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The Actuary The magazine of the Institute & Faculty of Actuaries

ACA discussion aims to close gap on public sector pensions

Offering contrasting solutions to bridging the gap between private and public sector pension provision, Michael Johnson, research fellow for the Centre for Policy Studies, is scathing in his criticism of the Government's latest offer to the unions and calls for the adoption of market-linked pensions for the entire public sector, while ACA chairman Stuart Southall advocates a ‘middle way' approach with a wider sharing of the risks involved in delivering pensions across the board.

Mr Johnson said the price of the Government's latest offer in negotiations with unions would be ‘paid by those who are not at the negotiating table - the private sector and the young', and branded the Coalition's suggestion that there would be ‘no more reform for at least 25 years' if the offer were to be accepted ‘irresponsible'.

He noted that taxpayers were already meeting 80% of the cost of public sector pensions, including a cash-flow gap that will top £8 billion by 2014-15, and questioned whether the cost would fall as a percentage of GDP, which he said was ‘key' to the unions' case.

Mr Johnson called for unfunded public sector schemes to be replaced by a notional defined contribution framework, after an interim period where public sector employees would be covered by career-average defined-benefit schemes.

He added that all public sector employees should be compelled to participate in NEST in order to help catalyse a saving culture amongst 20% of the workforce, and so that the State's ‘limited capacity to absorb pensions-derived longevity risk' could then be concentrated into an improved State Pension.

stuart-southallResponding to Mr Johnson's comments, ACA chairman Stuart Southall (pictured) agreed that the cost to taxpayers of unfunded public sector pensions could rise quickly, especially if the economy failed to grow, but said that a total defined contribution solution across the public and private sectors was not the only option as it was unlikely to deliver comparability or the greater pension certainty sought by the public.

He instead put forward five recommendations for private (and public service) pension reforms, while acknowledging that implementation may have to wait until after economic recovery.

The suggestions include a cap on the costs falling on employers running defined benefit schemes/risk sharing schemes.

Mr Southall also said the reforms should encompass addressing the costs of elderly care, as well as the need for new financial incentives to save, and proposed the outsourcing to the private sector of a reform initiative that would simplify current pension regulation and related taxation.

Mr Southall envisaged that the work would be completed over an 18- to 24-month period.

"The gradual uptake of more risk-sharing schemes in the private sector will help to close the gap with employees engaged in the public sector, who seem likely to retain pensions of a much more generous nature than those generally applying in the private sector at present," he said.

A copy of the discussion paper is available at www.aca.org.uk (latest publications - 28 November 2011). The ACA noted that the views expressed are the contributors' own rather than those of their organisations.