ASH are making idiots of themselves again:

A new report by FairPensions and ASH (Action on Smoking and Health) has challenged the long held view that UK local authority pension funds can hold 'unethical' assets such as tobacco in order to fulfil a legal duty and  maximise investment returns

With tobacco sales declining for the first time in 2010 and savers continuing to express concerns over whether their money is invested 'ethically', the report claims to expose misconceptions surrounding investors' duty to have tobacco as part of their portfolio. 

The report is launched with figures showing that councils across Britain have at least £1.3bn of employee pension funds invested in tobacco.

Both organisations claim that the three most heard arguments in favour of schemes investing in tobacco can no longer be upheld.

One of the most heard arguments; that is a trustee's "legal duty to maximise financial return" and that a trustee "cannot give consideration to ethical issues", is dismissed by the report as being "somewhat simplistic".

"Although local authority pension funds are governed by different laws to other types of pensions, members of their pensions committees have similar fiduciary duties to pension fund trustees," says the report.

"The phrase 'duty to maximise return' does not appear in any UK statute or case law. Pension fund trustees have a fiduciary duty to invest 'in the best interests of members and beneficiaries'. This is based on the common law duty of loyalty, which exists to ensure that trustees avoid conflicts of interest and do not abuse their position to further their own ends. Trustees also have a duty to invest prudently."

The report also claims that the two other common justifications for the investment practice, (that trustees do not interfere with the day-to-day decisions of external investment fund managers and that tobacco is a low risk, high return investment) are no longer valid.

Now, I mostly hate smokers. I hate the way they smell, I hate the litter they make, and I hate how they're always in the fucking way the whole time, whether walking down the street or when entering or leaving buildings. I hate how they use stupid schoolboy arguments to rationalise their irrational habit. I really hate how they see themselves as funding the NHS single-handed, as if that excuses all their other sins.

However, smoking remains legal. Although I don't smoke myself, I have no qualms about investing in tobacco companies and making money from the addiction of smokers (I've made quite a bit of money in doing so). Yet I can see that some people do have a problem with it.

But when you sign up for a local authority pension, you forego any right to determine what equities your pension fund is invested in. Local authority pensions are defined benefit, ie they promise you what pension you'll get in retirement. If you want a fund to call your own, over which you can make investment decisions, then defined benefit pensions aren't for you. You'll be wanting a defined contribution pension plan instead, just like we private sector taxpayers have been enjoying for years.

You can't have it both ways. Either take your defined benefit pension and shut up, or move to a defined contribution pension scheme. ASH and FairPensions are trying to have their cake and eat it. They can get stuffed.

Filed under: Economics with tags ash, defined benefit, defined contribution, fairpensions, idiots, smoking
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Some bad news for final salary pension schemes in the private sector:

Falling stock markets and corporate bond yields saw deficits - the shortfall between a scheme's assets and liabilities - hit £80billion on 30 November, having stood at £60billion at the end of October, according to consultancy firm Mercer.

This is the perfect storm for pension plans. Soggy stockmarket prices mean that the value of plan assets are low. And low corporate bond yields mean that you discount future liabilities by less, resulting in a higher liability. So the net liability (plan assets less plan liabilities) just gets bigger and bigger.

Ultimately, scheme sponsors may conclude that this problem may never reverse and that they should simply cut their losses and stop all future accruals. Unless, of course, the scheme sponsor is the taxpayer.

Filed under: Accounting, Economics with tags defined benefit, liabilities, mercer, pensions
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Public pensions are not gold plated, and £6k p.a. is not an unreasonable sum to pay nurses, teachers, doctors, cleaners, firefighters and police personnel in their retirement.

Oh dear.

This is a favourite trick of the left, and it's an extremely devious one. The £6k figure isn't sourced (of course it isn't, this is an Eoin article),  but happily we know it because it's a number unions bring up in pensions debates. It's the average annual pension for a retired member of (some portion of) the public sector pension schemes.

Now, think of a nurse, teacher, doctor, cleaner, firefighter or policeman. You'll probably think of someone who has worked in that area for all of their life. But there are plenty of them that don't. They work in the sector for a bit and then go do something else - perhaps have a baby, or move out of the public sector altogether. When they retire, their pensions are included in the average pension of a public sector worker and, in doing so, drag down the average. So it's daft and totally misleading to just look at the average figure without digging behind it some more.

