Robbing the retirement fund to house the young - are you mad?

Sara Benwell 1.43pm

Another day, another bonkers financial plan from Nick Clegg.

At the Lib Dem conference in Brighton, Mr Clegg announced his nascent “pensions for property” scheme.

How would it work?

The scheme aims to enable first-time buyers to tap into their parents’ or grandparents’ retirement savings and allow them to take out a deposit.

It is as yet hazy on details, but it seems that parents would be allowed to sign an agreement with their child’s mortgage lender promising that a lump sum will be allocated towards the child’s home financing costs.

Essentially, a retired (or nearly retired) parent with a £60,000 pension pot could promise that a chunk of this (around £15,000) would be used as a deposit on a child’s first home.

The scheme will be targeted at parents who have built up a pension fund worth around £40,000 and are nearing retirement. Lib Dem officials have estimated that as many as 250,000 households could fit these criteria, including public sector workers such as teachers and nurses. Those with more valuable pensions would be able to use the scheme, but ministers have argued that they are likely to have other financial assets that they can use to help their children.

Why is it bonkers?

There are two reasons that this scheme doesn’t make sense. The first is that it won’t solve the problem that it sets out to solve; the second is that it may cause further problems in a pensions industry that is already riddled with them.

Why it won’t solve the problem

We have an alarming lack of affordable housing for young people. It is nigh on impossible for most of us in their twenties and many in their thirties to buy their first home. Particularly in London. I’m a twenty-something and it’s depressing to consider the amount that I throw away on rent and that at this rate I’m unlikely to be able to save enough for a deposit and get a mortgage until I’m about 55 years old. Nevertheless, Mr Clegg is mad if he thinks that stealing from pensions will save the young.

This scheme will only make a difference to a relatively small group of people with a pension pot of a certain size.  Furthermore, it seems likely that a lot of people who will be able to swap part of their pension for their child’s property may have other methods of helping their children out. Those whose pensions sit below this threshold will not be able to join in the fun, and those with a pension pot of significantly higher than the 40k mark are unlikely to take this route anyway. Also remember that at 55, most people will be able to access this tax free sum anyway and do with it what they wish – be that go on a cruise or help their children to buy a house.

If you believe (how could you not?) that we have problem with unaffordable housing for the young, how can you possibly think that a scheme which will change the fortunes of so few will solve the problem? If the problem is that houses are too expensive, allowing the vast minority of the populace a potential solution won’t make an iota of a difference to the fact that houses are too expensive for the majority.

What we need is more affordable housing, which would allow people to buy property that is within their means. If anything, this scheme is likely only to make houses more expensive, as it pushes more people into putting up deposits for houses they can’t afford.

Why it might make the pensions crisis worse

Firstly, one has to question how a scheme like this would actually work. Would it apply to all pensions schemes? How can lenders assess the risks involved if a pension scheme were to go bust? It seems likely that lenders would be very cautious when it came to lending to occupational pensions schemes, for instance.

One must also ask how well this policy would sit with other pensions policy and regulation. If changes are made to the access that people have to their pensions or to the tax-free lump sum entitlement, where will this leave the scheme? It seems that if this is even to get off the ground it needs to be more fully integrated with wider pensions policy.

The biggest problem is that this could leave retired people short of funds when they eventually come to giving up work. Already, the country is faced with a problem where not enough people are saving adequately for retirement and various schemes such as NEST are being implemented to try to change this. Guaranteeing this money as a deposit for a child’s home could mean that when it comes to retirement people are left with insufficient funds. What we don’t need is a system where people aren’t left with enough money to retire on.

Otto Thoresen, director general of the Association of British Insurers, told the Independent: ”Pensions are designed to mature into a decent retirement income, not for other purposes. Any scheme which uses pensions as a guarantee must ensure that it does not inadvertently make the saver worse off when they retire.”

One also wonders how this scheme will work amidst a move towards defined contribution pension schemes, when annuity rates are falling as a result of QE and falling stock markets.  How can you guarantee a lump sum of your pension when you don’t know how much it will eventually be worth, and if the downward annuity rate trend continues you’re likely to have a much lower retirement income than expected?

