Pensions Conference. Review of Workshop C3: Public sector schemes: last bastion of defined benefit

Download the paper here

This session primarily provided a broad grounding in what the public sector schemes currently provide and the Hutton proposals (summary at the end of this review).

The main question that I took away was whether the changes are needed at all.  In particular, Hutton is predicated on the concern that public sector pensions are unsustainable in affordability terms, however the chart (below) from the Hutton Report projects that benefit payments will (with no benefit changes) fall relative to GNP.

I could only conclude that the key issue is the scale of the chart: 50 years is a long time to wait and the projected saving is mainly predicated on the growth of the public sector itself being about 0.5% pa less than the growth of the economy.  The government is perhaps looking for a quicker and more certain reversal of pension costs to 1999 levels.  There may also be the concern that the taxpayer is underwriting almost all of the risk that the economy does not grow as assumed (3% real) in much the same way that trustees may be nervous about basing a valuation on a discount rate at that level, even if it is a best estimate.

These concerns must be balanced against a wider pensions policy view as the current proposals risk widespread opt-outs from the public sector schemes, as well as a narrowing of access.  In many cases, further rises in member contributions, especially for younger members, could make the schemes sufficiently unattractive as to cause an exodus.

Highlights of the background I learned that I didn’t know before:

• 12 million members
• Public schemes’ rules are set out in legislation, so practitioners should not expect to find a trust deed
• Public schemes are exempt from most pensions regulations
• Public sector employers have to pay pension contributions to the state, even though the schemes are unfunded and the payments are circular, the money having come from the state in the first place.  However, this does set up a budgetary process which is a helpful discipline
• Contribution rates are set based on a discount rate of RPI+3.5%pa, soon to change to CPI+3%pa, a proxy for economic growth.  This contrasts with FRS17, say, where the rate might be RPI+1.8%pa, so the contributions are around 2/3 of an accounting service cost
• The Judges’ scheme is not registered (so that the Lifetime Allowance does not apply)
• Independent school teachers are also members of the public sector schemes
• Scotland and Northern Ireland typically have their own schemes, eg in the NHS
• There are about 50 different police schemes, administered locally, making central information difficult to collect
• Member contributions vary materially between schemes, eg the armed forces are non-contributory but the police pay a massive 11%
• Under the new proposals, many may lose access to the schemes, such as contractors and employees in GP surgeries