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The Actuary The magazine of the Institute & Faculty of Actuaries

Actuarial Profession calls for transparency and a rational approach to public sector pensions debate

Ronnie Bowie, president of the Institute and Faculty of Actuaries, has said that he is encouraged by Lord Hutton’s interim report into the future of public sector pensions. Mr Bowie said: “The Profession welcomes his objective and reasoned approach, his rebuke of ‘simple, sloganistic approaches’ and his willingness to provide a set of general principles to shape the next stage of the Commission’s work.

“The Profession strongly supports the Commission’s view that much greater transparency and consistency is needed in relation to the way in which public sector pension costs are calculated. It is reasonable that some account of future GDP growth may sensibly be taken into account in assessing the future burden of public sector pensions on future generations of taxpayers.

However, we believe that when comparing the value of private and public sector benefits, the only coherent measure of value is the economic value (generally giving a much higher cost and value). By this better measure, public sector pensions are roughly three times or more valuable than a typical current private sector defined contribution scheme. The effective difference is even more marked when the higher expenses of private sector schemes are taken into account. The current approach to valuing these pensions hides this difference. We will be reiterating this point in phase 2 and providing a clear rationale for a new approach.

“We also agree that there is little to commend a wholesale switch to private sector levels and types of provision and are glad that the Commission has not just focused on cost to the public sector workers and taxpayer but also risks to both parties. Identifying and managing the risk to the different parties is critical to the sustainability of any future arrangements.

“In looking forward we believe there is considerable debate to be had about the merits and demerits of a funded against an unfunded approach. The present predominantly unfunded approach has a number of merits but it inevitably leads to the current ‘crossover point’ when pension payments begin to exceed contributions with consequent costs to the Exchequer (even though the previous decades have seen public sector pensions making substantial positive contribution to the Exchequer). The Hutton Review gives us the opportunity to revisit the funded versus unfunded debate. For the sake of future generations it is vital we get it right.

“The Interim Report is a good start to the debate. Our challenge to politicians and trades unions is to maintain the rational and reasoned approach articulated by Lord Hutton. A lasting solution will not be achieved if the debate descends to the partisan and sloganistic.”