It’s all very well saying that we’ll help parents to help their children get on the property ladder, but this is all for nothing if it comes at the expense of increasing the problem of Britain’s underfunded retirement system. It seems bizarre that when we already have a pensions crisis caused by people not saving enough for retirement, Mr Clegg seems to think that we can use people’s pensions to try and solve the problems of unaffordable housing for the young.

Let’s only hope that this idea gets shelved in that cupboard of bizarre Lib Dem economic policies before we worsen the pensions crisis without helping the mortgage finance problem at all.

If by some miracle it does go ahead, I’m looking forward to the look on my mother’s face when I tell her she has to give up part of her retirement fund so that I can buy a house…

Follow Sara on Twitter @sarabenwell

Breaking down the Budget

Sara Benwell 10.53am

Another year, another Budget. Another abortive attempt to find a pub with a garden and a telly with the Budget on it, so that I can enjoy the sunshine and a glass of wine (but perhaps not, thank you very much George, many more cigarettes).

This year’s Budget has been called ‘radical’ by members of the press. It contains many positive elements, including tax measures to help the lowest earners and stamp duty increases for the most expensive properties.

On the negative side, pensions have taken a pounding and there is scant help for the nation’s savers. Let’s look at the headline measures and see what they actually mean in practice.

Income Tax personal allowance to be increased to £9,205 in April 2013

This is the big good news story, which will mean a real cash gain for British workers. George Osborne said this Budget would reward work and this will do so, while also keeping the Lib Dems happy (it is, in essence, a policy they mostly instigated). It means that the Government is hopefully going to reach the £10,000 level desired by Nick Clegg sooner rather than later.

It is worth noting, however, that hidden in the Budget, the Chancellor has lowered the threshold for the 40p higher tax rate from £42,475 to £41,450.

50p top tax rate to fall to 45p

This could be interpreted as a political gamble, rather than financial decision. A nod to the well-heeled and a sop to the right-wing, it could sit well with ‘traditional’ Tory voters.

But it isn’t. While the move will only (directly) assist the highest earners, Mr Osborne said the 50p rate had distorted the economy by encouraging tax avoidance and the cut to 45p will only cost the Exchequer £100 million.

He also claimed the richest would be paying five times more than before, due to other measures such as the increase in stamp duty on properties worth more than £2 million.

Age related additional personal allowance to be phased out

This is already turning out to be the biggest headline of the Budget, with #GrannyTax being the highest trending topic on Twitter yesterday afternoon. Commentators circled in their droves to criticise the changes, for instance Iain Martin on Telegraph blogs, who said it would “spark a war between the generations”.

The Chancellor announced a phasing out of the higher income tax allowance, meaning that from next year, people turning 65 will no longer qualify for the higher rate allowance of £10,500 and instead only receive the standard allowance, which was raised to £9,205. This change, reported to be worth an additional £3.3 billion over the next five years for the Treasury, represents one of the biggest money-makers of yesterday’s Budget.

It is a strange move from Mr Osborne, given that retirees are, statistically speaking, more likely to vote - and vote in great numbers. (While the top rate reduction, conversely, will affect very few voters.)

What we have to remember is that pensioners have also borne the brunt of quantitative easing as annuity rates have been hit hard (see Fraser Nelson’s figures of an ‘annuities rate massacre’ on the Spectator's Coffee House), and whose savings are already hit by with record-low interest rates.

Nevertheless, we ought also remember that most pensioners don’t pay any tax at all and this change will only affect those who earn more than the average working wage.

Child benefit gradually withdrawn from those earning over £50,000

Mr Osborne has bowed to considerable pressure from his own MPs and diluted plans to remove Child Benefit from all families containing at least one higher-rate taxpayer.

Under this new scheme, anyone earning up to £50,000 will be able to keep their Child Benefit, worth £1,055.

Child Benefit will still disappear but now only gradually for parents earning between £50,000 and £60,000. Earn above £60,000 and you will lose the lot.

One of the biggest concerns with the original plan was that it didn’t take into account single income families with that single income falling into the higher bracket - and this problem still exists. Mr Osborne will continue to face criticism as the cuts hit families with a sole high earner on more than £60,000 but not families with two parents earning up to £49,000 each.

New Stamp Duty of 7% on properties worth more than £2m (and rate on company-bought properties rising to 15%)

It is a policy designed to show that the biggest burden should fall on the wealthiest.

It will mean that anyone purchasing a property above the £2 million threshold will be looking at a Stamp Duty bill of at least £140,000.

