A public problem at large

The commission on public sector pensions will also shine a light on private sector schemes, says John Greenwood

The establishment of a commission on public sector pensions looks set to have wider ramifications for the entire pensions and benefits industry.

There is no shortage of opinions in the pensions industry as to what should happen to the £1trn liability the UK is said to have accrued on account of promises to public sector workers. Indeed public sector pensions is one of the hottest issues in financial services, even though only a tiny fraction of financial services providers are involved in their delivery.

Pensions have already moved from the ’boring’ category to hot political potato. The appointment of an independent body to see what is and is not being paid out through these schemes is likely to bring the world of retirement saving under even more scrutiny.

There is no doubt the general public have very strong views on public sector pensions, but the views they have are not always consistent. Yes,
they will agree that open public sector pension commitments are to generous.

But they will also agree that the nurse who looked after their granny or the soldier who risked his life for his country should get a decent pension.

Public sector pensions is a classic example of how you can influence research to say something approaching what you want, by choosing which way you ask the questions.

For example, research from Axa conducted just before the election found 61 per cent of voters believe it is unfair that people working in the public sector generally receive better pensions than their private sector counterparts.

At the same time, research for the NAPF has found 90 per cent of respondents believe that everyone deserved a decent pension at work, regardless of whether they worked in the public or private sector.

The one solution to this seemingly contradictory set of views is that the public thinks private sector pensions should be brought up to the same level as public sector ones.

Indeed public sector pensions representatives such as the unions would argue that it is only doing what the private sector pensions industry is telling it to – putting sufficient resources into pensions to give members a retirement income they can live off. However, where schemes are unfunded, such arguments hold considerably less water.

Joanne Segars, chief executive of the NAPF, told the organisation’s recent Local Authority Conference: “Some have suggested that the key to
closing the gap between private sector and public sector pensions is to ratchet down public sector pensions to the levels typically seen in the private sector.

With 12 million people either not saving or not saving enough, making millions of public sector workers – from firemen to dinner ladies -worse off in retirement doesn’t seem to me to be much of an answer.”

The contrary view, that we simply cannot afford these open-ended commitments, is well rehearsed. So does it benefit the private pensions industry to get the public sector to level down or switch across to DC plans?

“There is an element to which the DC models in the public sector look a poor relation in light of public sector offerings,” says Ian Naismith, head of pension marketing development at Scottish Widows.

Naismith also points out that there would be some extra contribution inflows into private sector pensions if the review of public sector schemes were to lead to money purchase solutions.

“The industry has been flogging AVCs and stakeholders to the public sector for years, so there is no reason why not. They might consider Nest, but given the contribution limits, that would seem an unlikely option,” says Naismith.

He also points out that if some public sector schemes were to move across to a DC basis, the amounts that would be contributed could set new benchmarks for what is acceptable, that could ultimately influence perceptions of private sector contributions.

Pensions have already moved from the ’boring’ category to hot political potato

“Big contribution rates into DC from the public sector would create more direct competition. It is difficult for non-specialists to work out just how
much they are being paid when they receive a final salary pension,” says Naismith.

While such an eventuality may seem far off, the impending commission will inevitably bring the public’s understanding of the true costs of providing for retirement into sharper focus. At the same time it will also serve to underline what retirement without a decent pension will be like, which has to be good for the industry and the country at large.

Quick wins for the Treasury are unlikely from this review, although many in the public may be perceiving it as part of the Government’s shortterm
austerity measures. Ironically, while public sector pensions are where the greater problems are, there is the potential to do much more to fill the nation’s coffers through an assault on higher-rate tax relief on savers in the private sector.