The "great pensions divide" - it isn't what you think

Mehdi Hasan on today's pensions strike.

As public-sector workers, including teachers, go on strike today, the (right-wing) papers are filled with anti-union, anti-public-sector-pension headlines and stories. The Daily Telegraph, on its front page, claims that "a mid-ranking teacher on £32,000 a year will receive a final salary pension that is the equivalent of having built up a £500,000 pension pot. This is 20 times higher than the average private-sector scheme, according to figures from the Office for National Statistics."

The Daily Mail headline is:

Great pensions divide: private-sector staff must put in a third of their pay to match state worker benefits.

But the "divide" isn't between private sector and public sector -- as usual, it's between the rich (including newspaper editors!) and the rest of us. Most papers conveniently chose to ignore a report from Income Data Services, published yesterday, which revealed a "widening gap" between the boardrooms and workers.

Thankfully, the Guardian didn't:

Directors in Britain's top 100 companies have accumulated final salary retirement pots worth £2.8m on average, according to figures that reveal a widening gap between the pensions awarded to boardroom executives and the shop floor.

Incomes Data Services (IDS) said about 46 per cent of FTSE 100 directors were still accruing final salary benefits in generous schemes that typically pay two-thirds of final salary as a retirement income.

A pot of £2.8m could buy an employee a pension annuity worth more than £170,000 a year, IDS said.

Using the Telegraph's aforementioned ratio, directors' pension pots are worth more than 100 times as much as the average private-sector scheme. The Guardian report continues:

Company directors, like MPs, have among the most generous schemes in the G20 group of richest nations, with guaranteed benefits worth two-thirds of final salary accrued at an accelerated pace. Many directors can earn their full pension after only 20 years service, while it takes MPs just 26 years. Most workers take between 35 and 40 years to accrue a full pension.

Meanwhile, a letter in today's Guardian reminds us of TUC research in 2009 outlining how:

. . . tax relief on pension contributions of £37bn is heavily skewed towards the better off. Treasury figures show that 60 per cent of tax relief goes to higher rate taxpayers, with 25 per cent going to the top 1 per cent of earners.

Where is the anger? The outrage? Where are the headlines bemoaning "gold-plated" pension schemes in Britain's (failing) boardrooms? As Mark Serwotka, the leader of the PCS union, has rightly pointed out:

It's not public-sector workers who exploit [private-sector workers] but their private-sector employers.

One final point: can we, once and for all, nail the right-wing lie that public-sector pensions are "unaffordable"? The cost of public-sector pensions is set to fall in the coming decades. Don't believe me? The Hutton Report, commissioned by the coalition government and used by ministers as a justification for the "reforms" to pension contributions, states on page 22:

There have been significant reforms to the main public-service pension schemes over the last decade, including increased pension ages for new members and a change in the indexation of pensions from RPI to CPI indexation. Some of these changes have reduced projected benefit payments in the coming decades. For the interim report, the commission asked the Government Actuary's Department (GAD) to project future public-service pensions expenditure. It projected benefit payments to fall gradually to around 1.4 per cent of GDP in 2059-2060, after peaking at 1.9 per cent of gross domestic product (GDP) in 2010-11.

But, as Jon Snow's interview with the Cabinet Office Minister, Francis Maude, on Channel 4 News on Monday evening revealed, the government seems totally unaware of the contents of the report that it commissioned -- and that it now chooses to hide behind.

Mehdi Hasan is a contributing writer for the New Statesman and the co-author of Ed: The Milibands and the Making of a Labour Leader. He was the New Statesman's senior editor (politics) from 2009-12.

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Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation