If you were chancellor, what would you do with a £2 billion windfall? Build a really big new hospital or two? Give a £2,000 bonus to each of the million poorest families in the UK? Provide a huge injection of help to Ukraine? Ease the loan repayments of recent graduates? Give it to Sheffield to transform local
infrastructure? (Other deserving cities are available.) You get my drift; £2 billion is
worth having.
You will almost certainly not have noticed that in the last budget, the chancellor allocated a windfall of some £2.3 billion. And how did she decide to spend it? On dramatically enhancing the pensions of around 40,000 public sector pensioners, many — if not most — of whom are already pretty well off.
I should explain. Annex B of the budget red book is entitled “Delivering in Scotland, Wales and Northern Ireland”. For some reason, the announcement to which I am referring, despite being a UK-wide policy, is hidden away under the Welsh bit of that annex. Here we find the following statement: “The government will also transfer the Investment Reserve Fund in the British Coal Staff Superannuation Scheme (BCSSS) to the scheme’s trustees. This will be paid out as an additional pension to members of the scheme.” This is enough to enhance their pensions by 41 per cent, and pay a hefty backdated lump sum. What an amazing windfall for these fortunate few.
To be clear, most members of this scheme were not actual miners but engineers, white collar staff and so on. A similar arrangement was reached for the mineworkers pension scheme a year earlier. The BCSSS is a funded, defined-benefit pension scheme of the sort that is pretty much extinct nowadays. It provides members with an annual pension from a normal pension age of 60. An answer to a parliamentary question, published on Christmas Eve, revealed that some 2,500 of the scheme pensioners already receive more than £50,000 a year from their BCSSS pension alone. They will see their pension rise by at least a further £20,000.
There is a history here. The coal industry largely closed down some three decades ago. At the time, the government offered a guarantee that pension promises would be underwritten by the taxpayer, on the basis that any surpluses would be shared. That, unusually, allowed the schemes to invest in riskier assets than other effectively closed pension schemes which — to the detriment of all concerned —moved overwhelmingly into gilts. Except, with the scheme now in substantial surplus, the
risk-sharing turns out to have been one way. Heads the taxpayer loses, tails the BCSSS pensioners win.
You may be thinking, fair enough, this is a pension scheme and it is the pensioners’ money. They paid their contributions, so they should get any upside. But the whole point of these defined-benefit schemes is that they offer a guaranteed pension which is enormously valuable in itself. In normal cases the employer will make up the difference if there is a deficit and, in active schemes, will take the upside in the form of lower contributions when there is a surplus. In this case the taxpayer was on the hook as guarantor, effectively in place of the employer. The pensioners are getting the valuable pension which they were promised. There is no good reason to distribute the surplus to them. This is just another example of the British state as a machine for moving money from younger generations to older ones.
This matters more broadly. For one thing, it is yet more evidence that politicians have all the spine of a warm jelly when it comes to resisting pressure from some groups, especially if those groups are older. In this case, even more so if they tug at a particular set of heartstrings related to a half-remembered, romanticised industrial past. It makes it ever more difficult to commit to particular forms of behaviour in the future. Knowing this, if I were a Treasury civil servant, I would put body and soul into
trying to prevent any such “risk-sharing” agreements for the future. Exactly the sort of behaviour that gives the Treasury a bad name.
More importantly, after years of measured deficits, we have happily moved into a world in which many private sector defined-benefit schemes are now in surplus. Most are closed to new members. Rather than having the taxpayer standing behind them, they have employers effectively guaranteeing the schemes. During those years of deficit, companies poured literally hundreds of billions of pounds into the schemes to keep them solvent. Somebody paid those hundreds of billions. As ever, that somebody had to be some combination of the employees, the customers and the shareholders of the companies concerned. The sums were big enough to be a drag on the economy and probably contributed to lower levels of investment and lower pay rises for current employees.
Government is now acting to create a clearer and more permissive legislative framework, giving firms and trustees some flexibility over how surpluses are used. The numbers are big, up to £160 billion. Here is a plea to those with the power of decision: wherever possible, release the surpluses to the sponsoring employers.
They have stood behind the schemes, they have seen them through tough times, they have paid the costs of guaranteeing the benefits. Let them, and their employees and investors, reap the rewards.
We have made a series of catastrophically expensive mistakes in the regulation of defined-benefit pensions. Mistakes, made for the best of reasons, which have ensured the almost complete demise of these schemes. We now have an opportunity to get at least a little back. That little needs to go back to the companies and the current and future working generations, not as yet another windfall for their parents’ generation. The government has not set a good example.