The publication of Lord Hutton’s long-awaited interim report into the future of public sector pensions was met with comment bordering on hysteria in certain quarters and some degree of entrenchment as various parties sought to set out their stall for the future.
But Hutton’s report provides a balanced and well thought through assessment of the position we find ourselves in with public sector pension provision and an initial consideration of what options might exist to provide a more sustainable solution for the future. It needs to be viewed dispassionately and without the level of rhetoric that has already begun to appear.
How surprised can people be about the major thrust of the report that ultimately people will need to pay more, retire later or retire on less? This is a well-worn message common to all reviews of UK Pensions PLC over the past 10+ years. Lord Turner and Alan Pickering all reached the same inevitable conclusions in their reports. It’s all too easy to be distracted by vested interest or righteous indignation about how we got here and whose fault it is.
There is a degree of collective responsibility for the debt levels which have accumulated over the last decade. Deficit levels built up in schemes over recent years have in part been caused by the irresponsible use of early retirement provisions and an overly optimistic funding basis, where there has been a funding basis at all. The former has now been largely addressed and the latter being something Hutton has already commented on in a subsequent speech to the National Association of Pension Funds conference.
The facts however are inescapable:
* We are all living longer and therefore the cost of pension provision will be inevitably higher and that extra cost needs to be found from somewhere.
* Due to an unfortunate convergence of circumstances that extra money needs to be found at a time when there’s not really that much to go around, but the need for a more sustainable approach to public sector pensions is not something that can be laid at the feet of the banks or the recession.
* We are now in a low return economy at least for the foreseeable future.
* We are all taxpayers and the costs to the public purse need to be justified and balanced against other priorities – an increase in costs of one third in the past decade is unsustainable.
It was particularly interesting that Hutton described the final salary link in public service pensions as ‘inherently unfair’. Nine out of ten pensioners receive less than £17,000 per annum of pension, however that means one in ten exceed this figure and those with higher benefits disproportionately benefit from the final salary related scheme design.
Hutton also suggested that it was a myth that public sector workers are less well paid compared to the private sector undermining any argument that better pension benefits are somehow compensation of this non-existent inequity
There are those who will seek to portray this analysis as an attack on the public sector, but it needs to be borne in mind that a significant proportion of the private sector, particularly those in the third sector, also participate in these schemes and will have their benefits affected. Many charities are struggling to meet the rising costs of defined benefit pension provision for their staff, which directly impacts on their ability to perform the role that people subscribe to fund.
Clearly charities do not have the option of continually turning to the taxpayer for additional funding when needed. A more sustainable and fair solution needs to be arrived at for everyone’s benefit.
One of the difficulties is that a wider reform of the whole UK pension system is required that incorporates state pension benefits and how they integrate with private provision and how individuals can be encouraged to effectively save for their retirement. This requires wider thinking and integration but at least this report provides a good start.
David Davison is a director at Spence & Partners, independent actuaries and consultants
