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Expect evolution not revolution

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Many are predicting a wave of strikes in defence of existing pension arrangements when former Work and Pension Secretary John Hutton publishes his interim report into public sector pensions later this month. Yet Hutton may not be as radical as some anticipate. If he reads carefully the submissions from the pensions industry, there is little appetite for levelling public sector pensions down to that of the private sector.

This first report will attempt to analyse the situation and the potential for reducing costs in light of submissions received. Before the next Budget he must publish his final report making firm recommendations for change.

The first area where consensus is needed is in calculating more realistically how much these pensions will cost. Retirement ages and contributions will have to rise for all staff. But an enforced move to a private sector-style defined contribution arrangement should be avoided.

Another area of consensus is that DC schemes, it seems, have failed - which is awkward given the Coalition’s intent to proceed with Nest. The hope is any new public sector arrangement could be adopted by the wider workplace, and used to increase overall pension savings. As such, it should maintain an element of employee guarantee, offering a low-level salary link, a career average, or hybrid scheme.

Even such modest reforms will meet with objections. Submissions from staff members of the Police Federation point out that most policemen
On retirement age, it comments: “Many professions within the public sector are stressful and physically and emotionally demanding: this is especially the case for police officers.”

Other union submissions were of a lower quality. The Chartered Society of Physiotherapy defended the status quo on the grounds NHS employer and employee pension contributions have consistently exceeded the amount paid out in pension benefits. They should stick to twisting joints.

The teachers’ submission was more strident than illuminating, talking only of myths and lies about affordability, and what the union would do to protect its members pensions.

To be fair, they are right about the myths and lies. Current projections are sheer fantasy.

To bring some clarity, the Actuarial Profession has established a project examining discount rates, and analysing the various “matching” and “budgeting” approaches to measuring liabilities.

The Government currently uses a “social time preference rate”, which allows it to account for future pensions into never-land, using generous assumptions, because the social value of these employees make their pensions a special case.

With vintage understatement, the Actuarial Profession’s submission suggests that such an approach is “limited”, and it might be more appropriate to properly assess the employment cost of providing this benefit.

The Public Sector Pensions Commission put it more bluntly, estimating that the bill for these pensions was more than 20 per cent higher than Government admits, and cost typically 45 per cent of salary. This figure, they argue, should be properly disclosed as an employment cost and benefit, so the population at large can weigh the attractions of a public sector job.

Hymans Robertson sees the review as a “once-in-a-generation opportunity” for lasting pensions’ reform. To this end, it would like to see the introduction of a new DB scheme which offered a low level of salary-linked guarantee, which staff can then top up with private savings if they wish.

For all the hysteria about spiralling public sector pension costs, the outcome of this review will be far less dramatic than people expect. Public sector workers will end up with some form of salary related scheme, but with guarantees at a lower level.

Teresa Hunter is personal finance editor of Scotland on Sunday

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