19 April 2002
Nowhere was this more evident than at a recent Public Finance dinner debate on local government pensions, currently the subject of a review that could result in fundamental changes to the sector.
Boasting a line-up of experts from government bodies, local authority finance directors, pensions accounting advisers and asset managers, the debate was always likely to be lively.
Chair Richard Harbord, managing director of the London Borough of Hammersmith and Fulham, introduced the motion reflecting the stark choice facing councils: 'The house believes that the current final-salary structure of the Local Government Pension Scheme is unaffordable and should be replaced.'
Speaking for the motion, Steve Jacquest, a senior actuary at WM Mercer, said: 'The private sector has woken up to the fact that defined benefit [final salary] plans are too expensive and the public sector should do the same.'
It has long been argued that DB schemes are too costly, as they often require employers to fund about two-thirds of contributions. The increasingly popular (at least in the private sector) alternative, the defined contribution scheme, Jacquest said, places less of a financial burden on employers, This also does not guarantee a final value on retirement, which means the employer is not committed to meeting any shortfall.
In essence, the debate came down to whether authorities can afford to pay for their staff in retirement, and those in attendance responded with a resounding 'yes'.
At least, only two of the 23 votes cast backed the motion. That's no surprise given that the audience was almost exclusively public sector-oriented, and that a well-funded final-salary retirement plan 'remains one of the most alluring aspects of the industry', said Terry Edwards, pensions consultant at the Employers' Organisation.
But a provisional vote, taken shortly before the debate began, had been unanimously in favour of a 'DB-only' LGPS, so the discussion had converted two attendees.
During the evening, sponsored by Threadneedle Investments, evidence emerged that council finance directors are making changes – albeit indirectly – to pension structures. For while they may oppose moves towards DC schemes in principle, many are making decisions that lead to staff being transferred out of DB plans, often through contracting them to private companies that do not offer a final-salary option.
Other contributors who spoke in favour of DC schemes raised issues such as the burden that early retirement places on the public sector, as well as the potential impact on council taxes that expensive pension schemes could (in theory) have.
Speaking against the motion, Ronnie Bowie, senior partner at actuary Hymans Robertson, said a DC scheme could fail to provide sufficient funding for retirement and undermine the appeal of public sector benefits. 'The average annual pension drawn from the LGPS is just £3,500,' he said.
Tom Powdrill, senior policy officer at the TUC, said that, contrary to many employers' claims, the trend towards DC plans was not an attempt to address the problem of longevity of human life. Instead, he argued, it was a case of offloading risk. 'Changing to a DC scheme would simply transfer responsibility for provision from the employer to employee,' he said.
Leslie Johnson, a member of the London Borough of Kingston-Upon-Thames' investment committee, agreed. 'It could be viewed in the context of a more generic shift towards individuals assuming more responsibility for their finances at the cost of state provision, such as the use of more private pensions,' he said.
Decreasing the role of the public sector in favour of individual responsibility? Where have we heard that before?
PFapr2002