While many people might think £6k is a fair pension for a career public sector worker, they might be horrified to find out that the true figure is 2-3 - or in some cases more - times that amount. I'm also sure that they wouldn't think it reasonable to pay someone who had worked in the public sector for only a few years that sort of pension. In addition, their answers might have been different if they had been given some information on the size of private workers' pensions.

Finally, I read somewhere that the 'gold plating' originally meant the fact that their pensions are underwritten by the state, and can therefore never fail to be paid; private sector pensions, until recently, had only their employer behind them. Even with new regulations, private sector defined benefit pensions are only guaranteed up to 90% of the benefits and only up to a capped amount.

Filed under: Economics with tags defined benefit, eoin clarke, eoinomics, firemen, pensions, police, public sector, teachers
56242 Comments »http%3A%2F%2Fwww.fcablog.org.uk%2F2011%2F11%2Feoinomics-and-teachers-pensions%2FEoinomics+and+teachers%27+pensions2011-11-29+07%3A36%3A32Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D5624

What do we want? Pensions Justice! 

Public sector pensions are under attack.

Oh noes!

The government wants to make people pay more and work longer for a lot less. Despite hours of talks, ministers have yet to seriously negotiate.

Pensions Justice is a site run by the Trades Union Congress for public sector workers. Presumably it's hard luck if you're a unionised worker in the private sector, but yippee if you're an ununionised worker in the public sector.

By 'pensions justice' they appear to mean preserving the future accrual rights and contribution levels of current public sector workers, with the taxpayer funding any shortfall. And that means private sector workers, many of whom have defined contribution pensions, will end up having to pay extra tax just to keep public sector workers in the pension schemes to which they have become accustomed.

As we've mentioned here before, defined contribution pension schemes are under significant strain as a result of Gordon Brown's 1997 pension raid, increasing longevity, soggy equity markets and low interest rates. The upshot of these four pressures are that private sector workers are having to pay more and work longer for a lot less.

So where exactly is the justice in calling for public sector workers to be mollycoddled while private sector workers must fund the increased cost of their pensions as well as funding the increased cost of their own pensions? Where were the unions in 1997? Why didn't they complain then? Because it didn't affect their members? It makes their calls for 'justice' now look depressingly hollow.

Filed under: Current issues, Politics with tags defined benefit, defined contribution, fairness, gordon brown, pensions, public sector, tuc
53151 Comment »http%3A%2F%2Fwww.fcablog.org.uk%2F2011%2F10%2Fpensions-justice-but-only-if-you-work-in-the-public-sector%2FPensions+justice%2C+but+only+if+you+work+in+the+public+sector2011-10-12+21%3A19%3A41Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D5315

Today, 30 June, lots of public sector workers are going on strike, in a protest over proposals to make public sector workers pay more for their final salary pension schemes.

So let's think about two workers. One, Miss Aubergine, is a newly qualified teacher, on £25,000 per year. The other, Mr Banana, is a "fat cat" on £100,000 per year.

Miss Aubergine's scheme asks currently that she pay 6.1% toward her pension. Under the government's proposals, she will pay another 3%. If we use this latter figure, she will contribute £2,275 per year.

Meanwhile, Mr Banana receives the average defined contribution amount from his employer, 6.1%. He contributes the same amount himself. So his pension pot is receiving £12,200, over 5 times Miss Aubergine's contribution.

What do they get in return? Miss Aubergine gets 1/60th of her final salary, currently £416.67. Meantime, Mr Banana must buy an annuity on the open market. At current levels, a pension with the same inflation protection as Miss Aubergine's would require an annuity rate of 2.9%. In other words his pot would buy him a pension of £353.80, almost 10% less than Miss Aubergine's pension.

Typically, Miss Aubergine would enjoy lots of public sympathy and Mr Banana none. But can it really be right that her incredibly generous pension rights aren't recognised in a transparent and honest way?

And also spare a thought for Mr Coconut, a private sector worker on the minimum wage on the NEST contribution rates of 4%+4%. Should we really continue to tax his income to protect Miss Aubergine's current pension arrangements?

Filed under: Current issues, Economics with tags defined benefit, defined contribution, fairness, nest, pensions, public sector, teachers, unions
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As of 0001 5 November 2010 I am on strike in protest at the BBC's theft of our pensions.

