St Andrew’s Day falls in the most turbulent times this year. Today is the day of a massive public sector strike – nominally over pensions but probably over far more.  The debate has become more empassioned, views more polarised and the real issues and possible solutions more fuzzy as the day of the strike dawns.

Today is also the day after a stark Autumn Statement where the Chancellor laid out bleak prospects for growth, a continuing huge national deficit and difficult prospects for the European and Global economies.  These are days of a realignment of conventional wisdom on macro-economics and what appears to be the beginnng of an era of stagnation.  Abroad, the European Union is under enormous strain and the Euro currency seems unlikely to survive in its present form.  In such times nationalism becomes increasingly popular and UKIP in the south and the SNP, with a very different form of nationalism, are riding higher still in Scotland.  Indeed, the very existance of the United Kingdom is under scrutiny with a majority SNP administration in Holyrood.

Now, more than at any other time in my life, everything is changing and all our ideologies are challenged.  Nothing remains the same.  It saddens me when I see some political bloggers retreating onto partisan soapboxes and coming up with predictable and lazy arguments.  Now is exactly the time for activists and political bloggers to stand back and honestly assess the situation, be open and discerning as to the causes of our pains and open and thoughtful as to the alternative solutions.

Now is a time to debate what issues the world around us faces, to explore our choices and think through what sort of societywe want and how we might get there – including the potential drawbacks of each solution.  For there are no easy answers, and if you are proposing some you are probably talking nonsense.

Now is a time for ideas freely expressed and tested in open good humoured debate because everything has changed and we need to think the unthinkable rather than retreat into old cliches.

So happy St Andrew’s Day and let the arguments begin.

It was a good system – if you worked for a large organisation.  By the end of the 1960s 53% of the workforce was in an occupational pension scheme.

However, in 1961 life expectancy for men was 68 years and just under 72 years for women.   Today life expectancy in the UK is 77.9 for men and 82 for women – and growing every year.

With retirement at 65, pension schemes could expect to provide retirement incomes for about 5 years, now with retirement ages at 60 schemes can expect to provide incomes for closer to 20 years!!

The fact that we are living longer is making pensions more and more expensive.  There are other factors that make them too expensive such as salary growth and changing assumptions on long term inflation and investment growth, but increasing life expectancy is  the root of the problem.

Private sector Final Salary pension schemes in the UK are therefore dead!  They have been for the last 5 – 10 years.  Companies can no longer afford them or bear benefits that are not only guaranteed but also an open ended commitment.  They are no longer commercially tenable and are a risk to the business.  That is why they are dead.

The simple fact is we will probably all have to spend a little less, save a little more and work a little longer to fund our retirements in future.

However, Final Salary pensions continue in the public sector – unfunded by investment and paid for by general taxation.   Yes, their projected costs are currently set to fall with CPI replacing RPI indexation and with workers making contributions.  They are still hugely expensive.

Pensions are in fact deferred pay.  Because of the pensions position, it often now pays far more to work for the public sector than for the private sector – which is different to the common perception.  This means the wider population are being asked to fund pensions which are far more generous than anything available to them.  This means funding something akin to our entire defence spending budget.    And no economy is going to last for very long where it becomes significantly more attractive to work for the public sector than for the private sector!

Of course the state can afford to pay whatever it wants for public sector pensions if the political will is there.  However, the true costs of final salary schemes are unsustainable to fund – as the private sector has discovered.  Employers can no longer underwrite these unquantifiable, open-ended commitments.  Neither can the state or future tax payers – change is unavoidable.

What to do?

It seems to me that the real issue here is that our occupational pension infra-structure is broken – for both private and public sectors.

You see it is worse!  New legislation aimed at widening pension provision just means a levelling down right across the private sector of what pensions are now provided!

The government is introducing something known as “auto enrolment” so that everyone in a job will have a modest occupational pension.  This will help a little with people who have no pension at all.  However, it is very modest provision.

With jobs for life gone and guaranteed final salary schemes for life also gone, companies don’t do social welfare anymore like they used to in the post war period.  Unfortunately, many employers have been replacing old generous schemes with much less generous ‘money-purchase’ schemes with no guarantees for the employee.  The new auto enrolment provisions, while welcome for some, is just accelerating this levelling down affect.

I’m told both the USA and Australia have been much more effective than the British at replacing old unsustainable pension schemes with new money purchase provision.

That is why I think the public sector unions have a real opportunity here.  They need to be constructive.  Accept the old pensions are unsustainable and come up with some good alternatives.  If they are sustainable and something that provides decent pensions takes its place then market forces in the labour market could lead the way to improvements in the private sector as well.

The public sector could lead the way to a new pensions protocol which is desparately needed.  Because we all need to save more for our retirements and we all need something that is much more sustainable than we have had in the past!