The ballooning public sector pension deficit must be tackled by switching employees from a final salary model to a pay-as-you-go defined contribution (DC) model, the CBI has warned.
A new report by the business group claims the transfer to the less conventional DC model is necessary to help plug a £10bn black hole of public spending every year.
Workers’ current accrued benefits would be protected under the changes, but public sector workers would need to accept that final salary schemes – which can pay out two-thirds of salary each year – are no longer sustainable, the report published today said.
The total overall liability of public sector pensions has escalated to £1.01 trillion – 153 times more than annual public spending.
The pay-as-you-go DC model suggested by the CBI is different to the more traditional DC scheme as it does not invest payments in financial markets.
Pension retirement ages should increase, says CBI
Public sector pension schemes should increase their retirement age in line with the state pension age, the CBI has urged.
The UK state pension age for men is currently 65, with women moving from 60 to 65 by 2020. By 2046, it will increase to 68 for both sexes.
But some schemes “have not moved with the times”, according to the Getting a Grip report. Teachers, the NHS and civil service schemes have increased their retirement ages to 65 – but not for existing staff, even when they have many years of service remaining, the report states.
However, John Cridland, CBI deputy director-general, insisted that scrapping the default retirement age (DRA) – the point at which employers can legally force someone to retire – was not a viable option.
“Employers need to have succession planning,” he told Personnel Today. [The DRA allows] a way of knowing when they are going to pay a pension and deal with it in a dignified way.”
The government is due to deliver its verdict on whether to scrap or raise the DRA this summer.
Instead, the money is ring-fenced into a personal account, separate from general public funds and budgets. According to the CBI, this eliminates risk and unpredictable taxpayer liability, and offers a more transparent system for employers.
John Cridland, CBI deputy director-general, told Personnel Today: “The most important thing we’re doing here is capping the risk,” adding this was not a straightforward cost-cutting exercise.
A small number of countries, including Sweden, Germany and Poland, have opted for the pay-as-you-go DC scheme.
However, at a central London briefing, Cridland could not outline what benefits workers could expect to lose when they were forced to move across to the new plan.
He called for an independent commission to be set up to help employers reach their own decisions on pensions provisions – which could vary justifiably between the NHS, police and civil service.
The CBI added it had opted for this ‘notional’ DC scheme because a more conventional funded model would cause practical problems.
The report said: “A move to funded DC for all public sector schemes would require employer and employee contributions now used to pay pensions to be invested in personal accounts – but existing pensioners would still have to have their benefits paid.
“Funds would therefore have to be diverted from other spending commitments such as the NHS and education system to meet their cost.”
The CBI report, Getting a Grip: The Route to Reform of Public Sector Pensions, comes as a National Audit Office study last month forecast the annual cost to the taxpayer of public sector pensions will soar to £79bn per year by 2059 – up from the £14.93bn spent annually today.
[Article edited at 17:18 on 7 April: Removed reference to when potential pension changes could come in, with the CBI stating it did not say the move to a notional DC scheme could take place alongside 2012 auto-enrolment changes.]
Funded pension scheme: A funded pension scheme is one in which the employer and employees’ contributions are invested in a mix of equities, bonds and cash. It is normally separate and distinct from the employer’s business. On retiring, the value of the account is available to provide a pension and potentially a lump sum. Defined contribution (DC) schemes are conventionally funded.
Unfunded pension scheme: An unfunded pension scheme uses the employer’s current income to fund retiring employees, rather than out of money put aside on a regular basis irrespective of need. The NHS, teachers and the civil service final salary scheme is unfunded.
Pay-as-you-go DC scheme, or ‘Notional DC’: Unlike a conventional DC scheme, money is not invested in financial markets. Employer and employee contributions are directed to independently-managed, ring-fenced funds, separate from general public funds and budgets, which are then drawn on when required. The key is that the greater a worker’s contribution, the more they will get in retirement.
Source: CBI/ HMRC