Thursday, January 05, 2012

Today's Bad Science on pensions

It is difficult to get to grips with the report on the Today Programme that increases in the pension age in the three "pay as you go" public service pension schemes will not produce long term savings (http://www.bbc.co.uk/news/business-16419888) since the BBC don't go far into the detail of the assumptions on which this claim is based. This is not helped by the fact that Mr Ralfe's website (http://www.johnralfe.com/) provides no further details (at least not yet).

Perhaps it is as well that the BBC don't try to get into the detail as they might not understand it. Yesterday the BBC, whilst reporting that "civil service pensions were still gold plated" (http://www.bbc.co.uk/news/16419885) told us that "Before the changes, which were finally agreed before Christmas, public-sector workers accrued pension entitlements at the rate of 1/80 of salary per annum, plus a cash lump sum on retirement of 3/80 of salary, which was equivalent to an accrual rate of 1/70."

This of course wrong on so many counts! First 1/80 plus 3/80 is not equivalent to an accrual rate of 1/70 but is more generous. Secondly, the last round of changes generally moved to 1/60 accruals. Thirdly (of course!) - no changes were "agreed before Christmas" as all need to be considered by our elected Committees.

The net effect of this incredibly poor reporting by the BBC is to obfuscate and confuse the issues. Today's report (http://www.bbc.co.uk/news/business-16419888) does no better.

This is how it deals with the question of the revaluation rate, which, together with the accrual rate, is crucial to assessing the future monetary value of a career average pension;

"The Teachers Pension Scheme (TPS) and NHS have annual increases over CPI baked in, which gives no flexibility to have a pension freeze along with a pay freeze," said Mr Ralfe in the report.

"Pensions will still go up, even if pay is frozen."

That last sentence is misleading in the extreme since what it refers to is not pensions in payment (which will increase in line with the CPI rather the generally higher RPI, as in the past) although this is what most readers would understand to be "pensions".

Here Ralfe is referring instead to the accrued pension from previous years of service which are revalued annually until retirement according to an agreed formula to prevent price inflation destroying the value of accrued pension rights. This is a novelty for those of us used to final salary pensions, where (obviously) the salary to which the accrual rate was applied to determine our pension tended to increase in line with (or for high flyers, faster than) earnings throughout our career.

Ralfe's implied criticism of even having a fixed revaluation rate appears to show a distinct lack of understanding of how pension schemes are negotiated, since without an agreed revaluation rate a given accrual rate gives none of the certainty about retirement income which is what defines the benefits in a "defined benefit" pension. Without both an agreed accrual rate and a fixed revaluation rate we would really be buying a "pig in a poke").

It is clear that negotiators on both sides have a better understanding of this issue than the "pension consultant" of whom the BBC make such play, as is clear from the proposals for different accrual and revaluation rates in each of the three schemes.

In fact, based on the assumptions made in UNISON's pensions calculator ("Future AWE is assumed to be 1.5% above RPI. For the projection of pension from retirement, future RPI is assumed to be 4.6% pa (in line with September 2010 RPI), and future CPI is assumed to be 3.6% pa, i.e. 1% lower than RPI. (Actual CPI as at September 2010 was 3.1% pa.)"), none of the three proposals have a revaluation rate which will be likely completely to protect the value of accrued service from past years compared to long term increases in earnings - a topic about which I blogged a little while ago (http://www.jonrogers1963.blogspot.com/2011/12/accrual-rates-and-revaluation-when-is.html?m=1).

The "more generous" accrual rates picked out by Ralfe are balanced by less generous revaluation rates (as is evident from the inverse relationship between accrual and revaluation rates in each of the three proposed "pay as you go" schemes.)

So does this all mean that, whereas we know that the RPI/CPI switch will cost us 15% of the average lifetime value of our pensions (if we can't stop it), and that (at least in the three "pay as you go" schemes) trade unionists face substantial "contribution increases" to pay down the deficit (if we accept the Heads of Agreement), that Ralfe is right and the change to the retirement age would not, of itself, save any money?

This is what the BBC are reporting, but on so little information it is impossible to assess. What assumptions does Ralfe make about mortality? About future increases in earnings and prices? About the demographics of each workforce?

We don't know because the BBC don't tell us and Mr Ralfe's website doesn't yet feature the report. All in all, shoddy work by a public service broadcaster.

Nothing in today's news makes me look more favourably on the "Heads of Agreement" - it would be good to see the detailed analysis of the excellent pension experts in our movement though.

Sent using BlackBerry® from Orange

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