Pensions World

The divisions in pensions between public and private and rich and poor are unsustainable warns Robin Ellison, Pinsent Masons

Apartheid used to be an awful political system that was used to make life difficult for one part of the human community for the benefit of another. In recent years, the term has become somewhat debased; Israel, for example, is sometimes accused of apartheid against its Arab population, although it was an Arab judge that presided a year or so back over the court that convicted and jailed the president of the Jewish state for criminal behaviour. Some apartheid.

Nonetheless, even where the use of the term apartheid is somewhat hyperbolic (and emotive), there is usually dissatisfaction when one group is dealt a hand of cards different from another group. And pensions seem to be developing a number of such groups.

Public vs private

One for example is the alleged pensions apartheid between public sector pension provision and private sector arrangements. It is hardly a secret that the private sector is struggling at the moment and that the public sector is having to face a genteel cutback in its arrangements, prompted partly by the Hutton Report. One of the changes that is proposed is a conversion of schemes to Consumer Prices Index protection from Retail Prices Index protection. This does not seem much when the annual difference is around ½%, but over time it could apparently save around 15% of costs or – looked at from the members’ viewpoint – result in a reduction of about 15% in the value of their rights.

Of course, if a private scheme did this without statutory authority, the full rigour of the Pensions Regulator and the Pensions Acts would come to bear on it. On the other hand, the government can make it own rules up as it goes along, which is why the trade unions ran an action (at the end of October 2011) in the High Court alleging that the government has no power to do this. Only a fool predicts the outcome of a court case, but it is unlikely the union will get a return for its legal expenses. But you can understand the unhappiness of the public sector in having its benefits cut back in a way which would otherwise be prohibited in the private sector – and the annoyance of the private sector in being unable to enjoy the benefits of the public sector.

Different rights

Another group of people who seem to be enjoying different rights from the rest of us are the judges. English judges have unique protection against the capping rules of the Finance Act 2004 and judges elsewhere in the world have better deals than the rest of us. In October 2011, New Jersey found itself struggling to balance its budget and, as part of its economising, decided to increase the contributions that its judges had to pay to the state’s public employees’ pension scheme. Sounds pretty familiar. Over the following six years, judges’ contributions to their index linked scheme were to be progressively increased from around $3,000 a year to around $18,000 a year. To put the sums in context, judges in the New Jersey Superior Court earn around $165,000 a year.

In addition, the judges’ contributions to the private health care plan (more important there than here) would be increased in some cases from around $2,500 a year to around $15,000 a year. These amounts eclipse anything being demanded from public servants in the UK as part of the Hutton proposals on which, as this piece is being written, the civil service is striking.

Now the judges have a real problem when they complain about their pensions. They do not go on strike, as lesser mortals such as teachers do. What they do is use the system they are familiar with; in other words, they go to the courts.

In the DePascale case in New Jersey, the legal argument was that, since the contributions amounted to a deduction from salary, the salaries were effectively being reduced – and the state’s constitution forbade that. There was a good reason for the prohibition in the constitution; it was to make sure that judges could not be threatened by the government with a reduction in salary if they gave decisions the government did not like.

Necessity trumps ethics

There was just one minor problem with the case; the complainant was a judge and the judge was a judge. And there is a rule which applies in most countries, and even in the United States, that a judge with a personal interest in the outcome of a case should disqualify himself or herself (it is called “recusing” by the techies) and assign the case to another impartial judge. But the judge held that if every judge in the trial court was disqualified from hearing the matter, a complainant would be denied his right to adjudication. The rule of necessity triumphs the rule of ethics. There are no prizes for guessing the outcome of the judgment.

Oddly a similar (but different) case in Australia also discussed the problems of judges. One of the High Court judges complained that it was “unconstitutional” that he had to pay a pensions tax surcharge (almost identical to the lamented anti-forestalling system and the caps introduced in the Finance Act 2004 in the UK).

To no-one’s astonishment, after one of the lengthiest judgments of the court, it was held by five judges that such a tax was unconstitutional. The report of the case is a wonderful read in an Alice in Wonderland way.

Community of interest

Just two more examples. MPs still have a fantastic pension system, unavailable to the rest of us. Few of us would begrudge giving decent pensions to the lawmakers – but it would make them more aware of the imperfections of the system if they suffered the way the rest of us do. Now the MPs have voted, if not for Christmas at least for some form of winterval, by agreeing that in future the level of pensions will be set by the Independent Parliamentary Standards Authority (IPSA). That is a brave move, given that IPSA is determined to give a MPs hard time, that its running costs over one year are three times the MPs’ excesses over five years and that it is commonly criticised for its own profligacy. And of course, the three great officers (Prime Minister, Chancellor and Speaker) get a pension of £40,000 a year worth around £2m even if they only serve one day in office. That deal is rare for the rest of us.

And a paradoxical apartheid, which no-one really cares about, and which has hurt more lower paid people than anything else, is the cap on pension arrangements for the higher paid. The inability of the higher paid to participate in a decent pension scheme has distanced them from the interests of the majority of their workforce; it was the previous community of interest that led to the great growth of defined benefit schemes in past years.

Them and us

So we have a number of great divides in pensions and history shows that such divides over time are unsustainable. “Them and us” does not really work in pensions, just like it does not really work in other areas of life (as in directors’ pay, for example).

We need simpler, non-divisive pension structures (for the rich as well as the poor) so that the system as a whole can flourish for both the rich and the poor.

The MPs have reluctantly shown the way for their own scheme; now it is up to them to dismantle the several pensions apartheids that exist for the rest of us.

Sources

Independent Public Service Pensions Commission, Final Report, 10 March 2011 (Hutton Report) cdn.hm-treasury.gov.uk/hutton_final_100311.pdf

Austin v Australia [2003] 10 PBLR (092); [2003] HCA 3 (Taxation – constitution, whether judiciary liable to pay pensions tax surcharge – whether taxation legislation incapable of ascertainment or lacking in general application)

BBC News, Unions call “national day of action” over pensions [for 30 November 2011], 14 September 2011

DePascale v New Jersey [2011] 091 PBLR (024) Superior Court of New Jersey, Law Division: Mercer County, United States,
17 October 2011

Djuna Thurley, Parliamentary Contributory Pension Fund, House of Commons Library, SN/BT/1844, 3 March 2010

Djuna Thurley, Parliamentary Contributory Pension Fund, House of Commons Library, SN/01844, 27 October 2011

HMRC, Pensions taxation: NEST, Budget Note 23, 22 June 2010 (allows Nest to be a registered pension scheme even though it does not comply with the Finance Act 2004)

Rachel Dalton, “MPs lose right to vote for own pension”, Professional Pensions, 18 October 2011

Corin Taylor, The Pensions Apartheid: the problem, the costs and the tough choices that need to be made, Institute of Directors, 2009