The Government should automatically enrol all public sector workers into Nest as part of a radical shift towards “pure” defined contribution pension provision, Michael Johnson says.
The Centre for Policy Studies research fellow’s latest report, titled ‘Self-sufficiency is the key: Addressing the public sector pensions challenge’, says a “brave” Government would target a switch to DC by 2020. He says any move from final salary to career average defined benefit provision, a proposal Lord Hutton is considering as part of his independent review, should only be viewed as an “interim step”.
Johnson (pictured) also urges the Government to introduce compulsory Nest participation for employees earning more than £10,000, with the potential for the state to absorb the 1.8 per cent Nest contribution charge at a cost of £64m per annum.
He says: “The legacy of our public sector pensions’ vast liability is now manifesting itself as demands for hard cash to meet burgeoning pensions in payment. The price of meeting these obligations is generational and sectoral inequality, which is unjust. Reform is therefore essential.”
Johnson also suggests introducing limited “seeding” of unfunded public sector schemes with tradable securities to aid a transition towards funded status. This would force the Government to service new index-linked gilts, issued to schemes by the Treasury, for interest and principal. He argues the Government already faces this obligation through unfunded pension liabilities.
Hargreaves Lansdown pensions analyst Laith Khalaf says: “Seeding would increase transparency because it would make the amount the Government owes explicit. But I doubt the policymakers would welcome the idea of adding to their immediate deficit.”
Johnson also proposes fundamental reforms to Local Government Pension Schemes, which differ from other public sector schemes because they are funded. He says the governance framework of local funds is “complex and ineffective” and should be replaced a single, trust-based board responsible for all decisions concerning the sustainability of the LGPS.
Johnson says policymakers should “prepare the ground” for reform through the introduction of a flat-rate basic state pension, although the DWP green paper outlining the reform has been delayed.
Lord Hutton’s Independent Public Service Pensions Commission is expected to deliver its recommendations to Chancellor George Osborne ahead of the Budget on March 23. A final decision on raising employee contributions has been put off until June as Union representatives and officials continue to haggle over the timing of the increase and the impact it will have on low earners.