Speech

Michael Gove on public sector pension reforms

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

The Secretary of State's speech at Policy Exchange on pension reforms.

The Rt Hon Michael Gove MP

Introduction

Tomorrow, the Chancellor will deliver his Autumn Statement. It will contain a series of measures to get our economy moving in the right direction and help people - especially young people - get working.

On Wednesday, TUC leaders will call on their members to bring Britain to a halt.

Among those Union leaders are people who fight hard for their members and whom I respect.

But there are also hardliners, militants itching for a fight.

They want families to be inconvenienced.

They want mothers to give up a day’s work, or pay for expensive childcare, because schools will be closed.

They want teachers and other public sector workers to lose a day’s pay in the run-up to Christmas.

They want scenes of industrial strife on our TV screens; they want to make economic recovery harder; they want to provide a platform for confrontation just when we all need to pull together.

I’m speaking out today because I know what it’s like to go on strike because some people at the top of a Union leadership wanted to prove a point.

I lost my job. So did more than one hundred others. I was lucky - young, unmarried, without a mortgage. I got another job soon enough.
Many others didn’t. They never worked again in the profession they loved. And the deal we were offered before the strike never improved.

So today I want to appeal directly to teachers - and other public sector workers: please, even now, think again.

The economic backdrop

Think firstly of the uniquely difficult economic circumstances this country faces.

Since John Hutton first reported on the future of pensions, and since we first began negotiating to get a deal, the global economic situation has deteriorated.

Growth has slowed everywhere.

Nations that spent billions on an economic stimulus plan - like America - now have growth rates similar to ours and unemployment rates worse than ours.

Nations that have failed to reform their labour markets - like Spain - have huge unemployment problems - especially youth unemployment problems.

Nations that have failed to reform their public sector pension schemes - like Italy and Greece - lost the confidence of international investors, have had to pay massive sums just to service their debts and now have to contemplate yet more cuts.

And even nations hitherto thought safe - such as France and the Netherlands - are under threat from speculators, as questions are asked about the robustness of their national balance sheets.

Britain is in a different position to those Eurozone nations. Because we took action early.

To lay out a robust plan.

Not just to bring our deficit under control by the end of this Parliament.

But also to introduce reforms to improve our education system further.

And make decent public sector pensions sustainable.

If we don’t stick to that path of reform, if we undermine the credibility that George [Osborne] and Danny [Alexander] have won for our country, then the consequences could be grimmer than many have yet envisaged.

If investors think we’re not serious about bringing both the deficit and our future liabilities under control, then we could find interest rates rise to levels where economic recovery is threatened, where businesses pay much more for finance, where new job creation is undermined, where mortgage costs rocket, eating up disposable income and reducing consumption, where much more public spending has to be spent servicing debts, so less is available for schools, the early years and the NHS.

So pension reform isn’t a marginal issue. Nor is confrontation, or protracted wrangling or a lack of agreement in anyone’s interests.

And that’s why the Government, even as the global economic situation has worsened, has been more generous - not less - in its approach to public sector pensions.

Because we want agreement. We want a sustainable deal for the future which gives certainty to teachers and others that they will have defined benefits in retirement. And we want to invest as much as possible in the education frontline.

Putting schools first

That’s why we’ve reduced non-frontline expenditure - we’re cutting the central costs of administration in the DFE - by more than a third.

We’ve looked everywhere for economies. We’ve cut unnecessary travel costs: we reduced expenditure on first class rail travel by 90 per cent. While the last Government spent £2.46 million on first class travel in 2009/10, we have spent just £265,000 in 2010/11. We’ve sought to limit spending on everything unnecessary - so we spent only £25,000 in the last 12 months on new furnishings in the DfE. The previous government spent £1.66 million in 2007/08 and £765,000 in 2008/09.

In our desire to see economies everywhere, we’ve got rid of the fruit bowls that used to be delivered to every minister and sent back the Government art.

And as well as looking at every area - no matter how small - to make savings, we’ve made some tough decisions to reduce expenditure.