So says Paul Mason, the desperately talented Economics Editor at Newsnight.  Yet, despite being rightly proud of having such an influential blog, I'm afraid that this time he's talking quite squarely out of his arse.

Look up 'theft' in a dictionary.  A typical definition might be "the wrongful taking and carrying away of the personal goods or property of another".  A key feature of theft is that, after it's happened, you have less than you had before.

The BBC pensions reorganisation isn't theft.  The accrued pensions rights of employees are completely unaffected by the proposals, as indeed they have to be, by law.  What is being 'stolen' is the expectation that the pension scheme that has existed in the past will exist in perpetuity.  And that's clearly an unrealistic expectation.  Conditions change.  Successful organisations must respond to those changes.  Where the government has made it clear that there will be no licence fee increase for six years, it would be commercial suicide to allow the pension scheme to continue unreformed when the liability is still spiralling upwards.

So I'm surprised and disappointed by Paul's comment.  Yet, I'm also angry about it.  Because I'm one of the millions of private sector pensions savers that actually have seen our pensions stolen.  Most of us have defined contribution schemes, in which we own a pot of money that is invested on our behalf, and from which we buy an annuity when we retire.  Our schemes have high charges, which eat into the value of our pots, reducing their value by thousands of pounds.  We suffered appallingly when Gordon Brown removed the ability for pension schemes to reclaim the tax credit on dividends in 1997.  We have borne all the costs of annuity rates plummeting over the last 20 years. And, on top of all of this, we now face the prospect of our pensions being downgraded to the paltry contribution rates provided in the NEST pensions regime.

Not one of these costs is borne by public sector defined benefit schemes, such as the one enjoyed by Paul.  Instead, the costs get added to the employer's bill for running the scheme, which means it ultimately gets passed to licence fee payers.  So he has some gall to complain about his loss of future accruals when the rest of the country has suffered so much more already.

Filed under: Current issues, Economics, Other blogs with tags bbc, defined benefit, newsnight, paul mason, pensions, the decline of pensions
43701 Comment »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F11%2Fdude-wheres-my-pension%2FDude%2C+where%27s+my+pension%3F2010-11-05+09%3A11%3A25Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D4370

The TUC's Nigel Stanley, who is a nice enough bloke, but should probably stay away from tax policy work in future, has been writing about pensions tax relief in the Guardian ¹

Pensions tax relief is the pensions world's dirty little secret – a conveyor belt that shovels money in the direction of the better-off. While the government has put some limits on how much can be claimed – and that's worth at least one cheer – they have done nothing to reduce the fundamentally unfair nature of pensions tax relief.

Few understand how it works. If you put a pound into a pension, the tax authorities will take that pound off your taxable income, thus reducing your tax bill.

Standard rate taxpayers would have paid 20p on this pound – so for every pound they save they get 20p knocked off their tax bill. It therefore costs 80p to save a pension pound if you pay standard rate tax.

But as higher-rate tax is 40%, higher-rate taxpayers get 40p back for every pound they save, so it costs them just 60p to put a pound in their pension. Fair?

Tax relief does not come free. For every pound the government gives back in tax relief it has to collect in other taxes and the costs are staggering. Before the rules changed, tax relief on pensions cost more than £36bn a year. Three-fifths of this (close to £22bn) went to higher rate taxpayers, but 25% – nearly £10bn – went to the top 1% on more than £150,000 a year.

The new 50p tax rate for earnings over £150,000 gives us the ludicrous situation that the super-rich get 50p back for every pound they save. In other words we have a pensions "bogof", whereby the wealthy can buy one pension pound and get one free while the deal for standard-rate taxpayers is only five for the price of four.

In future no one will be able to claim tax relief on more than £50,000 a year of pension contributions. This will raise £4bn a year, and does come from the better-off. But the new rules do nothing to change the fundamental unfairness of tax relief.

This is because people can still claim at their marginal tax rate. The super-rich keep their pensions bogof, but there is now a limit on how many items they can take through the till. But there is no need for a whip-round for these distressed gentlefolk, for they can still buy £50,000 worth of pension for just £25,000.

He's falling into the Ritchie trap of presuming that all your money are belong to us and that what you get to keep is yours only by the divine mercy of the government.  Under this distorted, crackpot view of the universe, because we tax rich people at 50%, every £1 that you are permitted to pay out of pre-tax income costs you only 50p but is then topped up by a donation by the state of 50p.