Property investors will also be a casualty of the new charges on high-value homes.

The Chancellor emphasised a crackdown on tax avoidance and unveiled three extra levies on people buying homes via companies. In future, people who purchase properties for £2 million or more via a company will have to pay Stamp Duty at 15 per cent.

There will also be a consultation on whether people who have already bought homes worth more than £2 million through companies should have to pay an annual levy.

These Stamp Duty changes will have a disproportionately high impact on the London property market. Take just one borough, the Royal Borough of Kensington & Chelsea, for instance, whose average property price is more than £2 million. Some are concerned it could have negative repercussions for London as an international business centre as it will discourage corporate executives from basing businesses in the capital.

Follow Sara on Twitter @sarabenwell

If Osborne succeeds, he could join Neville Chamberlain and Sir Geoffrey Howe in the pantheon of great Tory chancellors

David Cowan 10.26am

As George Osborne has approached his third Budget as Chancellor, the press has been abuzz with speculation about future taxation.

This has largely been fuelled by the public airings of Liberal Democrat tax demands, such as an accelerated timetable for raising the income tax threshold to £10,000 (itself a policy strongly supported by Conservatives) or Nick Clegg’s nebulous 'tycoon tax'.

Even Ed Miliband has waded in with a proposal to reverse tax credit cuts. But there has not been any word from the Conservative front bench - as traditional Budget purdah prescribes.

Any meaningful discussion of Mr Osborne’s economic policies cannot be centred on ideology, but on political pragmatism.

Certain commentators, such as Spectator editor Fraser Nelson and the Telegraph's Peter Oborne, have noted how Mr Osborne is a part-time Chancellor of the Exchequer, and full-time political strategist.

For Mr Osborne, taxes should in the long run be lower and simpler, but fully funded tax cuts can only be made once fiscal stability has been achieved. Above all, tax cuts cannot allow the Conservatives to look like the party of the rich. This ‘fiscal conservative’ approach is very much part of the strategy for a Conservative majority in 2015.

The narrative weaved in the press and driven by Lib Dem leaks has so far described a Budget in which the 50p top rate of tax will be scrapped and the lower threshold raised faster, both policies funded by a new tax raid on pensions. It is all symptomatic of the wider tax debate within and without the Conservative party that says direct taxation should be shifted from income to wealth.

The last two Budgets have been attempts to raise additional revenue by targeting the wealth of the ‘super rich’ but they have tended to result from confused tactics rather than coherent strategy. The arbitrary increases to the bank levy, a £50,000 non-dom charge, a tax raid on North Sea oil and gas, new taxes on private jets - these are all policies motivated by envy, not sound economics.

Other ideas produced by the Lib Dems, such as a mansion tax on £2 million-properties or new council tax bands for high value homes, or Labour’s Bonus Tax, which the party has already claimed will support nine different schemes, are similarly flawed. It wouldn’t be surprising if this sort of misguided thinking infected the Budget tomorrow.

Yet there is a robust case for transferring direct taxation away from income, towards wealth. Nick Boles recently argued at the TRG’s Macmillan Lecture for a Land Value Tax (LVT), and I have previously described on these pages how a LVT could form the basis of a new agenda for tax reform. This is the only fiscally sustainable and fair means by which direct taxation can make the transition from income to wealth but it is unlikely to make an appearance tomorrow.

Mr Osborne must stand by his ‘fiscal conservative’ strategy by not allowing unfunded tax cuts to threaten deficit reduction or to portray unfairly the Conservative party as the party of the rich. The Lib Dems cannot be permitted to imagine themselves as the solely compassionate side of the coalition.

Nor should tax cuts come at the expense of costly gimmicks to ‘bash the rich’ without raising substantial revenues, and merely serving to foster the growing anti-enterprise culture in this country.

Instead, Mr Osborne must outline a ‘middle way’ via a clear, long-term vision for lower and simpler taxes, based on sound public finances and the effective taxation of wealth, rather than income.

If he succeeds, then he could secure his accession to the ranks of Neville Chamberlain and Sir Geoffrey Howe in the pantheon of great Conservative Chancellors.

Follow David on Twitter @david_cowan

What does the base rate decision really mean for your finances?

Sara Benwell 7.35am

The Bank of England announced recently that it will continue to hold the base rate at 0.5 per cent, the lowest level in its 318 year history.

