TUC - Pensions changes and pay freeze will cost low-paid staff over eight per cent

1 Jul 2011 11:34 AM

A part-time nurse earning £17,000 a year will suffer an eight and a half per cent real terms pay cut by 2012/13 - almost £100 a month - as a result of planned pension increases, the public sector pay freeze and tax changes, according to new TUC research published today (Thursday) as teachers, lecturers and civil servants prepare to take strike action.

While ministers say their proposals would protect low-paid public sector staff from pension increases, this does not include those who, if they worked full-time, would earn more than the government's £18,000 cut off.

TUC General Secretary Brendan Barber will tell a rally in Exeter in support in public sector pensions later today:

'The brutal truth is simply this. The burden of deficit reduction is being piled unfairly on to millions of low and medium paid public sector workers who did nothing to cause the crash.

'Their pay has already been frozen for two years - even though inflation is higher than it has been for over a decade. By April 2012 a part-time nurse on £17,000 a year will have seen her living standards fall by over eight per cent.

'Meanwhile those who are actually guilty of causing the crash in the finance sector are busy getting back to business and bonuses as usual, escaping the scene of their crimes just as a hit-and-run driver would flee a car crash.

'This is a gold-standard for unfairness.'

TUC analysis of official earnings statistics for a range of low to medium earners in the public sector show losses from 4 per cent to 10 per cent in living standards from the pay freeze and the increase in pension contributions, even after taking account of tax changes and wider exemptions said by the government to help the low paid.

The TUC research is based on the Annual Survey of Hours and Earnings, uses official projections of the retail prices index (RPI) to estimate the likely increase in the cost of living, and allows for the government's protection of those with low full-time equivalent earnings from the pay freeze and proposed pension contribution increases. A full spreadsheet is available at www.tuc.org.uk/tucfiles/38/livingsstandardsforpublicsectorworkers.xls

At a rally in support of the union campaign in Exeter later today, TUC General Secretary Brendan Barber will say:

'Ministers keep saying that our talks are all about the long term future and affordability of public service pensions, but that is only a small part of the real story.

'The brutal truth is simply this. The burden of deficit reduction is being piled unfairly on to millions of low and medium-paid public sector workers who did nothing to cause the crash. Their pay has already been frozen for two years - even though inflation is higher than it has been for years.

'On top of this the government has decided on an arbitrary increase in pension contributions. By April 2012 a part-time nurse on £17,000 a year will have seen her living standards fall by over eight per cent.

'Meanwhile those who are actually guilty of causing the crash in the finance sector are busy getting back to business and bonuses as usual, just as a hit-and-run driver would from a car crash. This is a gold standard for unfairness.

'It is hardly surprising that public sector workers are on strike today. They know that they are being asked to play an unfair part in deficit reduction. What adds insult to injury is that this is wrapped up in attacks on public service pensions as gold-plated, unreformed and unsustainable.

'None of these myths are true. Lord Hutton is clear that public sector pensions are not gold-plated. Most are under £5,600 a year. Only a handful even get within sight of a typical top boardroom pension.

'Nor are pensions unreformed. Negotiations with the last government guaranteed tax payers against unexpected changes in longevity though cap-and-share - and reduced the value of pensions by 10 per cent. This government's imposition of the change to the consumer prices index (CPI) has taken another 15 per cent off their cost. Pensions reduced in value by 25 pence in every pound can hardly be said to be unchanged.

'Nor are they unsustainable. The National Audit Office (NAO), the Office for Budget Responsibility and Lord Hutton's report are all clear that the cost of public sector pensions is due to fall as a share of the wealth the country creates. Can the government say that about any other part of the costs associated with an ageing society?

'Public sector workers have not taken the decision to strike lightly. Nobody wants to forsake a day's pay when the cost of living is so high. Nobody wants to inconvenience the public and working families. And nobody wants to wants to see our schools and jobcentres closed.

'But the government needs to know this. Our resolve is strong, our determination is absolute, and we will see this through until we reach a just and fair settlement.'

Public Service Pensions mythbuster

Myth 1: Public service pensions are gold-plated

Half of public sector pensions in payment are less than £5,600 a year. In local government half of pensioners get less than £3,000.

The Commission firmly rejected the claim that current public service pensions are 'gold-plated.' Hutton Report p26.

