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Of all the former Labour Ministers, John Hutton was one of the better ones and at least as Defence Minister, looked like he cared. His very public resignation had a degree of ‘principle’ to it and the ever craven David Miliband would have done well to have followed him and set off a change of Labour Leadership before the General Election.

The Labour Party has very little ‘talent’ available as the current Leadership Election demonstrates only too clearly (a bit like a Muppet Show), they really couldn’t afford to lose people like Hutton who stood down at the last election.

Public Pensions

Because he was available and in no small part because he was a former Labour Minister, the Coalition have asked him to lead an investigation into how to make Public Sector Pensions “affordable”.

Predictably, that well known gob shite John Prescott bemoaned Hutton, Fields and Hoey lending their services to the Coalition Government and in Kate Hoey’s case, as a sports advisor to the London Mayor Boris Johnson. His point being and ever a one for “Tribal and Class” related politics, that Cameron is using these people along with his LibDem partners to impose “Tory Policies” that would otherwise never have seen the light of day.

Oddly, such an allegation and particularly with regard to John Hutton, merely illustrates just how bad the Labour Government and particularly under Gordon Brown was on these matters. I would bet that Hutton will do a far better and more honest job on this than Turner did on pensions generally. I found it hard to decide whether the now “Lord Turner” was either totally inept or whether his report was “knobbled” and he just kept his mouth shut in return for ennoblement because the conclusions of his report were total crap.

John Hutton will not be bribed in this way and in inviting him to undertake the work, both Cameron and Osborne know that whether they like it or not, his report will be honest and he will be outspoken. Yes, using a former Labour Minister is a purely “political move” because by appointing a fiercely independent man such as Hutton, if the conclusions were considered “unfavourable” by public sector workers, then at least the Government cannot be accused of “being the Nasty Tory Party” trying to sneak through changes they intended anyway.

However and on the other hand, the whole issue of pensions need to be approached on a cross party basis because it is far too important a topic to be subject to party political dogma and squabbling because major changes will take between 20-40 years to fully implement.

Beyond Just Public Pensions

There will be very many different matters to consider and the current appalling state of the Public Finances is really the driving force behind this Review. In all truth, except for the relative few on “accelerated funding”, public sector pensions for the majority aren’t that generous. The maximum pension element (there is a separate cash element) will only deliver a 50% pension after 40 years service however, this is indexed in retirement.

In addition, the Labour Government recklessly expanded the public sector workforce whilst they were in power thus creating a long term problem for future generations. The real problem lies in the fact that whilst public sector workers do make pension contributions towards their pensions and some schemes may be “fully or nearly fully funded”, the vast majority are not and therein lies the main problem, today’s taxes pay today’s benefits.

This in a sense ties in if, slightly obliquely with the question David Cameron poses in the broadest sense: “What services should the State provide ?” One can accept that “today’s taxes” should fund unemployment, invalidity benefits and so forth because these are both unpredictable and fluctuating by their very nature, retirement isn’t, it is wholly predictable and therefore, it is totally wrong that pensions, all kinds of pensions, are not fully funded.

The most bizarre conclusion from the Turner Report on UK Pensions was that there was no case for compulsory pension saving which must be the most stupid thing any person in touch with the real world could say or else, they live on another planet. The problem is how we get from where we are today, to where we need to be tomorrow.

Defined Contributions

It would be totally wrong to take away benefits already accrued by people in the public sector pension schemes, particularly those within 10-15 years of retirement. However these schemes need to be phased out immediately for new employees and those existing employees who are say 30 or younger and replaced with portable personal pensions or “Defined Contribution Schemes”.

Such schemes do not promise a defined outcome in terms of a percentage of final salary, they promise to make defined contributions to the individual’s personal pension whilst they are in employment with them. This same structure should become universal to both the public and private sectors and Members of Parliament should set an example, immediately by changing to one.

The issues are complex but there is much to learn from the experience of Chile:

http://en.wikipedia.org/wiki/Chile_pension_system

http://www.oecd.org/dataoecd/32/7/43921368.pdf

http://www.cato.org/testimony/ct-jr073101.html

The main problem with pensions savings is that they are of little to no interest to people below the age of 40/50 and in a cash saving scheme, this is fatal because the final fund is built up by accumulated interest on interest therefore, the most valuable £ at retirement is the first one you put in. It therefore follows that if you want 20 year old s to save for their retirement, there will have to be compulsion and, as in Chile, a greater loosening of the “Rules” regarding such funds, whether they can be used for ‘self investment’ or even be inherited, the UK is currently very rigid on these things.

Diverting NIC

The only way to bring this about immediately would be by diverting most of the current NIC to these funds which, because National Insurance Contributions are such an important source of tax revenue to the Government, would squeeze Government Spending in all other areas further than just dealing with the current Public Deficit. However, whilst this will be painful over the next decade, starting within 20 years or so, the pressure on the taxpayer in terms of supporting the retired will start to ease considerably.

Within 30 years, an ever ageing population will still be significant “consumers”in the UK economy plus, that economy will have changed significantly because of the extra funding going into the insurance companies as ‘contributions’ that then need to be invested both in the UK and overseas in order to make returns. What it also means is that owning a house will not be the only source of wealth building available to the ordinary working person.