Quangos - all with separate boards, comms teams and premises - have either been abolished or accepted significant cuts. The QCDA, BECTA and the GTCE have gone. The NCSL, TDA and Office of the Children’s Commissioner have borne big reductions in spending.

And, perhaps most painful of all, we had to stop the Building Schools for the Future programme - because it was inefficient, poorly targeted and exceptionally poor value for money.

Instead - under Sebastian James - we developed plans to build schools more cheaply, taking advantage of new technology and reforms of planning rules and regulations.

And it’s because we took those decisions - to show we were determined to make every penny go further and put the frontline first - that the Treasury have been able to prioritise education.

Apart from the protected areas of Health and International Development, Education got the best revenue spending settlement in last year’s comprehensive spending review.

And since then our commitment to reform has helped the Treasury go further.

So more has been released to help schools. £600 million for new free schools, with areas of poverty and population growth prioritised. And £600 million more to help local authorities create more good school places in areas where the population is rising fastest.

And - perhaps most crucially of all this week - the arguments we were able to make about the success of our reform programme on the ground helped the Treasury to release additional funds to improve the pension offer we are able to make to teachers.

It’s really important teachers appreciate this point. The success of reform, the growth in Academies, the more efficient use of resources on the frontline, the commitment of the profession to ever higher standards - these have all helped make the case for a better deal for teachers.

Supporting teachers

And the offer we’re making is a good deal.

Since becoming Education Secretary, I’ve been determined to improve the position of the teaching profession.

Teachers and heads deserve our support.

That’s why I’ve fought for legislative time to get new laws to strengthen teachers’ disciplinary powers.

That’s why I’ve reduced the bureaucracy and red tape teachers face - scrapping bumf like the 100 page Self-Evaluation Form, getting rid of the requirement to record every incident when a pupil has to be restrained, making clear there’s no obligation for every teacher to have a written lesson plan for every lesson.

That’s why we’ve faced down opposition from vested interests to give teachers anonymity if they face malicious allegations from pupils.

That’s also why we’ve reformed inspection to make it more responsive to teachers’ needs - and put a teacher in charge.

And why we listened to the profession’s legitimate concerns about tests at the end of primary - and reformed them.

It’s also why we’ve pushed ahead with the Academy programme - Academies give teachers greater control over how they teach, and because money is used more efficiently in Academies, teachers in Academies often enjoy better pay than in other schools.

The same determination to support teachers has driven my personal approach to pension reform.

Because I’m all too aware of the feelings of many of my constituents - and many others in the country - about pensions.

There are now very few private sector defined benefit schemes which are still open and which guarantee a fixed income in retirement.

In March, the National Association of Pension Funds annual survey found that a record number of final salary pension schemes - one in five (17 per cent) - have shut their pension to both new and existing members.

This was a record jump from seven per cent in the previous survey in 2009, and just three per cent in 2008. Most of these schemes will have already been closed to new joiners. Just 21 per cent of private sector schemes are now open to new joiners, compared with 88 per cent ten years ago. A third (33 per cent) of schemes are planning changes around their existing members, including cutting benefits or migrating staff to a defined contribution pension.

Many of those affected among my constituents, and others across the country (including, for example, people let down by Equitable Life), want additional support from the Government.

I have to justify to them why we, as a Government, are prioritising a good deal for teachers. I do so because I believe that teaching is a noble profession, the most important vocation in the country. But let no one think there isn’t a political cost to safeguarding public sector pensions in this way. There are many citizens working in the private sector who feel short-changed. I understand their concerns.

But I also think it’s important we continue to attract the very best young graduates into teaching and retain experienced teachers.

I’d like to do more for teachers - and over time - I hope we will. We will, for example, soon introduce new bursaries and rewards for top graduates in science and maths who train as teachers.

But it’s important now for me to defend the position teachers are in.

Teachers earn - on average - the same as other graduates. £34,800 compared to the national average for graduates of £35,900. Teachers in Academies earn more.

Head teachers and others in leadership positions earn more than other graduates in managerial roles: £55,200 compared to £52,600.

At a time when some are seeing their earnings in the private sector declining, I want to defend the principle that teachers salaries should be protected - and in due course enhanced. I will do so at every opportunity. But that depends on all of us together showing that we are not complacent - and we are determined to go further in reform and raising standards.