A YouGov poll of 2,500 in February 2011 asked what the average public sector pension should be, the average across all responses was £17,088. Forty-four per cent said it should be more than £15,000. Almost half (49 per cent) of respondents believe the average public sector pension is more than £10,000, and only 23 per cent believe it is less than £10,000. (www.prospect.org.uk/news/newsstory.php?news=878)

Myth 2: Public service pensions are unreformed

Two major changes have been made to public sector pensions. Together they reduced the value of public service pensions by 25 per cent even before the current negotiations started.

• Negotiations with the previous Labour government reduced the cost of pensions by 10 per cent. Of particular importance is the agreement to cap-and-share the costs of any unexpected changes in longevity. This means that if the costs of pensions go up because people live longer than current projections, the extra costs are first shared between government and members, and then capped for government by making scheme members pay the whole costs. The Treasury estimates that cap and share will add £1 billion to contributions next year. In addition there were increases in the pension age and a switch to career average pensions in the civil service.
• In June 2010 the Chancellor announced without warning that public service pensions would be uprated according to CPI rather than RPI. The switch to linking the indexation of pensions in payment to the CPI measure reduces the value of pensions by a further 15 per cent. The NAO estimate this is a saving of £67 billion. A number of unions are currently taking legal action to challenge the decision to cut the value of pensions in this way.

Myth 3: Public sector pensions are unsustainable

How best to measure the costs of commitments that go a long way into the future is controversial. Many of the attacks on so-called unsustainability of public sector pensions try and express all these future commitments as of they were a bill that had to be paid today. The NAO and the Hutton Review rejected this approach and say the test of the long term affordability of public sector pensions is what proportion of GDP future payments will require.

The NAO found that even before the switch to CPI indexation the cost was sustainable:

Government projections suggest that the 2007/08 changes are likely to reduce costs to taxpayers of the pension schemes by £67 billion over 50 years, with costs stabilising at around one per cent of GDP or two per cent of public expenditure. This would be a significant achievement. Public Account Committee: The impact of the 2007/08 changes to public sector pensions.

Once CPI indexation is taken into account the proportion falls clearly. The Hutton Review shows that the central projection of future costs (before any further changes) falls from 1.9 per cent of GDP to 1.4 per cent by 2060.

Myth 4: The government are protecting the low-paid

According to briefing ahead of Danny Alexander's speech on 17 June, the government is proposing to limit the contribution increase to those earning less than a full-time equivalent of £15,000 a year. But most low-paid staff in the public sector earn more than this, but have low take home pay because they work part-time. So someone who works in a job which if full-time meant they would earn £16,000 a year, but works half-time and thus earns £8,000 will not be protected.

NOTES TO EDITORS:

- The cut in living standards represents the proportional difference between the net pay of public sector workers in 2012/13 after the pay freeze and proposed increases in pension contributions have been applied and the levels their net pay would reach if earnings kept pace with inflation and contribution rates remained the same. The analysis takes account of the higher tax levels (and contribution levels) that workers would pay if their earnings rose with inflation, and of changes to the personal allowance which the government has stated will benefit low earners.

- In the mid-2000s, the main public service pension schemes underwent significant reform following negotiations between the government and unions. Reforms included changing contribution rates and increasing normal pension ages in a number of the schemes, and moving to a 'career average' scheme in the civil service. In the teachers, NHS, fire and civil service pension schemes, these changes generally only applied to new entrants to the schemes, with people who were already members at the time of the changes staying in the old schemes. In the local government scheme the changes applied to current members as well as new entrants. Where the post-2005 changes only applied to new entrants, we have modelled the impact of contribution rates on members paying into the reformed post-2005 schemes and the older schemes in the full analysis. This release only contains the results for the new schemes (though the results are similar).

- Full details of the methodology used in the analysis are available in the spreadsheet, which is available here www.tuc.org.uk/tucfiles/38/livingsstandardsforpublicsectorworkers.xls

The analysis does not include additional cuts that are being made to tax credits (in particular the childcare element of working tax credit), which will further reduce the incomes of many workers.

- All TUC press releases can be found at www.tuc.org.uk

- Register for the TUC's press extranet: a service exclusive to journalists wanting to access pre-embargo releases and reports from the TUC. Visit www.tuc.org.uk/pressextranet

Contacts:

Media enquiries:
Liz Chinchen T: 020 7467 1248 M: 07778 158175 E: media@tuc.org.uk
Elly Gibson T: 020 7467 1337 M: 07900 910624 E: egibson@tuc.org.uk