an assessment is not made.

Whilst the media headlines have concentrated on his recommendations that pension contributions and retirement age be increased, little or no coverage has been given to his thinking about future pension provision or his explicit statements concerning reducing pensions in order to facilitate privatisation and out sourcing.

Regarding the latter, two quotes give a flavour of his thinking:

"... by taking on employees with defined benefit pension rights, private sector bodies expose themselves to the investment and demographic risks discussed in Chapter 1. For larger firms, these risks might be considered manageable, although evidence submitted to the Commission indicates their concerns. But evidence also suggests that smaller firms and charities in particular feel unable to take on risks that could seriously harm their organisations if investments do badly or if longevity increases unexpectedly.

As a result, they can either withdraw from the outsourcing process or purchase a pension from a third party. These pensions can involve contribution rates of about 40 per cent of salary, more than double the average employer contribution in the non-uniformed public service pension schemes...

It is clear that structural reform of public service pensions could be part of a solution if reform creates a more level playing field with the private sector. The Commission’s final report will deal with long-term structural reforms" (p.110-111).

When discussing future pension provision Hutton states:

"The Commission will also consider elements of scheme design such as:

•ensuring normal pension ages are in line with latest developments in longevity;
•reviewing rules around changes to pension payments when they are taken before or after normal pension age to increase labour market flexibility;
•the implications of different indexation options for pension costs and incomes over time; and
•accrual rates in the different schemes".(p.127)

"The Commission will also be considering the extent of accrued rights, their protection and the implications for future pension terms. The Commission is clear that protecting accrued rights does not extend as far as protecting current terms for future pension accrual".

Hutton will recommend major and detrimental changes to public sector pensions.

So how should the Labour and union movement react to the Hutton report? Firstly they should attack it. It is a deeply flawed document as shown above. It can be readily pulled apart. Unfortunately the response has been muted, even respectful.

The movement should see this as the declaration of war it is. We cannot wait to fight it.

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