The unfairness of final-salary pensions

Lord Hutton is right about the fundamental unfairness of final-salary pension schemes.  The only surprise is that it’s taken anyone close to government so long to notice or, alternatively, that they’ve ‘noticed’ even now.  (Which option you prefer depends on just how cynical you are about government and politicians).   I have been aware of this since the eighties and I’m no pension expert; the unions must be pretty useless not to have wrung changes out of the Labour government.

The reason is quite simple.  A minimum wage worker like a cleaner will get a more or less constant wage all his/her working life in real terms (that is once you strip out the purely artificial effect of inflation).  However a high-flyer, who might also starts on a (relatively) low wage moves to progressively higher and higher wages in real terms which, in today’s public sector, can be very high indeed.  And because his/her pension is determined by his/her final salary (in the case of a scheme I used to belong to it was the average of the last three years’ salary) the pension is weighted to a high figure while his/her contributions are a lifetime average dragged down by relatively modest earnings in the early years.

So, the cleaner subsidise the Chief Exec’s retirement. 

Although Lord Hutton’s report is on the public sector, the basic unfairness of final salary pension schemes extends to the private sector; it’s long been one of the ways some directors loot their companies.   All that is required is that your colleagues on the board vote you a massive increase in your last year or two (in expectation of the same generous treatment when they also approach retirement) and, hey presto, your pension pot magically swells out of all proportion to the contributions that either you or the company have ever made.  Naturally, the poor Joes on the shop floor don’t get asked if they want to donate some of their pension pot to departing directors; such things are best left to the experts.

Come to think of it the same trick might work for union bosses.  Is there a vested interest here?

The serious point is that we need to end payouts tied to final salaries in the private as well as in the public sector.   In the case of the public sector I would go further and put an absolute cap on pensionable salary at, say £50,000.  This would be a very effective deferred-pain way of cutting the overblown payroll expense bequeathed by Labour.  And if someone earning over £100,000 a year wants to have a better pension – well there’s a market out there where they can go and buy the extra privately.

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