Vir Cantium

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Dear Unions, Those Pensions/Mortgage Analogies of Yours? You’re Doing It Wrong

We are now just a few weeks away from the 30th November public sector strikes, when public sector unions will be (officially at least) protesting over the thinning of the gold plating on their pensions. Some of the more interesting points being made by the unions are the analogies being drawn with mortgages.

For example, one disgruntled public sector worker on the radio today likened the pension reforms to having a mortgage where, a few years in, the estate agent ‘phones up and says the original purchase price has increased and so your mortgage repayments have to go up.

Then there was Brian Strutton, the GMB spokesman, who said that estimates of the the pension deficit were…

… the equivalent of taking a snapshot of your personal finances part way through a mortgage – it looks like you’ve got an unaffordable debt but the reality is to look at the long term and whether you can meet that debt.

There Mr Strutton has, unwittingly hinted at the problem. The things is, the mortgage analogies could be good comparisons, if only they were to use accurate ones.

To properly compare a pension to a mortgage, a far closer comparison can be made with a endowment mortgage. As many have learned literally to their cost, the endowments running alongside their mortgages are not necessarily going to pay out enough when the time comes to clear the capital debt.

In a very similar way public sector pensions are akin to the mortgagee who, having discovered that the forecast endowment value in a few years is insufficient, is having to either make extra repayments (or investments) and/or will have to remortgage or extend the term of the loan – rather like a defined benefit pension scheme member having to increase their contributions or work longer.

So by all means let’s compare public sector pensions to mortgages: poor performing endowment mortgages.

The big difference with public sector pensions, of course, is that they would rather the taxpayer continue to compensate for the shortfall in the final payout. Many of those taxpayers can never hope to build up the pension pot that many in the public sector will retire with (or the equivalent thereof). In a race to the bottom, those taxpayers are already well past the winner’s tape while public sector pension members will barely have to jump the first set of hurdles.

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One response to “Dear Unions, Those Pensions/Mortgage Analogies of Yours? You’re Doing It Wrong

  1. Richard Young (@RichardYoung) November 7, 2011 at 10:43 am

    Up to a point, Lord Copper. Why use an analogy? It’s pretty simple. Public sector workers were promised something when they took up a contract of employment that is now not being delivered. The deal was changed – for very good reasons, it’s true – by their counter-party. So it’s fair enough they’re pissed off. (Whether they should accept that we’re all screwed unless more realistic terms can be agreed is another matter.)

    OK, if you insist on an analogy. You take out a ten-year mobile phone contract because the deal looks great. Three years in, the operator says, “ah, sorry about this, but it looks like that unlimited data plan we offered you when you took out the contract is costing us a bit too much money. We might even go bust if we honour the deal. I think we’ll cap you off now, if you don’t mind.” As a good consumer, how would you react? Especially if the alternative providers are either much more expensive or just not taking new customers?

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