This is of course mad, because if you earn £10, your tax would be £5, and you'd take home £5.  If you are allowed to pay £1 out of pre-tax income then your tax is £4.50 and you take home £4.50.  You're always taking home less than you would have done, and the state tolerates this because it's in the long term interest of the country.

If we imagine a much poorer person who earns only £2 but pays tax at 10%, they pay 20p in tax and take home £1.80.  For them to contribute £1 into their pension, they would pay 10p in tax and take home £0.90.

We should accept this settlement, even though Stanley and his nutty union buddies cry foul, because you will observe that the richer person still pays substantially more tax than the poorer one.  You will remember that the richest 5% of earners pay 45.5% of total income tax, even after taking account of the current tax relief arrangements.

And we should further accept pension contributions out of pre-tax income because it binds higher earners into a common settlement with everyone else over pensions.  Without this, there is the risk that higher earners will simply give up on pensions altogether, leaving everyone poorer.  To a certain extent we have already seen this with defined benefit pensions, as directors joining companies after their defined benefit pension plans have been closed to new joiners have a real incentive to close the schemes to future accruals as well.

There's also a profound unfairness that Stanley unsurprisingly overlooks.  As I mentioned a week or so ago, public sector pensions can cost in the region of £6.50 for every £1 contributed by the employee.  The £1:£1 that Stanley thinks is so unfair pales into insignificance compared to this largesse.

If he's serious about fairness, his union colleagues will demand that public sector pension schemes be scaled back significantly, given how grossly unfair they are for the taxpayers that fund them.

Filed under: Other blogs, Politics, Taxation with tags defined benefit, guardian, nigel stanley, pensions, public sector, tuc
42811 Comment »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F10%2Fthe-tucs-nigel-stanley-on-pensions-tax-relief%2FThe+TUC%27s+Nigel+Stanley+on+pensions+tax+relief2010-10-20+08%3A48%3A44Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D4281

The awfully smart and meticulous people over at FullFact have blogged about John Hutton's pension report, observing that Hutton is at pains to stress that public sector pensions are not gold-plated:

But it is wrong to say that public service pensions are gold‐plated.  The average pension paid to pensioner members is about £7,800 a year. About half of pensioners receive less than £5,600 a year. And 90% of pensioners receive less than £17,000 a year.  Although these figures are partly accounted for by part‐time or part‐career working these pensions provide a modest – not an excessive ‐ level of retirement income

I'm afraid Hutton is wrong.  And FullFact are welcome to check my workings on why I say he's wrong.

The point isn't the absolute level of pensions in payment, which are indeed low.  After all, plenty of private sector workers have appallingly low pensions too. What matters is the amounts they cost the employee to purchase.

We'll take as our base case an employee who earns £25,000 a year and earns a pension over 10 years.  We'll also make the following assumptions:

• Inflation: 0.0%
• Investment (real) return: 4.0%
• Annuity rate: 3.3% ¹
• Annual scheme costs: 0.5%

I've plugged these figures into a Google Spreadsheet, so if you don't like these assumptions you can change them and see what it does to the figures.

If our employee is in a typical public sector pension defined benefit scheme, such as the Teachers Pension Scheme, they will contribute 6.4% of their salary in return for 1/60th of their final salary for each year of work.  If they earn no pay rises over the 10 year period, they will earn a pension of £4,167 for their service. They will contribute £16,000 over their employment for this pension.

Compare this to an employee on NEST (scenario 1 in the spreadsheet).  They will contribute only £7,500, because contribution rates are lower.  But they also bear the administrative and scheme costs.  They also bear the risk of poor investment returns and inflation.  The NEST member will have a pension of less than £800 per annum to show for their ten years of service.  This is less than one fifth of the public sector worker's pension.  Do you still think public sector pensions are not gold-plated?

For another comparison, let's imagine another employee on a much better defined contribution plan.  I don't really have one to refer to, so I'll make one up: let's take the employee contribution to be the same as the Teachers Pension Scheme (6.4%) and let's make the employer contribution as double that (12.8%).  That's a pretty nice DC scheme, and is probably far better than most private sector workers get.

That scheme would give our employee a pension of under £2,000 per annum (scenario 2), still under half what the public secctor worker would get.  Do you still think public sector pensions are not gold-plated?