This is the third year since the Bank’s decision to slash rates to this level back in March 2009 and many analysts predict that rates may continue to be held till 2015, with some predicting they could even be slashed further to 0.25 per cent. What does the base rate hold actually mean for your finances, and who are the winners and losers?


Yet another base rate hold is being heralded as a disaster for already over-squeezed British savers, whose savings continue to be hit by low interest rate returns.  Bank figures indicate that there are more than £100 billion sitting in savings accounts paying no interest at all, compared with just £15-20 billion before the financial crisis.

With the Bank of England continuing to hold the base rate, there is real concern for savers, however there may be some respite if inflation levels continue to fall as predicted – making it easier to secure a real return on investment.

For those saving in an ISA, the outlook has been less bleak.  While ISAs were hit very hard in 2010, they have since bounced back with rates averaging out at around 3%, so those savers taking advantage of their ISA allowances are continuing to make a decent rate of return.


While many savers have been hit hard by low interest rates, it has been a different story for Britain’s eight million homeowners, particularly those with tracker or variable mortgages.

With base rates at a record low, mortgage repayments for new borrowers have been at the most affordable levels in over a decade. Recent Moneysupermarket research showed that 23 per cent of homeowners had taken advantage of the current rates to overpay on their mortgages over the last three years. Even those taking out fixed rate mortgages have seen some benefits, though less than other borrowers.

The news that the base rate is unlikely to rise anytime soon should be good news for those with variable mortgages who would be likely to see a sharp rise in repayment levels if rates do go up. However, there has been some bad news for borrowers lately with a number of lenders ramping up the costs of some mortgages in spite of the base rate decision.  The Bank of Ireland has almost doubled its variable standard rate from 2.99 to 4.49 per cent, while Halifax and NatWest have also increased the cost of some mortgages.

Many consumers are expressing outrage that lenders are hiking rates despite the BofE decision to freeze rates for the thirty-sixth consecutive month in a row. These hikes should serve as a warning to British borrowers. The tide is turning on low mortgage rates, and people need to evaluate their finances now, before rates inevitably rise across the board.

Furthermore, households are feeling the squeeze more generally with extremely high interest rates across overdrafts and credit cards.  The average rates on overdrafts in 19.5 per cent, which is the highest since comparable records began. The Bank of England has said the average interest rate on credit cards is 17.3 percent - the highest in eleven years.

Borrowers are often heralded as the great winners of a low base rate, due to the benefits that homeowners usually see. However, as mortgage lenders begin to raise rates, and consumers are being squeezed across other forms of borrowing it’s not clear that borrowers are seeing all of the benefits that we would expect to associate with a record low base rate.


As well as holding rates at 0.5 per cent, the Bank of England announced it would not be introducing any more quantitative easing (QE), keeping the total at £325 billion following last month’s announcement of an additional £50 billion.

The minutes from February’s MPC meeting revealed that both Adam Posen and David Miles wanted to inject £75 billion (rather than £50 billion) more QE into the economy, suggesting that more QE could be a possibility in the not so distant future.

The Bank of England has faced huge criticisms from pension funds that its policy of quantitative easing is reducing the value of annuities. Annuity rates suffer because they are linked to gilt yields, the value of which have been slashed as a result of QE.

Pensioners, along with savers, are the big casualties of the hold in the base rate, buying annuities that are worth less and will pay out less whilst struggling with the impacts of inflation.

If more QE is announced, pensioners will continue to be hit hard as annuities devalue further.

Follow Sara on Twitter @sarabenwell

Don’t forget Gordon Brown’s hand in Britain’s great big pensions mess

Sara Benwell 10.03am

Nobody can reasonably deny that public sector pensions need reform. They are unsustainable. We simply can’t afford them in their current format and schemes which require constant taxpayer subsidy, paid by those in the private sector who won’t be offered anything like the same schemes, just aren’t fair.

The other side of the debate, however, points out that private sector pensions aren’t all that great, and argues that yes, the disparity between public and private sector pensions is unfair, but why should that lead to a race to the bottom, where public sector pensions are forced to emulate the private sector, rather than lead to reform giving those in the private sector access to better pensions?

When put like this it almost seems intuitive: shouldn’t we be giving everyone access to a decent pension scheme rather than taking the private sector pensions model and using it as a benchmark for the public sector, meaning that they too will be faced with little or no access to proper pensions schemes?

