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State of emergency

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Much is being written about public sector pension schemes. Some such schemes are funded but most public sector employees are in unfunded ones. If they were backed by funds – rather than IOUs signed by future taxpayers – unfunded public sector pension schemes would have about £1tn tucked away in them.

Something must be done about this state of affairs. Quite what that something is, no one can say for sure right now but it is unlikely to be popular with the people whose retirement pensions are locked up in public sector schemes.

The law states that private sector pension schemes must be backed by funds and that those funds must meet stringent requirements so that it is clear the money put aside will match the benefits promised. No solvent employer may walk away from the pension promises made to the employees.

These laws should apply to all members of pension schemes. All schemes should be backed by real money, funded and properly accounted for on a uniform basis, whoever the employer. The Government should be treated just like any other employer in this respect.

More than that, all state pension schemes should also be funded. Where people and their employers have had the choice in the past between pensions backed by political promises or by money, they have overwhelmingly opted for the latter.

Contracting out, something that has applied to our state second pension since 1961, should also have applied to the state basic pension – although this should not be voluntary.

But contracting out, into defined-contribution schemes at least, has been knocked on the head. It is still there for the ever dwindling number of private sector defined-benefit schemes and all of the public sector DB schemes, whether funded or unfunded, but contracted-out employment is not quite the same thing as contracting out through individual choice.

I hope this review into the affordability of unfunded public sector pension schemes goes even further and examines the whole concept of unfunded schemes, including the state pensions. For that matter, the review might consider whether it is sensible to have more than one state pension scheme anyway.

If a pension is nothing other than a pile of money, properly managed and accounted for, under the control of the individual rather than their employer or the Government, then why would anyone need two piles of money for their state pension rather than just one?

While we are looking into these things these days, let us really look into them.

Steve Bee is managing pensions partner at Paradigm

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Comments

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  1. Richard Brown, Managing Director, Moneynotion Limi 16th July 2010 at 5:34 pm

    We can do nothing about past service in the public sector. That has to stay unfunded and on the contractual basis already promised.

    For the future, it should be funded, not final salary, and not inflation proofed.

    A funded State sector pension would lift the Stock Market, (supply and demand) and lift the funded pensions for all private and State employees.

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