This week, we have seen some major potential changes in the UK’s welfare state. One key change involves child benefit. (see Who won’t benefit from child benefit?) However, a more recent development stems from a problem that has built up over a number of years and is not just peculiar to the UK: Pensions.
As technology advances and medical procedures improve, there has been a general increase in life expectancy for both men and women across the world. People are living for longer and longer and hence pensioners can be in retirement for over 30 years. This is over double the retirement time we used to see decades ago. Therefore, pensioners are eligible to receive their state pension or their private pension for much longer and hence the cost is becoming unsustainable.
Lord Hutton has led a review into public sector pension schemes and has concluded that public sector workers should be paying higher contributions. Lord Hutton has said that employees should be working for longer and hence retiring later. This would increase their contributions throughout their lives and also reduce the time period over which they receive a pension, hence cutting costs. There was also a recommendation that ‘final-salary pension schemes should be scrapped and changed to so-called ‘career-average’ schemes. The final-salary scheme benefits high earners and not those who make gradual progression up the career ladder. This possible change should certainly reduce the pension you are eligible to receive and hence should positively affect the sustainability of pension provision in the UK.
However, public sector workers who may face higher contributions and have already, in some cases, faced pay cuts or pay freezes, are unsurprisingly upset. They argue that accepting work in the public sector means accepting a lower wage than they could achieve in the private sector. The compensation, they argue, is the reward of a higher pension, which could be about to change. However, the independent review has found that the contributions made by the public sector do not reflect the true cost of the benefit they receive in their pension. This is likely to be a contentious issue for some time to come. Below are some articles considering this, but keep a look out for further developments.
Articles
Public sector pensions report explained BBC News (7/10/10)
Public sector pensions review: Q&A Telegraph (9/10/10)
Pensions reforms to focus on high earners Independent, Simon Read (9/10/10)
Why Lord Hutton could make public pensions bills bigger … not smaller Financial News, Mark Cobley and William Hutchings (8/10/10)
Lord Hutton: I busted the myth that public sector pensions are gold-plated Telegraph, Lord Hutton (8/10/10)
Key points of UK public sector pension review Reuters (8/10/10)
Public pensions review recommends higher contributions BBC News (7/10/10)
Public sector workers paying ‘less tax’ due to generous pension rules Telegraph, Myra Butterworth (8/10/10)
Asda closes final salary pension scheme Telegraph, Jamie Dunkley (9/10/10)
Hutton report: he’s no friend of gold-plated pensioners Guardian, Patrick Collinson (9/10/10)
Asda to close final salary pension scheme BBC News (8/10/10)
Lord Hutton: what the pension revolution means for public servants Telegraph, Emma Simon (8/10/10)
Report
Independent Public Service Pensions Commission: Interim Report Pensions Commission, Lord Hutton October 2010
Questions
- What is the purpose of a pension? Think about the idea of redistribution.
- Why should average-career pension schemes be less costly than final-salary pension schemes? Which is the most equitable arrangement?
- What are the key problems that have led to the pensions problem in the UK?
- What are the main recommendations of the independent pension review?
- How is opportunity cost relevant to problem of pensions provision?
- Is it fair that public sector workers should pay higher contributions towards their pensions?
- The BBC News article, Public sector review recommends higher contributions states that: “The recent decision to uprate pensions in line with the consumer prices index (CPI) rather than the retail prices index (RPI) has shaved 15% from the cost of the schemes.” Explain why this is the case?
What is the future of the Royal Mail? One thing for certain is that it needs an injection of money, which has led the government to consider either privatisation of the Royal Mail or selling it. Over the past years, we have seen continued strikes by the postal service in response to proposed changes in working practices. Mr. Cable commented that:
‘Royal Mail is facing a combination of potentially lethal challenges – falling mail volumes, low investment, not enough efficiency and a dire pension position.’
