The pensions industry has come out in overwhelming support of the government's plans to change public sector pension provision and reduce the funding burden on taxpayers in line with Lord Hutton's recent report. As the debate between government and unions turns increasingly acrimonious ahead of a planned public sector strike on 30 June, Pension Funds Insider asks industry figures how they see the big pensions debate.

Graeme Muir, a partner at Barnett Waddingham, told Pension Funds Insider that he welcomed the reforms "to ensure the schemes remain sustainable and employees still get a decent level of pension in retirement. Albeit, it might be a bit less than before but still well worth having."

Nonetheless, talking about the coverage of the proposals in the national press he says he is "disappointed but not surprised at the lack of understanding of how public sector schemes are financed and the lack of knowledge of the rules of each scheme".

Two particular widely reported claims rankle Muir; that the retirement age is to rise across the whole of the public sector from 60 to 66 and that the deficit in the combined local government pension scheme (LGPS) has risen by 73% in the year 2009 /2010.

He explained that "many in the public sector already have a retirement age of 65 – however having to work an extra year doesn't make as good a headline as implying they have to work an extra 6 years."

Responding to reports that LGPS schemes were suffering a 'ballooning deficit' at the end of the 2009-2010 financial year, Muir said: "These deficits are accounting deficits that are calculated to comply with accounting standards and do not have an impact on council tax levels. The equivalent total deficit on 31 March 2011 is likely to be considerably less than on March 2010 [mainly due to a change of inflation indices for pension payment increases], and as a result will be less likely to attract the attention it has this time around."

"The reported deficits are very short term accounting numbers whose purpose seems to be to try to answer the question 'if I was a company and wanted to finance my pension liabilities by borrowing on the corporate bond market, how much would I need to borrow?'. I'm simply not sure why central or local governments are required to answer such a question".

Lost in the fog

For Charles Magoffin, pensions partner at Freshfields Bruckhaus Deringer, "the noises that are coming out of the unions are in danger of making some significant points lost". Magoffin expressed disappointment that two points have been overlooked in much national press coverage: the honouring of previous pension accruals and keeping of a defined benefit link to payments in a "career average arrangement that is very respectable".

Magoffin admits to be "surprised that more has not been made of Hutton's proposals to synchronise the public sector retirement age with the state pension age", which is proposed to be raised to 66 by 2020 and 68 before 2050.

He says that along with the material difference of many public sector workers moving from a retirement at age 60 to 66, it has the potential of becoming something of a "moveable feast" depending on where the government places it in the future with serious implications for the value of public sector pension provision.

Looking into his crystal ball, Magoffin reckons that "this may end up as one of the most controversial points in the negotiations and while I haven't seen any comment on it in the press it would not surprise me if public sector unions focus on that and make the point that they don't really know what they're getting. If the government did concede on that it could be valuable for unions".

Seeing pensions flashed across the front pages as a major political talking point could help focus the wider public on their retirement savings, Magoffin agrees. "Within the bubble of the pensions industry we can't help but be aware of the value of these benefits but it may focus people's minds on how valuable pension benefits are, particular defined benefit pensions."

He adds that "the value of the few defined benefit plans around is ever increasing as an employee retention tool and this debate could remind greater numbers of employers of the value of effective pension provision". As an example Magoffin mentions Tesco who attracts employees with its career average scheme.

Putting it straight

Bob Hair, head of financial planning at solicitors and asset managers Turcan Connell, supports the government's view that current public sector pension arrangements are excessively expensive for the taxpayer and "absolutely unsustainable". He says: "The sabre-rattling from the TUC misses the point. The problem of public sector pensions is just too big to ignore and the reforms are needed to square the circle as you can't deal with public sector pay without dealing with pensions."

Hair reflects much of the pension industry in that beneath seeing the planned reforms as a financial necessity he expresses some sadness at another step being taken away from the generous UK pension system of old. "I have tremendous sympathy for the 12 million people affected by the reforms but I suspect the private sector will have less sympathy for those affected than many people expect it will."

The union argument that the entire public sector faces a pension raid doesn't carry favour with Hair. "If the TUC read the Hutton report it's clear that those most affected by reduced pension payments are middle-grade workers and senior managers.

Hair says that public sector workers have in the past told him in individual retirement consultations that they do not wish to retire at the age of 60. "It's not a point that everybody would agree on, but some people will welcome the opportunity to work longer and accrue a more adequate pension before gaining a more appropriate replacement rate by retiring once they qualify for a state pension. This replacement rate is actually extremely important for our wider consumer economy as well."

Murray Smith, marketing and sales director at Mattioli Woods, also supports the planned changes on principal but says that "the timing of the reforms is questionable". "There could be a negative economic impact in the short term because those in the public sector who have survived job cuts are now faced with a reduction in disposable income. As the public sector is the biggest employer in the country that is bad news for us all."

Smith said the debate "is very big news and there has been a lack of sensitivity, but that is the nature of the beast". He added that "there should still be some positive PR in the debate for the public sector, as public sector pension provision will still be absolutely miles better than in the private sector even after the planned reforms have come into force. That is a difficult point to get across though, as something is being taken away from people's pensions."

Clare Abrahams, senior actuarial consultant at benefits firm Lorica, is, on the contrary, not hopeful of any major boost to pensions saving emerging from the debate. Abrahams said: "Unfortunately, I don't believe the debate is making non-pension savers think more about their retirement. At the moment it seems as though very few people realise that the onus is on them to ensure they are comfortable in retirement – this should be the case whether the individual is part of the public sector or part of the private sector."

"There is potentially a very large section of the general population that could face poverty in retirement. This may only be truly impacting years down the line when the benefit of hindsight becomes apparent. It will be difficult then to avoid this putting a further strain on Government finances and further impacting both private and public sector workers."

Making it all add up

Fears of significant numbers of public sector workers opting out of their pension schemes once contributions are raised and their pension entitlements potentially reduced has caused disquiet within the pensions community. The National Association of Pension Funds (NAPF) has echoed concerns that the problem will be particularly acute for those enrolled in a local government pension scheme, given that local public servants already contribute more towards their pension than their colleagues in other parts of the civil service.

A recent NAPF survey claims that 95% of local authority pension managers are fearing that members will opt out should the 3% increase in contributions proposed by the government be introduced. Unions have been claiming for months that substantial amounts of the local government pension scheme membership will quit their schemes, but the treasury says only 1% will be driven out.

Magoffin raises fears that the government will refuse lower planned contribution hikes even if they force substantial opt-outs that leave some public sector workers dependent on future generations of taxpayers for means-tested retirement support. He said: "Ultimately it might be political considerations that decide this as the government just can't be seen to continue something that is seen as generous and gold-plated, whereas deferring the burden to means-tested welfare in the future is more of a cost that can be hidden."

Chief secretary to the Treasury Danny Alexander's recent promise to shield public sector workers earning under £18,000 per annum has somewhat taken the wind out of the unions' sails, industry figures suggest. According to Hair the industry needs to factor in that these reforms "protect the lowest paid public sector workers from contribution increases".

First published: 28.06.2011

dbillingham@wilmington.co.uk