Monday, August 23, 2010

Pensions for those Stepping Out of the Public Sector

Pensions are on my mind at the moment. Partly because mine is worth only marginally more than what I have paid into it these last fifteen years - but also because I am working with a number of potential social enterprises which are about to `step out' of the public sector.

For some of these pensions are a big headache. There are several public sector schemes and all work a bit differently but all have three things in common. One is that they are `defined benefit' - meaning what you get is a proportion of your final salary linked to inflation. The second is that the employer (the state) contributes up to 20% of the employees' salary - much more than is normal in other sectors now (0-6% is fairly common). The third is that most schemes are in deficit - meaning that the payouts are not covered by those paying in. The bill for this is picked up by HM Treasury and total unfunded liabilities were, on 31st March 2008, estimated at 770 billion pounds.

So what's the relevance of all this for the divestment of public services to social enterprises and the third sector? Well, if the Government insists, as HM Treasury's `Fair Deal' Guidance states now, that former public sector workers are offered a `broadly comparable' pension, we have a potential show-stopper on our hands. To take on these commitments, at minimum, creates a huge current and future obligation the third sector.

Indeed I spoke recently to one third sector CEO who had recently been presented with a bill from the LA Pension Scheme for 360k for FOUR employees the charity had taken on from the public sector a few years earlier under arrangements that allowed them to remain in their original pension scheme. The bill reflected a deficit in those four employees' pension built up over the whole of their employment with the LA, not just the three or so years with their new employer. The deficit had, in effect, been dumped on the charity. Just imagine the damage this causes to, say a medium-sized charity. And this is aside from the resentment felt by those employees without deals like this which are often worth, in effect, 40% of salary.

So put yourself in the shoes of a charity today looking at taking on state services faced with a local authority insisting you took on responsibility for funding staff pensions. You'd effectively be taking on employees on terms and conditions, and with accrued liabilities that the LA itself didn't have to fund (because HM Treasury picked up the tab) so probably didn't even have on its books. Successfully obtaining `Full Cost Recovery' in those sort of situations is hard to envisage.

Which is why the third sector and new social enterprise have to read the small print on pension deals, even if the public sector is offering enhanced payments as part of the deal, as they are with many of the new health spin-outs. These are fine - as long as the money keeps coming. Should the taps ever turn off, one is, as an organisation, left with the job of funding the scheme. And what the deal says about long-term liabilities is absolutely critical.

The white-knight in the case of all of this is, we all hope, Lord John Hutton. His forthcoming review of pensions is a one-off opportunity to deal with the imbalance between public section pensions and the rest. Most observers are confident that Hutton will raise the employee contribution as a minimum. But it is still unclear whether he will recommend the abolition of `Fair Deal' which would liberate social enterprises and third sector orgs to take new employees out of the public sector scheme and put them in a money-purchase scheme immediately - for pensions are not covered by TUPE rules.

Neither is it clear whether Hutton will reduce the contribution from employers or insist that new public sector employees cannot join defined-benefit schemes. Or that all public sector pensions are brought back into some semblance of fiscal balance by reducing the overall benefits paid. This might require legislation and it is unclear at the moment whether the Government will want to go this far.

The minimum, I believe, is that `Fair Deal' should go. This will allow social enterprise and third sector organisations to pay pensions to new public sector employees at their existing charity levels (normally about 6% compared to the forthcoming 2012 legal minimum of 3%) and without generating future liabilities. It will also mean that all employees are on a similar deal, which is better for workforce morale. Former public sector employees will still be on a slighly better deal than existing staff - as TUPE means that more favourable conditions around sick pay and so on will automatically transfer. But the really OTT differences created by the pensions gap will be eliminated.

There will be people reading this who have reached understandings with public sector bodies for staff coming out to stay in the old pension scheme under `approved provider' arrangements. This will often be underpinned by a short to medium term committment from commissioners to meet the costs of the pension scheme current and future. But this is only useful for as long as commissioners can afford to pay. Once this ceases to become the case, whatever the legalities, it automatically becomes your problem too. Better, I believe, we avoid that by seeking to get people coming out of the public sector onto money-purchase schemes as soon as they leave state employment.

Let's hope Hutton's review allows this to happen.

4 comments:

Rob 'Arris said...

Good post Craig; i agree the public sector has gone 'hog wild' on terms and conditions for decades now. Incidentally i have an older friend who is 78 years old, he was a Detective Super in the police, retired when he was 50 after 30 years service. He has an index linked pension that is worth £30,000.00 per year after tax; obviously he will have this until he dies. He cant believe his luck and openly tells me its ridiculous for the work he did as a very well paid public servant that could have afforded to pay for his own retirement (the pension pays for his holiday home) - all this for retiring at 50 years young. I think 'good on him' if thats what he has ended up with. The bigger picture, harsh or not is that he has cost the taxpayer £840,000 in pension payments already (a small amount will have been contributed by him i know) plus the bumper golden handshake he received at the time of retirement and the future years he has to live - my estimation is that he will have cost the public sector £2million in pension costs by the time he dies - is that really value for money? Did he change crime and disorder that much? Did he jail that many thieves? (I jest). My friend is only 1 person in a group of millions. The public sector is also one of the safest places to be in a recession and out of one. Many private and third ector organisations now deliver public services - would they be competitive with costs like those? Errr.....no.
On TUPE i agree 'Stepping Out' is one of the measures that has to happen for the public sector to recover - however when contracts state that full pay will be given for the first 8 months of sickness absence regardless of length of service you have to feel sorry for some of the social entrepeneurs who will be negotiating more reasonable terms with the new staff..... interesting times.

Geof Cox said...

There are other issues here:
One of the reasons the government wants to externalise services is precisely the cost of pensions - but instead of actually dealing honestly with this problem they want to float some of it away with social enterprise.
If social enterprise is complicit in this process it will inevitably come into conflict with the trade unions, and become discredited in many people's eyes.
Moreover, in my experience the key issue for NHS staff is NOT about personal financial benefits, but being part of 'the NHS family' - to which pension scheme membership is felt as the key - many conventional and social businesses are in fact already part of this family, and the attempt to exclude social enterprise is relatively new and Treasury-driven.
I do not defend public sector pensions - they are clearly over-generous and unaffordable - but it's precisely this that needs to be dealt with, and social enterprise needs to be very careful about hyping itself around this conflict.

Cadseen said...

Thats interesting, need to look into this.

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