However, there are concerns that the privatisation or sale of the Royal Mail could lead to higher prices, job losses and further pension problems. The transfer of the Royal Mail to the highest bidder could shift the pension deficit, currently standing at £13.3 billion, to the taxpayer, potentially costing each taxpayer £400. The choice for the public is stark: either lose the right to send a letter anywhere in the UK for the same price or take on postal workers’ pensions.
Expecting massive opposition from the Communication Workers Union (CWU), Ministers are looking to pursue an arrangement similar to that of John Lewis, whereby staff are given shares in the company. This will give the staff an incentive to perform well to improve the performance of the company and hence increase their future dividend. Read the following articles and then try answering the questions that follow.
Royal Mail is to be privatised, government confirms BBC News (10/9/10)
Royal Mail sell-off is confirmed BBC News, Hugh Pym (10/9/10)
Royal Mail privatisation backed Press Association (10/7/10)
Royal Mail sale could cost £400 per home as taxpayers set to fund £13.3 billion pension deficit Mail Online, James Chapman (10/9/10)
Royal Mail pension plan challenged by regulator BBC News, Ian Pollock (30/7/10)
Ministers consider offering 20 per cent of shares in Royal Mail to staff Telegraph, Christopher Hope (10/9/10)
Cable to privatise ‘inefficient’ Royal Mail Independent, Cahal Milmo and Alistair Dawber (11/9/10)
Royal Mail revolution needed, say bankers Telegraph, Louise Armitstead (10/9/10)
Questions
- What are the problems that the Royal Mail is facing? Why have they occurred?
- What are the arguments for and against privatisation of the Royal Mail?
- How might privatisation lead to job losses and higher prices?
- What type of business arrangement does John Lewis have? Explain why this may improve overall performance of the company?
- If the pension deficit is passed on to the government, why will it cost the taxpayer? Is such an arrangement (a) efficient (b) equitable? Explain your answer.
Ginsters is a large producer of pasties in Cornwall. Most of its ingredients come from Cornwall, but the pasties are sold throughout Britain. But, not surprisingly, they are also sold in Cornwall. In fact, there is a large Tesco virtually next door to the Ginsters’ pasty plant and, as you can imagine, it does a good trade in Ginsters’ pasties, pies and sandwiches. After all, they are a local product.
But are they delivered directly from the Ginsters’ factory? No they are not. In fact, they are sent by lorry to the Avonmouth distribution depot, some 125 miles away, only to be sent back again to the Tesco supermarket next door! So does it make economic sense to incur all the costs of transporting the pasties 250 miles only to end up virtually where they started?
It is a similar story with Rodda’s Cornish clotted cream. It is made with Cornish milk but is also sold nationwide. In this case it is transported some 340 miles to get to another Tesco supermarket virtually next door to the Rodda plant.
The following articles and podcast consider the logistics of manufactured food distribution, and ask whether private costs are the only thing that should be taken into account when judging the sense of the system.
Articles
From here to eternity: 340-mile journey for clotted cream made two miles away Guardian, Steven Morris (3/9/10)
Food miles row as pasties travel 250 miles to the supermarket next door This is Cornwall (30/8/10)
Supermarket food mileage ‘completely bonkers’ BBC Today Programme, Tim Lang (30/8/10)
Questions
- Why does Tesco’s distribution system for pasties, clotted cream and other products made in parts of the country away from large centres of population make sense in ‘conventional economic terms’?
- What economies of scale are there in pasty production and distribution?
- What externalities are involved in the distribution of Ginsters’ pasties?
- Consider the arguments for and against locating mass producers of food products nearer to the ‘centre of gravity’ of markets.
$8 billion – this is the likely cost of the BP oil leak, which spilled 206 million gallons of oil into the Gulf of Mexico. Whilst the oil leak has been stopped for some time, there were ongoing concerns that the leak would re-appear due to the underwater pressure. The cost of stopping the leak has been substantial, but BP will face further costs, as the company begins to pay out compensation.
