Tackling the Public Sector Oligarchs

December 16, 2008


As if British workers and pensioners didn’t have enough to fret about, what with a looming “black hole” in pension funds due to the developing economic crisis, another scandal has appeared as if on cue to ratchet up the stress level.

It turns out that a firm called XAfinity has been overpaying the pensions of perhaps 100,000 public sector workers, leading to what some papers suggest will be a £100 million charge, probably to the taxpayer. So far, the government has committed itself to not clawing back the overpaid pensions, and Chancellor of the Exchequer Alasdair Darling assures us that “It will be necessary to adjust what’s paid for the future.”

This allays fears that the firm would either choose, or be made, to require the money from its “customers” – none of whom chose to sell their pensions off to a firm run by a private equity firm (Duke Capital).

These fears may have been stoked by Vince Cable, very distantly in line to take Darling’s job, who was reportedly told by a journalist from Ulster that an “error had just been discovered and the company were about to start retrieving the money from the pensioners.”

Cable waited a week, consulted with the head of the Civil Service, and then asked a question about the overpayments in the House of Commons. Labour are claiming that he breached confidentiality agreements, but from the perspective of the public, Cable’s intervention is perhaps a little too late.

Whatever the government claims, thousands of pensioners and workers – all public sector employees, it should be added – will spend Christmas fretting about how far they will be docked payments in the new year. Moreover, while Xafinity manages the payments to 100,000 public sector workers, not all of those workers are presumably affected. Yet they will not be told how much money they have been erroneously paid, if indeed they were.

At a time of deepening economic uncertainty, many will have to deal with fearing for their job and pension payments. Pensioners will enter winter both cold and uncertain. It was reported last week that many of the poorest pensioners will not qualify for assistance in insulating and heating their homes as they cannot afford to join a government-led scheme designed, supposedly, to achieve both aims.

As the Times has reported, the Warm Front scheme set out in 2001 to dispense grants of between £2,700 and £4,000 to the elderly to make home improvements. But these payments were, somewhat incompetently, capped. Now, with higher material costs, aspirants are required to pay the extra charges needed to carry out the work. More and more people who apply to the scheme are withdrawing citing lack of funds.

This is unconscionable, but routine. The £60 Christmas bonus offered by Darling in his November budget may seem to many more of a kick in the teeth than a generous policy gesture, given such circumstances. That “bonus” was a substitute for investing in energy efficiency and heating. As the Guardian reported, “For those struggling with gas and electricity bills that have doubled in recent years, the chancellor resisted the temptation to increase winter fuel payments from their current level of £250 per pensioner household – £400 if one or more resident is aged over 80.”

As Joe Harris of the National Pensioners Convention put it, “The chancellor may have announced measures to ease the recession for the rest of society, but he’s done very little to tackle the recession felt in retirement by Britain’s 11 million pensioners. Darling has found billions for bankers, but still offers peanuts to pensioners. One in four older people still live in poverty and every week more and more of them face rising food and fuel prices.”

The errors of Xafinity will simply add to the crisis which perpetually faces masses of British pensioners.

It is, however, a very minor scandal in relation to that crisis. If 100,000 public sector workers have been overpaid, and the bill is £100 million, then the average overpayment is just £1,000. The timescale for the mistakes has been reported as 30 years, meaning that we do not know how many of those overpayments occured to recipients who are now dead. Should the living pay for the mistakenly paid pensions of the deceased?

Be that as it may, it is likely that the bulk of the errors have occurred since the privatization of the pension schemes, back in 1997, when the Paymaster Agency was purchased. Or, the mistakes could have begun in the mid 90s when, in preparation for its privatisation, the agency won “a number of market tests against private sector rivals” as the Tory Paymaster-General David Heathcoat-Amory put it.

Or, we could blame David Nunn, who “joined the Paymaster Agency in 1992 to introduce a commercial approach into the government department in preparation for its intended privatisation” and presided over “the change from a centrally funded department to an organisation with paying customers who had the power to negotiate and ultimately to take their business and revenue away” – making the provision of pensions (a very simple exercise) into a private boondoggle in which consultancy firms ran rings around civil servants and ministers, promising illusory efficiency gains and other private sector wizardry.

Nunn is still at Xafinity, drawing his own pension from the pensions of millions of nurses, ex-servicemen, hospital porters and other public servants.

However, while Xafinity have been messing about with 100,000 public sector pensions, there is an ongoing campaign to slash such pensions across the board. With 5.2 million public sector pension holders, this is a campaign with massive amounts of money at stake.

Pressure is growing from across the political spectrum to “take an axe” to “skyrocketing” public sector pension costs. The Lib Dems, led in this regard by Vince Cable, are calling for “an independent commission to review public sector pensions” and describe payments to public servants as “a serious long-term issue which must be dealt with honestly.” This is all part of Cable’s stated priority of “taking an axe to public sector waste.”

The Tories, as befits the party which privatised the provision of public sector pensions, now seek to slash them. Well, David Cameron has recently stated that he would like to scrap “final salary public sector pensions” – describing the disparity between private and public sector pension provision as an “apartheid” like system.

Companies have been seeking to cut costs, and boost profits, by moving from final salary pensions, which pay an agreed proportion of the recipient’s final wage until death, for much more flexible “defined contribution” schemes, which pay only what the fund can support, which depends both on how well the fund has been managed and wider economic conditions, which effect investments.

Cameron has taken to portraying public workers as greedy and unfairly privileged – like elderly, easy living “welfare queens” it would seem. This view is backed up by the Confederation of British Industry, which – as it turns out – has published a statement warning that “Taxpayers who are struggling to build their own personal pension will be lumbered for decades by the cost of covering public sector workers who retire years earlier on risk-free pensions.” The CBI also suggested that public sector workers should be worked harder, for longer, the lucky sods.

Meanwhile, the Taxpayers Alliance has been sticking its oar in, wherever possible. In a Times article about the Xafinity shambles, the Alliance’s Matthew Taylor thundered that “Public-sector pensions have long been a black hole for public money, but to learn that already gold-plated packages have cost the man on the street even more due to incompetent administration is a disgrace.”

What is happening here? Are public sector workers really destined for a “gold-plated” retirement as the rest of us labour for their benefit?

In truth, public sector workers are not well paid, by the standards of the private sector. Moreover, they have to contribute large amounts of money to their pension funds, just as private sector workers do. There is no free lunch available. According to Heather Wakefield of the union UNISON, “There’s a perception for some reason that public sector pensions are gold-plated, but that couldn’t be further from the truth. The average pension in local government is £1,500 a year, 75% of the employees are women and 60% of them work part-time for £7 an hour, so the idea that they are retiring in comfort is ludicrous.”

Doesn’t sound too gold-plated to me.

Business is fighting a battle against public sector workers, but it is not doing so in the name of private sector workers. The Conservatives may pose as champions of the unfairly treated private sector pension holder, and such people are surely shabbily treated by the economy. But for the Conservatives, the reason is that public sector workers are paid too much, and they are paid by taxpayers.

Yet the real apartheid system here, if it is in fact at all applicable, is between pension holders and those who put them to work. The rich are happy to spin a narrative that pits private versus public workers. The notion that public sector workers steal money from private sector workers nourishes the dominance of those who milk the labour of each group.

Companies have been offloading onerous pension commitments for years in the quest for higher profits. Spurred on by successive governments that have been ideologically committed to privatising the management of pensions, both public and private sector workers have found their retirement funds in the hands of unaccountable managers, or incompetent firms like Xafinity.

Banks have collected billions of pounds in charges for managing the contributions of millions. Consultancies have made out like bandits for providing terrible advice, advice which has universally sought to hand public money over to private hands. Only this week, the pension fund of Thorn Ltd was bought out by a firm called Pension Corporation, which is itself owned by Duke Street Capital. 15,000 employees of the stricken electronics firm now find their pensions are being managed by premium-grade asset strippers.

Xafinity, as mentioned above, was bought by a private equity firm in 2005. That firm happened to be… Duke Street Capital, backed up by a slew of investment banks, including Goldman Sachs. Banking interests are waging a solid campaign to acquire control over as much of the UK’s pension stock as they can. The goal, and it’s a nightmarish one for the average pensioner, is that we should all depend on the financial acumen of an elite set of fund managers to see us into old age.

Coincidentally, Xafinity’s parent company stands to do rather well from rising public perception that public sector workers have been “overpaid.”

ON UPDATE

The Press Association is reporting the missing figure as £126 million, with 95,000 retirees affected. They will “face having their payments cut or increased below inflation from April.”

Merry Christmas.

The PA further reports that “the issue arose because of mistakes calculating an element known as the Guaranteed Minimum Pension (GMP).”

“The element was included in the deal for members of those pension funds in 1978, when they contracted out of the State Earnings Related Pensions Scheme (Serps).”

The GMP refers to the basic pension that all workers receive, whether they remained part of SERPS or not. SERPS, for those not around at the time, was a scheme which tied pensions to earnings and ran from 1978 to 1997.

For money earned between 1978 and 1988, workers would receive a pension equal to 25 percent of their earnings. For money earned between 1988 and 1997, they would receive 20 percent.

Those payments continue, but the link between earnings and pensions has been severed.

The GMP was paid to all workers whose employers had opted out of SERPS, and sought to ensure that those opting out would receive a pension at least as good as those within the SERPS.

Opting out meant that private sector workers paid a lower rate of National Insurance contributions, while the GMP was linked to inflation, covering cost of living increases.

The pensions themselves were managed by private fund managers and employers.

It was a complicated system, much more so than SERPS, which was state managed.

But SERPS was very badly managed. It was at the centre of what the Guardian called the “worst case of maladministration since the second world war” when it emerged that the Thatcher and Major governments had deliberately misled millions of couples.

The couples had not been told that on the death of one partner, the other would not receive their SERPS benefits. Thatcher introduced the change in order to “cut costs” back in 1986.

What remains unclear to me, is why there are problems with GMP calculations in the public sector, and not in the economy as a whole. You would expect miscalculations to be fairly evenly distributed.

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