In order for our private sector worker to get the same pension as the public sector worker, they would have to contribute 28.8% of their salary over the period (scenario 3), or convince the employer to raise their contribution rate to 35.2% (scenario 6).  I don't think there's a single scheme in the history of defined contribution pensions that has ever seen an employer pay this sort of amount.  Do you still think public sector pensions are not gold-plated?

Unbelievably, it gets even worse when we add wage inflation.  This is because public sector final salary pensions are based, as they describe themselves, on the employee's final salary.  Defined contribution pensions are based only on the size of the accumulated pension pot on retirement, so a higher pension requires a bigger pot.  If we assume that our employee gets a wage increase of 3% (in real terms) per year, then they will retire on a salary of £32,600 for a defined benefit pension of £5,433 per annum.  Our defined contribution pension member would get a pension of only £2,184 per annum (scenario 4).  To get the same level of pension as the defined benefit plan from a defined contribution scheme, our employee would need to contribute 35% of his salary (scenario 5), or get the employer to contribute 41.4% (scenario 7).  Do you still think public sector pensions are not gold-plated?

A public sector worker getting a 3% wage increase per annum receives pension benefits from the government that are equivalent to £6.47 for every £1.00 contributed by the employee ².  The most generous defined contribution schemes pay no more than £2.00 for every £1.00.  On top of which, the private sector pension is not guaranteed - it's only as good as the insurance company behind it - whereas the public sector pension carries a cast-iron guarantee.

Do you still think public sector pensions are not gold-plated?

I mean, really?

It's absolutely essential that something is now done to fix this chronic unfairness in the pensions system.

Filed under: Current issues, Economics with tags defined benefit, full fact, lord hutton, pensions, public sector, the decline of pensions
41952 Comments »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F10%2Fpublic-sector-pensions-are-gold-plated%2FPublic+sector+pensions+are+gold-plated2010-10-08+07%3A26%3A58Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D4195

The Public Sector Pensions Commission, a body set up by the Insititute of Economic Affairs and the Institute of Directors, has published a thoughtful report on the state of public sector pensions.

The report blames a number of issues for the appalling state of public sector pensions: the lack of transparency, the large unfunded liabilities, the large unfunded liabilities, the disparity with employers in the private sector, inequity between employees at the same employer, and profound difficulties in the outsourcing of government services.

The report also finds that the expense of public sector pensions is profoundly understated, leading to improper decision-making processes within the public sector.

Yet, what do we hear from our public sector unions?  Are they going to engage on these terribly important issues? Er, no, they're just going to shoot the messenger.  Well, surely Ritchie can give us a clever exposition of why the PSPC is wrong?  No, like the pathetic union sock puppet he wants to be, he's also playing the man, not the ball.  Which rather suggests that the PSPC has got it right.  And, presumably as Ritchie is himself in hock to the unions, we can't take anything he says seriously either, as he's not independent?

Filed under: Economics, Politics with tags defined benefit, idiots, institute of directors, institute of economic affairs, pensions, public sector, richard murphy, trade unions
36943 Comments »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F07%2Four-public-sector-pensions-crisis%2FOur+public+sector+pensions+crisis2010-07-08+10%3A59%3A43Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D3694

The Coalition has declared war on overpaid civil servants, as part of a Conservative manifesto pledge to publish the salaries of high earners in the public sector.  They published a big list of people who earn over £150,000 per annum (the list has been repackaged by ConservativeHome - thanks!)

Eventually, the plan is to use every legal means necessary to make civil servants earning more than the Prime Minister the exception rather than the rule.  However, this does raise an interesting question - will this mess up their much-cherished defined benefit pension plans?

Well, dear reader, you don't need to shed any tears for our overpaid tax-guzzling brethren.  They're already well taken care of, thanks to a little provision in the civil service pension plan rules which allows them to look back up to thirteen years[p.21] to cherry pick the best years of their career to use as their 'pensionable earnings'.  So any mandarin forced to take a pay cut today will have plenty of time to quit their jobs in time to cash in on their overinflated pensions, largely paid for by the likes of you and me.

Still, in due course, as those civil servants on the older pension schemes retire and younger civil servants are admitted only into the career-averaging scheme, the costs of providing them with pensions should come down.  Slowly.

Filed under: Current issues, Politics with tags civil service, conservatives, defined benefit, pensions
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