Addressing the public sector pensions challenge

David Davison

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It is interesting to note, as we await the content of Lord Hutton’s report on public sector pensions, the amount of speculative material that is being produced on the subject.  It is already possible to discern that views and arguments are becoming to polarised and we have even had suggestions of a National strike over the matter.

Deputy PM Nick Clegg summarised the problem as a consequence of  the persistent under-estimatation of the value of the pensions promise  due to inappropriate funding methodologies and increasing longevity which in turn have given rise to insufficient contribution rates over an extended period of time.

A helpful contribution to the debate is a paper published last month by the Centre for Policy Studies  entitled “Self-sufficiency is the key.”  The report’s author Michael Johnson sets out a clear vision for comparable pensions irrespective of employment sector or political inconsistency. His objectives are fairness, inter-generational equality, affordability, sustainability and ultimately the creation of a pensions system that encourages and incentivises more people to become engaged in providing a suitable level of retirement income for themselves.

The key findings of the report are that:-

  • While “Quick wins” are needed the available choices in this regard are limited
  • Funded schemes are fairer…..and cheaper
  • Needs to be compulsory NEST participation
  • Limited seeding with index-linked gilts
  • One size does not fit all
  • A single objective for pension schemes; cash flow self-sufficiency

Some key statistics produced in the report show that:-

  • The four largest unfunded pension schemes cost tax payers £14.9Bn in 2008/9 which equated to about 77% of their total funding cost.
  • Projected cash flow shortfall of all unfunded schemes in 2010/11 is around £4.1bn.
  • Both gross pay and total reward in the public sector outstrips that of the private sector on average and across the quartiles.
  • Public sector productivity index fell by 3.3% from 1997 to 2008 in contrast to a 28% increase in the private sector while earnings in the public sector rose by 17.1% against RPI increasing the cost of pensions.

The author proposes two alternative frameworks to address the issues, one brave and one cautious and makes a series of thirty-five proposals for improvement.

Worryingly the insight provided by the Isle of Man’s quest to reform its public sector pensions does not offer much encouragement, with any form of implementation not expected until more than 5 years after inception and transition expected to last for up to a further 7 years. If it takes this long for an economy the size of the Isle of Man, how long can we expect to wait in the UK?

This is a huge issue for the current and indeed future generations and one can only hope that a balanced debate will prevail and sensible solutions can be implemented within a reasonable timescale.

David Davison

Post by David Davison

Specialist consultant on pensions strategy for corporate, public sector and not for profit employers

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