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Public pensions, like private plans, are changing for good

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Public sector pension reforms are never far from the headlines but it can be difficult to comprehend how much money we are talking about.

Some public sector pension schemes are funded, as private sector pensions are required to be, but many are not and the benefits will need to be paid from the public purse when they become due. The unfunded pension liabilities in the UK today are said by some experts to run to £1trn.

Everyone knows a trillion pounds is a lot of money but, just to put some scale on it, it can help to imagine one trillion seconds. A trillion seconds ago, it was the year 29,677 BC. That was way before 12,000 BC, when human beings repopulated what we now call the British Isles after the last Ice Age and well before the period of recorded human history, which has really only been the last 5,000 years or so.

If you had a pound coin for every second that has ticked by since 29,677 BC, you would have a trillion pound coins. It is not the fault of public sector employees that their pension promises are not backed by funds put aside for them. The pension entitlements they have earned are theirs by right. Pensions are deferred pay, owed for work already undertaken.

The public sector pension reforms being mooted relate to future benefits yet to be earned, not to those already earned. Public sector employees may be asked to pay more towards the cost of their future pension benefits than they have been required to in the past. That is not too dissimilar to what has happened already in the last decade in the private sector and should not come as any surprise.

As the true cost of providing generous final salary pension schemes has gradually emerged over the last decade, we have seen many changes to final-salary pension schemes in the private sector.

The vast majority of such schemes are now closed to new members. It is common for new employees to be offered defined-contribution schemes, where employers can be sure of the ongoing costs, rather than the defined benefit schemes of the past.

But schemes in the private sector did not change overnight. Many offered existing scheme members the chance of contributing more to maintain their existing levels of pension accrual or to keep their contributions as they were but accept a lower level of accrual in the future.

Some private sector employers went a step further than offering lower accrual rates and offered the employees in their DB schemes membership of a DC scheme for future accrual instead.

Over time, we have seen the nature of workplace pension provision in the private sector change shape. Something similar looks likely to happen in the public sector.

Steve Bee is managing partner at Paradigm Pensions

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. ‘The pension entitlements they have earned are theirs by right. Pensions are deferred pay, owed for work already undertaken.’

    If this is the case how are pensions schemes, with the tactit agreement of the Government, able to alter the revaluation rates for deferred members?

  2. @ Sean, perhaps because the increases will be in respect of inflation that has not yet happened?

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