$20 billion is the compensation that residents of the Gulf of Mexico will receive. Further to this, BP has said that it will invest more money in promoting the tourism industry there, which has suffered from the oil spill. However, what about the fishing industry? Although compensation will be paid for the losses incurred, will this continue in the long term? The oil may cause a loss in productivity in certain populations of sea-life. How will this impact us? If certain fish became scarcer, then their price will rise accordingly, whether you purchase the fish at a shop or have it as a meal in a restaurant. To make matters worse, the hurricane season has arrived in the affected areas, which will make the clean-up effort even harder.
As BP’s share price has fallen, individuals have suffered from lower dividends. Jupiter Income Trust had almost 10% of their portfolio invested in BP, which largely explains the 9 per cent drop in their payout.
Articles
BP oil well ‘poses no further risk’, says Allen BBC News (5/9/10)
BP oil spill fallout hits Jupiter dividend Mail Online, Richard Dyson (4/9/10)
Gulf Oil leak: biggest ever, but how bad? BBC News, Richard Black (3/8/10)
BP oil spill didn’t hit tourism too hard Jabber Lounge, Gloria Rand (5/9/10)
BP oil victims face strings on $20 billion oil fund Telegraph, Rowena Mason (20/8/10)
BP share price data
BP historical share prices Yahoo Finance
BP share price chart Interactive Investor
Questions
- Which industries have been affected by the oil leak? Don’t think too close to home – look at the wider picture.
- Is the oil spill an example of a negative externality? Can it be illustrated on a diagram and, if so, how?
- What has happened to BP’s share price since the beginning of the oil spill? Put this on to a graph to trace the trend. Try to explain the changes in the share price using a demand and supply diagram.
- How would BP have calculated the compensation to be paid to residents of the Gulf of Mexico? Would cost–benefit analysis have been involved?
Anyone who lives in the South West can argue that they get a raw deal. Not only are the average salaries in this region lower than in the rest of the United Kingdom, but their water bills are 40% higher than those elsewhere in England and Wales. South West Water is the only provider of water in the South West and hence there are no other competitors that households or businesses can switch to, despite the extortionate prices.
Many households and businesses in the region are struggling to cope with the unfair bills, as people are forced to sacrifice other things in order to find the money. Furthermore, it can be argued that these higher bills are actually used for the benefit of everyone else in the United Kingdom. Since privatisation, South West Water are responsible for cleaning and maintaining over one third of the UK’s beaches and the prices they are charged by SW Water reflect this £2 billion cost. Moreover, with a relatively low population, this large cost cannot be spread across many people. Instead, the small population has to pay larger bills. A hairdresser, who does use a lot of water, is finding herself crippled by water bills of some £2,500. And this bill will pay to clean the beaches in the South West so that people living elsewhere can benefit from the beautiful surroundings.
There is now wide recognition of how unfair this scenario is and proposals have been suggested, ranging from a government grant (hardly likely given the state of public finances) to a levy on other regions’ bills to compensate SW Water for their clean-up costs. However, no decision has been made about how to progress and so for now, residents of the region must just simply grin and bear it, while sacrificing expenditure on other areas and seeing residents from across the UK benefit from their sacrifice.
P.S. If you hadn’t guessed it, yes I do live in the South West!
Why is water so expensive in the South West? BBC News (13/7/10)
North Devon MP Nick Harvey tackles unfair South West Water charges Barnstaple People (14/7/10)
Questions
- What is privatisation? Assess the advantages and disadvantages of the privatisation of water some 20 years ago.
- Does South West Water have a monopoly?
- Which of the 3 proposals is the most beneficial to those a) living in the South West, b) businesses in the South West c) the government and d) the rest of the country?
- Which proposal would you recommend and why?
- Is it fair that those in the South West should pay disproportionately more to clean and maintain beaches, which are used by everyone?
- Is the concept of market failure relevant in this case? Explain your answer.