This is the argument that the TUC general secretary Brendan Barber recently put forward, saying:

“Pensions in the private sector are deeply unfair, and making public sector pensions more like private sector provision has nothing to do with fairness. It is just part of a long campaign by those on the small-state right to cut public services.”

But the two arguments are being confused. While it is possible to argue that the private sector pensions model isn’t one to emulate, it doesn’t therefore follow that public sector pensions don’t need reforming at all.

The arguments for reforming public sector pensions still stand strong: they’re still far too expensive, they’re still unsustainable due to increasing taxpayer subsidy and for that reason too they’re still vastly unfair.

Furthermore, it’s clear that the gold-plated deal being offered to public sector workers at the moment, is a far cry from the private sector industry, so the argument that they’re just involved in a race to the bottom would seem to be overshooting the mark.

While this argument clearly doesn’t illustrate that public sector pensions don’t need reforming, or that the deal they’re currently being offered isn’t good enough, as some of those using it had clearly hoped, what it does highlight is that private sector pensions are widely considered to be not only a bit of a mess but also inadequate. This concept is worth exploring.

The UK’s private sector pension system used to be pretty decent. In fact, I even once heard UK private sector pensions described as the best in the world.

That was before Gordon Brown decided to cash in on the system and tax our pensions system into the ground. Crucially not only taking the decision to axe tax relief on dividends paid into pensions funds, but also doing so at a time when the stock market was at a low, causing a double hit on the funds needing to make up the income in other ways, causing a further downward spiral in the stock market.

The UK Pensions Crisis, a report from the TaxPayers’ Alliance and Terry Arthur in 2008, says that occupational pension schemes lost between £150bn and £225bn in growth as a result of the tax grab in the 1990s and that consequently, the Basic State Pension was down 20 per cent or more from its 1950 level, relative to earnings.

Furthermore, the report stated that in 2008 there were more than 17,000 retired public sector employees with retirement benefits worth £1 million each, while unfunded public sector pension liabilities were estimated to exceed £1 trillion, or more than 70 per cent of GDP.

Private sector pensions were treated as a cash cow, with Gordon Brown’s decision forcing companies to make up for massive shortfalls. It was this that led to the beginning of the widespread decline in final-salary private pensions schemes. Gordon Brown’s poor timing - a mark of astonishing economic and financial ignorance - only served to deepen the negative impacts on private sector pensions.

The 1990s tax hike led to a greater widening of the gap between private and public sector pensions. Amidst all the outcry about public sector pension reforms, what we need to remember is that private sector workers are subsidising public sector pensions. This is the inequality and unfairness that really counts, that public sector pension schemes are being bailed out by taxpayers, many of whom come from the private sector where they don’t have access to anything like the same level of scheme.

Follow Sara on Twitter @sarabenwell

The ghosts of Keynes and Brown are alive and well in Her Majesty’s Treasury

David Cowan 6.00am

The dust has settled on the Autumn Statement.
George Osborne has stuck to his original spending plans but abandoned his 2014-15 target for eliminating the structural budget deficit.
Instead there will be further 0.9 per cent cuts in real terms to current expenditure during 2015-16 and 2016-17. Over the seven year period public expenditure will fall by 16.2 per cent in real terms.
This means that during the Conservatives will be going to the country in 2015 with the pledge to cut an extra £116 billion over two years.