Members of the public - including many of my constituents - argue that teachers enjoy longer holidays and greater employment security than most other workers.

But I respond by saying that teaching is physically and emotionally demanding - and given the problems with poor pupil behaviour and the importance of continuity in learning, teachers deserve strong employment protection.

And I deploy similar arguments when I’m challenged on the deal we’re now offering teachers on pensions.

A good deal - fair, affordable, secure

I say it’s because I think those in the private sector have suffered because of thoughtlessness - and a failure to plan ahead - by both Government and some employers, that we have to protect public sector workers - and teachers especially - from a failure to plan properly now.

I believe teachers must have the reassurance that comes from knowing that, on retirement, they will get a guaranteed income. The Government remains committed to ensuring pensions continue to be index-linked to protect them from inflation.

As I say again: there are scarcely a million private sector workers in open schemes like that, so it’s more important than ever that we defend that security for teachers.

And in terms of defending security, we’ve made some other things absolutely inviolable.

Anyone within ten years of their retirement age on April 1st next year will have their pensions totally protected; entirely unaffected; secure exactly as before.

And all teachers - let me underline that: all teachers - will have the money they’ve put in and the benefits they’ve secured - totally protected. Accrued rights are untouched. If you’ve paid in for a number of years, at a set rate, in the expectation that will deliver a proportion of your final salary on retirement, that will remain secure.

And, with inflation at its current levels, let me confirm that pensions will continue to be index-linked - through thick and thin.

The Government will bear that risk.

But there do need to be changes to ensure those benefits - and other future benefits - can be delivered.

Because all of us are living longer - and highly educated graduates are living longest of all - we need to make sure that we can carry on paying pensions to people who will be retired and on retirement incomes for much longer. The number of years teachers will enjoy in retirement is set to rise. The proportion of a teacher’s whole lifetime spent in the classroom will shrink. And the proportion of that same life spent in retirement will grow. So we need to take account of that. And we particularly need to take account of the fact that these very welcome increases in life expectancy are proving even greater than the experts predicted.

The average 60-year-old can expect to live ten years longer now than 30 years ago. 40 to 45 per cent of adult lives are now spent in retirement compared with around 30 per cent for pensioners in the 1950s.

Life expectancy in the UK has reached its highest level on record for both males and females.

The number of centenarians in the UK in 2010 is five times higher than was estimated in 1980.

The percentage of the population aged 65-plus increased from 15 per cent in 1985 to 17 per cent in 2010 - that’s an increase of 1.7 million people in this age group.

Over the same period, the percentage of the population aged under 16 decreased from 21 per cent to 19 per cent. This trend is projected to continue. By 2035, 23 per cent of the population is projected to be aged 65 and over, compared to 18 per cent aged under 16.

Not only is the population ageing, but there has been progressive ageing of the older population. Most striking has been the increase in the number and proportion of the ‘oldest old.’ In 1985, there were around 690,000 people in the UK aged 85 and over, accounting for one per cent of the population. Since then the numbers have more than doubled reaching 1.4 million in 2010 (two per cent of the UK population).

In comparison to the UK average, figures for teachers show even greater life expectancy. And between 2004 and 2010 the number of teachers working beyond age 60 increased from 9,909 to 31,572.

Regardless of any changes to teachers’ Normal Pension Age or the State Pension Age, teachers will retain options to retire at any age between 55 and 75.

In talking about longevity, I have to address one myth that has developed: the idea that I’m asking all teachers to work for longer - indeed insisting that every teacher must be in the classroom until they’re 68.

That’s just not true. Let me go into some detail to explain why.

Teachers who joined the Teachers’ Pension Scheme prior to 2007 currently have a Normal Pension Age of 60.

Those who joined from 2007 have a Normal Pension Age of 65.

We’re proposing a phased increase in the Normal Pension Age for all teachers to align with the State Pension Age (which is currently 65 and due to increase to 68 by 2046).

Under our proposals, teachers will still be able to take their pension at any age from 55 to 75.

