I do not understand Lord Hutton’s reference to the proposals in my recent paper (Self-sufficiency is the key), for the funding of public sector pensions, as “ideological”. To what ideology is he referring?
I am a technician and work with people irrespective of their political hue.I am not a political animal (and I am not a member of any political party).
My paper was backed by a Conservative and a Labour peer. My proposals are evidence-driven, notably the harsh reality of the Government’s own forecast for the rapidly widening gap between public sector pensions in payment and contributions – an irrelevant £200m in 2005-06, a mind-numbing £10.1bn in 2015-16.
As an aside, Lord Hutton’s recommended framework will do little to address this, perhaps reducing the gap to £8bn in 2015-16. It will, however, have a much more material impact on affordability 10 to 20 years later.
Today’s pay-as-you-go arrangements accommodate all sorts of behavioural downsides, notably lax financial discipline within the public sector. It shields employers from economic reality (including rapidly increasing longevity) by, for example, placing few constraints on overly generous pension promises being made to employees.
Such commitments, reaching well into the future, are disconnected from the harsh reality of annual cashflow discipline. PAYG enables employers to not be held responsible, let alone accountable, for the accumulation of pension promises – a serious governance failure. With most schemes being unfunded, employers never have to contemplate, let alone execute, a deficit recovery plan.
Ideally, the alarm over the growing annual cashflow shortfall (between contributions and pensions in payment) will now prompt employers to quantify the annual incremental “cost” of future pension promises and plan for how to meet the future cashflow requirement.
Hutton has done a fair amount to address the long-term affordability issue but the fairness issue is utterly unresolved. He has not confronted the injustice of the 80 per cent of workers in the private sector who are having to assume, and pay for, the longevity risk of the 20 per cent in the public sector. In the meantime, the 80 per cent are not able to enjoy certainty of income in retirement until they die, private sector occupational pension provision having almost become a defined- benefit desert.
I have little doubt this issue will be revisited in coming years, until the next round of public sector pension reform.
Centre for Policy Studies