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Are Public Sector pensions sustainable?

Friday, 17 Jul 2009 by lee | 0 Comments

Public Sector Pensions - the end of the Road?

A great deal of comment is being made about pensions at the moment, and one of the main areas is the sustainability of Final Salary Pensions.  Unlike the average private pension, where the benefits on retirement are based on the money paid in and how well it is invested (Money Purchase), Final Salary Schemes guarantee a fixed level of pension, based on the length of service and the final salary of the scheme member.

This ‘guarantee’ is underwritten by the employer.  Every three years the employer is advised how much to contribute to the scheme until the next review, based on projected scheme liabilities, interest rates, stock market values and a number of other factors.  If, for example, stock markets do badly, then there may well be a shortfall in the pension fund.  At the next review, this shortfall will have to be removed by the employer paying more money in.

Whilst the largest UK companies considered Final Salary Pension Schemes ‘de rigueur’ 20 years ago, there is now a mass exodus from offering these schemes to staff.  With stock market falls creating large holes, companies are seeing these schemes as a significant liability. 

So what about Government Pensions?  The majority of public servants have access to a Final Salary Scheme, funded from taxation.  So, in simple terms, if there is a hole in the pension fund, the appropriate authority just increases taxes.  Alright in principle, but hardly an option in practice, especially in the current climate.  If raising money via taxation is not an option, then how will be hole be filled.  Almost certainly part of the funds will come from cutting back services elsewhere.

The question for tax payers, and service users, the majority of whom will not have access to a Final Salary scheme, is should the Government, via its various agencies (including MPs, NHS, Teaching, University, Armed Forces, Fire and Police), close the Final Salary Schemes and revert to Money Purchase arrangements like everyone else? 


1) Should anyone in public service have access to a Final Salary Scheme?

2) If the answer to (1) is Yes, then how should it be paid for?  Should it be via increased taxation, a cut in services, redundancies, or via a significantly higher contribution from scheme members themselves?

3) Should the true cost/value of Final Salary Scheme benefits be taken into account when assessing the total salary package and when undertaking pay reviews?

What now?

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