Paul Leatherbarrow, Liverpool
Lord Hutton has this week published his interim report on pension’s reform in the public sector.
• His initial findings suggest there is no evidence that public sector workers have in the past accepted lower pay than the private sector in order to get better pension provision. (The public’s perception is that public sector pensions are renowned for their “gold plated cannot be beaten status at taxpayer’s expense”.)For a long time public sector workers were paid significantly less than their private sector counterparts, but the official figures from the office for national statistics for 2009 show that the average public sector worker is earning £539 per week compared with £465 for the private sector (extra £296 a month) So the argument traditionally put forward that they should not forego some of their pension benefits as it is their pay off for earning a lower wage no longer holds water.
• He believes the final salary link in public Service pensions is unfair, which can lead to high flyers getting almost twice as much back in pensions than those on more modest earnings for the same amount of pension contribution, but insisted it’s wrong to describe them all as gold plated
• The report is considering structural alternatives which may see the introduction of career average payouts and collective defined contribution schemes Options for the short term
1. One consideration would be to contract public service schemes into the second state pension, which would generate more national insurance contributions for the government.
2. Another option would be to either reduce the level of benefits paid or increase member’s contributions, while protecting the lowly paid and the armed forces.
Addressing long term aims
1. The retirement age should be raised or linked to longevity the commission will also look at schemes which combine elements of defined benefits and defined contributions
2. Collective defined contribution schemes to be placed in one fund, managed on behalf of the members
3. It cited plans to index pensions to the consumer price index rather than the retail price index.
The commission stated that a 1% point rise from all active contributing members would raise around 1billion. The report estimates there are 1 in 5 UK citizens with some entitlement to public sector pensions. The payments in 2008/09 were 32bn, about 2/3 of the cost of basic state pension Comment Final salary pensions in the private sector were not switched off overnight private sector employees went through the same process as Hutton is proposing The basic problem is that the cost for the employer is too high so employers may need to either pay more to retain the same benefits or make the same contributions and get reduced benefits.
Change is essential especially is need for any future measures to be based on the actual costs of the benefits, which requires more transparency from the government Due to longevity the public sector pension has to be looked at and cannot remain immune Public sector pensions are too expensive to maintain, more concerning is that the government has been using artificially high discount rates to calculate the employer and employee contribution rates for public sector pensions, Which means the pensions which we believed are costing us too much are costing us considerably more
The main schemes are set at around 20% of salary but the true value when measured using a discount rate based on the current yields on index linked gilts is over 40% of salary. One solution for the problem would be for employees and employer to increase their contributions. A 2% increase would add £2 billion to pension funds; some industry experts have recommended an increase of about 4-5% for the employer. Another solution would be to reduce the accrual rate of 1/60th to 1/80th, using a career average wage not final salary to set benefits received in retirement.
This would save £10 billion a year raising the retirement age to 65 for everyone would save further £5 billion a year. At present the books are not balancing currently £9 billion out of balance within the next 10 years. To move forward we need to strip away the belief that only new entrants will be affected by new rules. Any new legislation should be for all the public sector pensions.
The commission has recommended that all members of the scheme, no matter when they joined are treated the same, that changes which apply to top new members also apply to existing members. A further option would be a hybrid defined benefit scheme with additional defined contribution top ups for public sector workers which would be seen as a compromise Change is essential, especially is the need for any future measures to be based on the actual costs of the benefits, which requires more transparency from the government Due to longevity, the public sector pension has to be looked at and cannot remain immune. The basic situation is the majority of the workforce is expected to pay through their taxes to support pensions they cannot afford for themselves. The government announced as part of its comprehensive spending review on 28/10/2010 that: Public sector pensions will remain defined benefit schemes, but employees will contribute 3% more from April 2012 if it will make them remain fair to tax payers and employees and affordable.
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