David Roache is from Warwickshire and Group Finance Director in several listed businesses and writes here a second response to Lord Hutton's report on pensions. Read his first here.
Headlines such as “the death knell for final salary pensions” miss the point in this debate entirely - and the facts remain shrouded in uncertainty, at best, or secrecy, at worst, the choice about which course of action to take cannot be soundly made.
The decision regarding what to do about the cost of public sector pensions has to be made with the facts about the associated debt fully exposed. That debt is the unfunded liability for the total pension promises made to all public sector employees. So, for each category of public sector employee (i.e. MPs, the judiciary, armed forces, NHS, Civil Service, teachers, police, fire service, local government employees etc.) we need to know the current cost of the future liability for the pension promise, calculated using assumptions that the Pension Regulator would approve for such calculations in the private sector (i.e. inflation rates, mortality rates, asset returns etc.) and we need to know the value of any assets properly set aside to fund this liability.
The difference between the two (the liability and the assets) is the deficit which will have to be funded by tax payers in the future. My guess is that, properly calculated, this deficit will be many billions of pounds. For a start the liability has not in the past been calculated using acceptable assumptions. Those imposed on private sector pension schemes by the Pension Regulator are far more conservative than assumptions that have been used in calculating public sector pension liabilities. Also, I suspect that much of the liability for pensions is totally unfunded by properly segregated assets, again, something that would simply not be tenable in the private sector.