Tuesday, 14 June 2011

The UK conundrum on pensions

If you are in the UK this coming autumn, you better brace yourself for a series of strikes. Public sector unions are calling for a series of sustained strikes. Throwback to the 80s perhaps ?? Maybe. My view is that these planned strikes are completely unjustified and the unions are living in cuckooland.

The problem is pensions. Readers of this blog are young enough to completely switch off at the mere mention of this word. But this is one of the biggest problems in business today.

The problem is that, years ago, stupid HR types, gave away a perk called "defined benefit" pensions. This meant that when you retired you were eligible for a pension which was a high percentage of your last drawn pay. To add insult, these would be inflation indexed and accrue to you till you die. That's all fine, but who's going to pay for all this. The even more stupid accounting types, blissfully ignored the ramifications of what they had promised and simply ignored this future promise. When the time came to pay, surprise surprise, there was no money. This is what brought the mighty car industry in Detroit to the shambles it is in today.

Private industry woke up to this menace a decade or two ago. Firstly they started to predict what might be the princely sums they had to pay and started providing for it (which basically meant that the cost of labour went up astronomically). Secondly, the wise ones stopped recruiting new people on this crazy scheme and instead switched to a scheme wherein your contribution was matched by the employer - but did not promise that you will get moneys linked to your last drawn salaries. The problem will therefore go away in a couple of decades.

But the public sector has been sleeping. Or scared to get up because of the unions. This is the problem in the UK. They are still continuing the unsustainable defined benefit scheme. But the government is now asking that the employees increase their contributions by 3% more. This is what the unions are wanting to strike against. 

Public sector workers must be garlanding the government that they still can get defined benefit pensions. Nobody in the private sector can get it today. Instead they want to go on strike to protect some prehistoric "entitlement". The government should call their bluff and let them strike. They risk alienating voters enough so that Margaret Thatcher II would be voted to power. That should make them pause and think.

5 comments:

Sandhya Sriram said...

I feel as mature individuals we should plan for our future. it is not that there are dearth of schemes in the market to help us securitize. i can burn all that i earn in the good days and look at my voting power to push the government to support me.

having said this, all this is true when the compensation is above a level. the uk kind of situation. think of that retired pvt sector employee earning 10 K a month, spending it all on educating his son and marrying his daughter off and then looking at that son to be his old age support - it is just too painful when you here these stories.

I feel, pensions should be like the PDS schemes. above the line (you can call it sustainability line maybe) and below the sustainability line. People who earned below, must be sustained by the Organization that they worked for through a sustainability index equivalent compensation (doesnt matter whether they are private of public sector). and others must be asked to plan themselves.

J said...

You need someone who is bold (or maybe politically foolish) like Wisconsin governor Walker to attack these plans. What I find surprising is that new employees would continue to want these plans knowing how much pressure these plans are under and how underfunded they are. The problem is always tricky when you are trying to reduce already promised benefits to current employees. Even in India, the government employee pensions are so generous in terms of keeping up with cost of living. Is there any debate on this?

Ramesh said...

@Sandhya - Alas, individual responsibility is a much devalued phrase in today's times. Everybody wants something free from somebody else. Your idea of pensions below a certain line is very appealing. Above the line, why should anybody take care of them. Good idea

@J - No debate in India at all . New employees here actually don't want anything - they want everything to be paid in cash so that they can blow it up immediately. If provident Fund wasn't mandated by law, it would disappear in 1 day. Its the entrenched public sector unions that do not allow pensions to go away. In the private sector, pensions have almost completely gone.

Vishal said...

Pension? what is that? Did I have heard of it in my small career? Not yet.

Why would an employer promise a high %age of last drawn pay on retirement? Now I get that this can happen only in Govt. sector. If 3% increment in contribution is leading to a strike, what will happen if the govt. had to abolish this scheme completely? Can that ever happen?

Ramesh said...

@Vishal - There's no way the government can abolish the scheme for existing workers. Even the private sector couldn't do it. What it did was to abolish it for new entrants. That's what the government can do. But its scared of even doing that.

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