Pensions need government attention for a bright future

PensionsThe reform of public sector pensions has recently been dominating the news headlines and the government is right to put it on its agenda.

A reform in public sector pensions is needed to overcome the challenges that they are facing. These include increased longevity and lower investment return over the last decade, which are both making pensions more expensive to provide and are creating a burden
on taxpayers.

Save to avoid poverty
It is vital that this reform is handled properly. The UK is already suffering a serious lack of pension saving, with 53 per cent of workers not saving into a workplace pension. This means that millions of people face poverty when they reach old age, with over half of all pensioners predicted to be reliant on means-tested benefits by 2050.

Public sector workers are one of the few groups that are making proper retirement savings, thanks to the pensions arrangements currently available in the public sector.

The government needs to ensure that the reform does not make this savings crisis worse. Significant reductions in public sector pensions could result in a higher level of pensioner poverty and higher costs from means-tested benefits and care services, which would ultimately defeat the overall purpose of the reform.

The government also needs to pay attention to the diversity of the schemes existing within the public sector. Public sector pensions are often discussed as if they are one homogenous group, but there is a wide range of different schemes with different rules, benefit structures and costs. For example, the pension schemes offered by local government are very different to those available in the NHS and Civil Service.

Local Government Pension Schemes (LGPS) is the largest public sector scheme with 1.7 million active members in 2009 and 1.1 million deferred members. In contrast with the other schemes, LGPS is the only funded public sector scheme. This means it has all the liabilities fully funded.

As a funded scheme, LGPS presents numerous advantages over unfunded public sector schemes. For instance, it is transparent about its costs, with independent actuarial evaluation and scrutiny through governance committees, making the size of any possible deficit within the scheme clear. It’s a different story for unfunded schemes.

Guiding the changes
The Independent Public Service Pension’s Commission that the government has tasked to deal with the reform needs to take all these differences into account when formulating its recommendations. To help the Commission, the National Association of Pension Funds (NAPF) has published seven core principles that should guide the changes to public sector pensions. These are:  
• Fit for purpose: public sector pensions should be an integral part of pay and reward and support the recruitment and retention of staff needed to deliver vital public services.
• Adequacy: public sector pensions should not be “dumbed down”, but must continue to provide a good standard of living in retirement.
• Affordability: public sector pensions must be affordable in the long term. The schemes should be designed to meet changing circumstances and ensure intergenerational equity.
• Transparency: the costs of public sector pensions must be clear and transparent.
• Shared responsibility and risk: the employer and employee should share the burden ofcontributions and the risks of costs increasing.
• Quality and efficiency: public sector schemes should demonstrate efficient and high quality administration and governance.
• Mobility: public sector pensions should not put up barriers between the public and private sector workforces, preventing the UK workforce from becoming less flexible.

The public sector pension schemes are clearly going to have to change to meet the challenges of rising costs and longer life expectancies. We also need to address the increasing gap between the quality of public and private sector pensions.

In doing so, the government needs to ensure that it will not end up worsening our pension savings crisis. Ultimately, what our country needs are better, not worse pensions.  

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