But the annual pension income will vary depending on when teachers choose to retire.

All of the pension they have built up under the current scheme will remain payable in full at either 60 or 65, depending on whether they joined the scheme before or after 2007.

Only the pension teachers build up under the reformed scheme would normally be payable at a later age, but they will still be free to draw that pension at any point from your 55th birthday.

And I should add that the ratio between what you pay in every year and what you get out over time - the accrual rate - has been specifically improved following lobbying from the Departments for Education to ensure teachers are protected.

As Lord Hutton has acknowledged:

“Accrual rates - the vital part of the detail of any pension scheme, which determine the value of pension rights - have also been greatly improved. This will increase the generosity of pension benefits, and bring the proposed new scheme very much into line with the arrangements for new recruits that were agreed between the Unions and the last government.”

So what will that mean in practice for teachers?

Well…

Let me take you through a few examples of hard cases:

A teacher aged 27 in 2015 who began teaching at 22 and remained a classroom teacher until they retired on point U3 on the payscale at age 68 could expect a pension of £28,000 per annum, £23,000 if they retired at 65 or £16,000 by retiring at 60.

A teacher aged 35 in 2015 who began teaching at 25 and retired aged 68 from a leadership post on point L21 could expect a pension of £37,000 per annum, £31,000 if they retired at 65 or £22,000 by retiring at 60. They would also receive a lump sum of £23,000 at each age.

A teacher aged 49 in 2015 who began teaching at 22 and remains a classroom teacher until they retire on point U3 at age 66 could expect a pension of £23,000 per annum, £22,000 if they retired at 65 or £17,000 by retiring at 60. They would receive a lump sum of £37,000 at each age.

The Department for Education has developed a pensions calculator - which is on our website - which allows any teacher to punch in their details and see what they would secure. I encourage all teachers to use it to help them make a judgement about their future benefits. We take our responsibility to keep teachers informed about changes seriously, and so we contacted every teacher in the country directly last week to explain about the reforms in detail.

I do not know of any - any - pensions provision in the private sector which can match the current offer in scope, certainty and generosity.

And while I absolutely respect the right of teachers representatives to negotiate hard, they should, in fairness, join me in making clear that teachers who opt out of the pension scheme - or think they have to retire now in order to retain their pensions rights - are not acting in their own best interests.

It would be extremely unlikely to be in a teacher’s interest to opt out of the Teacher Pension Scheme and seek a private alternative. A private pension plan would almost certainly cost much more in terms of contributions - requiring around one third of salary in contributions to achieve the same level of benefit - without any certainty over final income at retirement. And the current employer contribution to teachers’ pensions - 14.1 per cent - is much more generous than they would be likely to get in the private sector. Only one in three workers in the private sector receive an employer contribution, compared with all teachers - and nearly nine in ten in the public sector overall.

Some teachers - including head teachers - have contemplated leaving the profession early because they are concerned by one of the central changes needed to keep the scheme sustainable.

We plan to link future benefits to the average salary earned over a lifetime, rather than the absolutely final salary on retirement. It makes the teachers’ pension scheme fairer to all teachers - and, as I say, is critical to making it sustainable. But I understand the concerns expressed and we are cushioning this change.

The move to paying retirement income based on the average salary over scheme will only apply to service from the date of the change to a new scheme.

Teachers will keep all the benefits they have built up in their current pension, and those benefits will still be based on final salary at retirement.

So if a teacher retires before the changes, they would actually get a lower pension than they would if they continued to contribute to the scheme.

Ready to be flexible - but determined on reform

Of course some have taken issue with this reform. That is why we are still in negotiation. So we can ensure that concerns are heeded and our offer, if necessary, adjusted.

But let me make clear. If we are more flexible or generous in one part of the scheme, the weight will have to be borne elsewhere in the scheme. There is no magic pot of gold we can plunder to add huge sums to what we have offered. I have already secured more from the Treasury. There is now a need for all of us to move to agreement.

Because we have already had an analysis of the sustainability of our commitments from Lord Hutton - an evaluation of our public sector pensions including the teachers pension scheme - and he has made it clear they are sustainable only with reform.