These are dangerous and unpredictable times. It is especially worrying when the OBR’s gloomy forecasts are based on the optimistic assumption that the Eurozone will survive its sovereign debt crisis.
The two year extension of the deficit reduction plan is also based on the complacent assumption that the Conservatives will still be in power in 2015. George Osborne should have refuted this complacent attitude and repositioned his fiscal policy in a credible manner, as by the 2012 Budget we could be living in a very different world without the Euro and the onset of another global recession, if not a depression.
A more credible fiscal policy would have been a reaffirmation of the commitment to eliminate structural budget deficit by 2014-15 by announcing some preliminary spending reductions which would go towards paying back the debt, such as scrapping the £34 billion ‘white elephant’ High Speed Rail 2 project (something Nik has blogged repeatedly about on these pages) and stop the £113 million going to trade unions every year (see Craig here), but then also say that further detailed spending reductions would be announced in the 2012 Budget with explicit aim of implementing the £216 billion cuts before 2015-16.
This course of action would allow new spending plans to be formulated in response to developments in the Eurozone. There is a need for further spending reductions if the coalition is going to put Britain back on track, keep borrowing costs and long term interest rates low, and maintain our perceived safe haven status.
However, George Osborne’s plan can only work if the economy starts growing again. The Autumn Statement was an opportunity for radical action but instead we got a ‘Brownite’ flurry of statistics and a plethora of small initiatives for ‘credit easing’, the Regional Growth Fund, and a ‘youth contract’.  All of which amounts to well over £10 billion at a time when we are adding another £145 billion to the national debt.
These schemes will waste taxpayers’ money on new bureaucracies and inefficiently re-allocate resources towards unproductive sectors of the economy. George Osborne has weighted his growth strategy too heavily towards a Keynesian style stimulus based on state intervention and cheap credit. He needs to bring the focus back towards supply side reform.
There are seeds of hope with the delay of the 3p increase in fuel duty, the aim to integrate the operation of income tax and national insurance contributions, the consultation on abolishing national pay bargaining, public sector pension reform, the liberalisation of employment legislation, and a more flexible planning system.
However, George Osborne could have been more radical. Indeed it would not be going so far as to say that it is essential for the future of the British economy that the Chancellor pursues this route instead of issuing headline grabbing micro-initiatives.
The ghosts of Keynes and Brown are well and truly alive in Her Majesty’s Treasury.
Follow David on Twitter @david_cowan

The strikes are wrong, but Conservatives mustn’t ignore the fears of the public sector

Giles Marshall 7.50am

For the first time in over twenty years, the school I teach in will be hit by industrial action today.

About half of its teachers, my colleagues, will be sacrificing a day’s pay to make their protest against the whittling away of their promised pension.

None of them are natural activists. All of them are dedicated professionals who will not have taken the decision to lose a day’s teaching lightly.

And, of course, as we all know, they are not alone. Across the full panoply of public services, strike action is taking place, often at considerable inconvenience to others. The strike is wrong and misconceived, but it is important to understand why now, of all times, it has generated such extraordinary support.

There will be no shortage of Conservatives happy to accept that the strike action is wrong. Their opinions will range from the slightly head-banging approach that tars all public servants as time wasters and scheisters in overly secure jobs for limited working hours who wouldn’t know a day’s real work if it came and blatted them across the face, to those who believe public servants have a genuine grievance but have chosen completely the wrong method at completely the wrong time. As a state school teacher who is working today, I fall – not surprisingly – into the latter group.

I do not waver in my belief that the strike action is not only altogether mistaken, but that it also severely harms the reputation and image of public servants. At a time when those in the private sector are suffering job insecurity, frozen or reduced incomes and all the hardships that come with a lengthy economic recession, the image of the state’s workers downing tools and parading through cities to demand that more of the private sector’s cash should be invested in our pensions is jarring indeed.

That we have jobs with a hefty level of security, and that we have pension pots which, no matter how reduced, still exist and to which we pay only a proportion of the actual contributions, are all factors which striking public sector workers have put too readily to the back of their minds.

At best, my colleagues are guilty of naivety. At worst, they are reminiscent of the most blinkered of the Greek protestors who felt that it was possible to maintain a hugely generous state payment system without regard to the state’s actual wealth.

A feature of the pension that teachers and others have ignored is that they contribute barely 10 per cent towards it. The contrast with the private sector – or parts of it at any rate – will be seen tomorrow at my school. While some of my colleagues are striking to improve their state funded pension arrangements, the builders constructing a new classroom block will be in at their usual early hour to carry on with the work of construction. In the construction industry today, you don’t lightly surrender the work that you have.

However, having established why the strike is erroneous, it is also important to know that the reasons behind it are not without serious foundation. Not for nothing has this action encouraged thousands of hitherto mild public sector workers out on strike.

The comparisons with the private sector – unhealthily mythologised in some parts of the Tory party – wear thin. It is the private sector, and notably its banking arm, that has got us into this mess in the first place.

While the hitherto contractually agreed pension arrangements of public sector workers have been ransacked by the government to help shore up its faltering economics, the rate of vast private sector bonuses and rewards continues unabated, even in those banks which might be seen as the cause of all the trouble. It isn’t easy for a public sector worker on a comparatively low income watching all of this to understand why their pension pot should be reduced but the inflated salaries and bonuses of bankers and corporate chiefs should continue unabated.

If the strike is wrong, but the concerns of public sector workers are not without foundation, what then has gone so awry in the body politic as to bring back a level of state disruption which we thought had disappeared in the 80s?

The issue seems to be, at least in part, one of serious lack of communication from the government, coupled with a lack of empathy for the public sector (most leading Conservative figures have made their way in the various manifestations of the private sector, whether it is party bureaucracies, family companies or self-built businesses).

The failure to communicate the real value of the public sector pension is a first base error; I suspect few of today’s strikers really appreciate this. The failure to hold out some sort of reform of the private sector financial industry is another. Public sector workers could more readily accept the mantra that “we’re all in it together” if there was a more serious effort on the part of government to show that that in fact is the case.

David Cameron and George Osborne will not be seriously hurt by today’s action – at least not politically, whatever alternative arrangements they may have had to make for their children’s schooling today. But if they want to head off a long, simmering dispute with their huge public sector, they need to avoid the temptation to succumb to the public sector bashing that exists in our party, and try and engage constructively with the large number of public employees who genuinely do undertake their jobs as a commitment to service and are looking for some sign that they are not simply deficit fodder.

The strike is wrong-headed certainly; but that doesn’t mean the fears of the public sector should be ignored.

Giles Marshall is head of politics at a London grammar school. Follow Giles on Twitter @gilesmarshall

Ending the pension time bomb

Alexander Clark 6.30am

David Cowan (of this parish) wrote a piece on Monday posing the idea of creating a ‘star chamber’ to conduct annual spending reviews. The purpose of the spending reviews would be to reduce government spending by five percent per year over a period of five years. Interestingly, David proposed that fifty percent of the composition of the chamber might consist of randomly selected UK citizens. This would serve to reflect the will of the people as well as to ensure that the Government prioritised spending on those things considered most important by the country as a whole.  Unfortunately recent experience has shown there are limits as to how far people are prepared to forgo their own personal interests for the sake of a collective interest.

 Last week’s public sector strikes provided a demonstration of the difficulties sometimes faced by democracies in resolving national problems (an even better example of this can be seen in Greece at present).  It is difficult to establish a political consensus in a society as diverse and fractured as the UK. Last week revealed a further fault line in our economy – the private vs. the public sector.  The economy is the key concern for the UK and consequently the size and cost of the public sector has now come under scrutiny by the increasingly cash-strapped taxpayer.

The UK economy is broadly characterised by a large private sector in south-east England, based on services that generate tax revenues which support other parts of the UK where the public sector is the main local employer.  This situation creates difficulties for any Government seeking to reduce spending in the public sector.  A sudden cut in jobs would cause wide-spread misery and hardship for many parts of the UK.  Consequently, the Government has sought to target a major fiscal liability whose reduction will not have an immediate effect on employment; public sector pensions.

 Having correctly identified the potential time bomb for the UK economy in the form of unfunded public sector pensions, the Government has now begun to implement changes in the way these pensions are funded and accrued.

Last week’s strikers were rightly concerned (from their perspective) that their pension provisions would soon go the way of dodo. Increasingly, public sector workers will find that their pension arrangements mirror those in the private sector. In other words, an end to final salary schemes, a reduction in employer (in this case the state) contributions and a raising of the retirement age.

Given the very high levels of debt facing the UK, one would hope that a rational person would conclude that government spending must be reduced as a priority.  Is it really rational for 600,000 public sector workers to dispute this? Of course, when challenged directly, the answer given is that public sector benefits should continue and that taxes should be raised or that the banking sector should be forced to pay.  This was the prevailing view amongst last week’s strikers, that their generous pensions must be paid by other people regardless of the impact such unfairness has on the rest of the country’s finances.  A debt star chamber made up of such narrow mindedness would exacerbate the country’s fiscal woes rather than diminish them. 

If left to continue down its present course, the public sector pensions burden will continue to grow and take up an ever increasing portion of government spending. In the long-term, this is neither in the interests of public sector workers nor those in the rest of the economy. It remains to be seen whether the Government and trade unions will be able to reach an amicable agreement or whether the empty public purse will dictate a more realistic solution.

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