A shocking revelation: the government's recent budget decision is a prime example of how the state can be manipulated to benefit certain groups, leaving taxpayers with the bill.
Imagine having a £2 billion windfall at your disposal. What would you do with it? Build state-of-the-art hospitals, provide financial aid to the most vulnerable families, or support a country in need like Ukraine? These are just a few of the noble causes that could be funded with such a substantial sum.
But here's where it gets controversial. In the latest budget, a £2.3 billion windfall was allocated, not to any of these worthy causes, but to dramatically enhance the pensions of around 40,000 public sector pensioners. And this is the part most people miss: many of these pensioners are already financially comfortable.
To understand this further, we need to delve into Annex B of the budget red book, titled "Delivering in Scotland, Wales, and Northern Ireland." Hidden within this annex, despite being a UK-wide policy, is the announcement that the government will transfer the Investment Reserve Fund in the British Coal Staff Superannuation Scheme (BCSSS) to its trustees. This transfer will result in a 41% increase in pensions for scheme members, along with a hefty backdated lump sum payment.
This scheme primarily benefited engineers, white-collar staff, and other non-mining personnel. A similar arrangement was made for the mineworkers' pension scheme a year earlier. The BCSSS is a funded, defined-benefit pension scheme, a rare breed nowadays. It provides members with an annual pension from age 60.
A parliamentary question, published on Christmas Eve, revealed that some 2,500 pensioners already receive over £50,000 annually from their BCSSS pension alone. These individuals will see their pensions increase by at least an additional £20,000.
The history behind this decision is intriguing. The coal industry largely shut down three decades ago, and the government guaranteed that pension promises would be backed by taxpayers, with any surpluses shared. However, with the scheme now in substantial surplus, the risk-sharing has proven to be a one-way street. Taxpayers lose, BCSSS pensioners win.
You might argue that this is their money, and they should receive any surplus. But the essence of defined-benefit schemes is the guarantee of a pension, which is incredibly valuable in itself. Typically, employers would make up any deficit and benefit from lower contributions during periods of surplus. In this case, the taxpayer stepped in as the guarantor, effectively taking the place of the employer. The pensioners are getting the promised pension, so there's no valid reason to distribute the surplus to them.
This decision sets a dangerous precedent. It showcases politicians' weakness when faced with pressure from certain groups, especially older ones. It makes it increasingly difficult to commit to consistent policies in the future. As a Treasury civil servant, one would be justified in trying to prevent such "risk-sharing" agreements going forward.
The implications are far-reaching. Many private sector defined-benefit schemes, after years of deficits, are now in surplus and closed to new members. These schemes are effectively guaranteed by the employers, not the taxpayers. During the deficit years, companies poured hundreds of billions of pounds into these schemes to keep them afloat. This money came from employees, customers, and shareholders, impacting the economy, investment levels, and pay rises.
The government is now working on a clearer, more flexible legislative framework for surplus management. With up to £160 billion at stake, a plea is made to decision-makers: wherever possible, release these surpluses to the sponsoring employers. They have supported these schemes through tough times, guaranteed the benefits, and paid the costs. Let them, and their employees and investors, enjoy the rewards.
We've made costly mistakes in the regulation of defined-benefit pensions, leading to their near-extinction. Now, we have a chance to recoup some of these losses. These gains should go back to the companies and the current and future working generations, not as another windfall for the previous generation. The government's actions have not set a positive example.