As Lord Hutton made crystal clear, the increases in life expectancy and growing numbers of teacher pensioners are putting a growing strain on other taxpayers.

The TPS, like most public service pension schemes, is an unfunded scheme. This means that current pension contributions, both from employees and employers, are used to help offset the cost of paying pensions to current pensioners.

But the amount teachers and employers pay together isn’t enough to pay pensions to all current pensioners.

And without reform it certainly won’t be enough to support future pensioners.

The shortfall between contributions received and pensions paid each year is met from taxes paid by all workers.

In 2005/6 it cost £5 billion to pay teachers’ pensions.

By 2015/16 the cost will have risen to £10 billion.

So reform is vital if we’re to be fair to other taxpayers.

But in order to ensure that reform is fair to all, we’ve deliberately sought to share the burden in a way that offers the greatest protection to the lowest paid.

That’s why we’ve tried to manage the increase in contributions next year in as fair a way as possible. Following an extensive consultation with the Unions and others, we’ve set out a process which reduces the impact on the relatively lower paid.

There will be an average contribution increase by 2015 of 3.2 per cent of a teacher’s salary in order to reinstate a fairer balance between members’ and employers’ contributions.

But teachers earning between £26,000 and £32,000 will only pay an extra 0.9 per cent in 2012/13.

It is higher earners who will pay up to an additional 2.4 per cent according to their salary.

Teachers will continue to receive tax relief on pension contributions, which will reduce the impact of this on their take-home pay.

The decision to strike

Reform must come. We are all living longer. It is unfair and unrealistic to expect other taxpayers to cover more and more of that cost and bear more and more of the risk. The burden must be shared.

At a time when all taxpayers face unprecedented pressure, we have to be fair to all, and we have to continue to prioritise investment in the frontline.

This week’s strikes will not change any of these facts. They will not make the tough decisions any easier.

But they will force tens of thousands of parents to scrabble around for emergency childcare or plead with their bosses for a day off. And they will deprive children of a day’s schooling.

I must warn parents that many schools are going to close. The overwhelming majority across the country. North of 90 per cent.

But while I am deeply opposed to this action, and the damage it generates, I don’t want any rancour to enter this debate and I don’t want to see the professional respect in which teachers are held undermined.

So let me stress that I understand why teachers value good pensions and appreciate that concern about the future goes right across the workforce - that’s why I got extra money from the Treasury.

And let me underline that I want talks to carry on the day after the strike in a constructive way - agreement is too important.

I also know that there will be many teachers and heads who are deeply conflicted, who - whatever they think about the pension proposals - don’t like the idea of striking and only do so reluctantly because they do not wish to let down other colleagues. I understand.

And I particularly understand that many schools will have to close when the headteacher wants to keep them open. The sheer number of those striking - including support staff - means there aren’t enough bodies physically to keep the school open. There are many fantastic heads working incredibly hard to keep their schools open. No head should be criticised if they have to close their school. It’s a professional judgement we should leave to the professionals.

But I still hope that teachers will pause and reflect over the next two days.

This is a good deal - one that millions in the private sector envy.

This is a difficult time - when we all have to reflect on the fact that we’re all in this together.

The success of school reform is increasing the respect, and securing the resources, teachers deserve.

So before striking, reflect: what further will be achieved?

The Government can’t afford to abandon the path of reform. Everyone would pay the price. Strikes will not change that. I do not blame Union leaders for negotiating hard on behalf of their members. That’s absolutely right. But there comes a point where we’ve got to recognise that they’re no longer serving their members’ best interests if they go out on strike - and I believe that’s the case here.

So I hope that many people will decide not to strike.

But I also hope that on Thursday morning, those who did strike will reflect; think again about our offer; and come to the conclusion that it is indeed a good deal.

Because if we don’t reach agreement then change will have to be imposed.

The reason I am in this job is because I want to ensure we give the next generation the best possible start in life.

It would be wrong to saddle them with increasing public sector debts, unsustainable financial commitments and unaffordable future promises.
That is why, on reform - in our schools, in our economy, in our public finances - there can be no turning back.

Published 28 November 2011