David Roache: Public Sector Pensions – let’s have the facts

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.

David Roache: Hutton has missed an important trick - The public sector should switch to Defined Contribution pension schemes

David Roache is from Warwickshire and Group Finance Director in several listed businesses.

I’m afraid Lord Hutton simply doesn’t get it. If the Government adopt his ideas on public sector pension reform, they will have missed a golden opportunity and will have saddled future generations with unimaginable levels of debt.

The public sector still enjoys Defined Benefit (DB) pensions, something that the private sector has long since worked out is unaffordable. A DB pension promises to pay the recipient a pension, based on his earnings, for the rest of his life and usually for his spouse’s life as well. This is, in effect, an open-ended liability foisted on to the taxpayer. The taxpayer takes all of the risk in this arrangement and, as people are living ever longer, this risk is growing. The Government has not faced up to the scale of the liability simply because they have used hugely optimistic assumptions when calculating it - assumptions that the Pension Regulator would not allow private employers to use.

The private sector has, over the last 20 years, moved to Defined Contribution (DC) pension schemes whereby the only promise given to an employee is to make certain contributions into a pension “pot” which becomes available at retirement. There is no promise made as to what pension this might buy, all of the risk is on the employee. This move to DC schemes has been made in the face of dogged opposition from trades unions.

Lord Hutton’s recommendations would make no significant reduction in the level of debt that the taxpayer will have to fund in future. By reducing the pension from one calculated on final salary to one calculated on average earnings makes very little difference to the overall liability that it creates. Any reduction in total liability will soon be eroded by the inflationary increase in average earnings. The recommendation that public sector employees should work longer and make a slightly larger contribution also dodges the issue. The only way to start to reduce the public sector pension time-bomb is to change the method of future accrual for pensions to Defined Contribution.

Why is it that Hutton sees fit to ignore all of the examples in the private sector and to try to re-invent the wheel? The private sector has been there and done it, why can’t the Government simply follow what has already been done successfully by many private concerns.

Hutton simply doesn’t get it, we can’t afford the huge unfunded debt that public sector pensions create and the only way to change is to have the fight with the unions now and make the change to Defined Contribution. Government, please take note, if you don’t grasp the nettle now the opportunity will go begging and the taxpayer will end up funding the debt... again.