Public sector pensions: broken promises

The spotlight on Royal Mail and its estimated £9bn pension deficit has paved the way for other public sector pension schemes to come under scrutiny, according to experts.

When prime minister Gordon Brown announced a review of MPs’ pensions earlier this year, it rang alarm bells that final salary pension schemes may be curbed across the public sector.

Although the review only concerned 646 members of parliament, it may have been the government’s first attempt at getting its own house in order before trying to tackle the public sector pensions burden elsewhere.

Tom McPhail, head of pensions research at financial services and asset management firm Hargreaves Lansdown, said: “I thought it was interesting timing that Gordon Brown announced a review of MPs pensions a couple of weeks ago. The MPs pension is a canary in a coal mine on this. There was no way the government can drive through some review of public pensions without putting its own house in order.”

Business group the CBI agreed that by announcing a review of MPs’ pensions, Brown could be clearing the ground for wider reform of public sector pensions.

Evolution

Neil Carberry, head of pensions policy, said pensions and benefits experts will closely analyse how the privatisation of the Royal Mail evolves to judge how the policy on public sector pensions will progress.

The CBI has long called for a debate on public sector pensions, as a commitment to final salary schemes could create a trillion pound hole in the public accounts. “We hope that the whole public sector will take a step back and look at the mess they are making,” said Carberry.

The private sector was already going through the process of pensions reform, he added. “What’s good for the private sector is good for the public sector. The government can either reform public sector pensions now, or in 20 years time there will be a significant disparity between the public and private sector, or the government simply will not be able to afford it.”

McPhail said: “It will be a question of time whether other public sector schemes [than the Royal Mail] go down that road. We are some way off seeing the NHS or the police losing their final salary schemes, but [the Royal Mail sell off] is a move in that direction. How far and how quickly we go has yet to be determined. That is one of the things we will see in the next 24 months.”

Test case

According to the director of the Pensions Institute, David Blake, the reaction of unions and politicians to a further renegotiating of the Royal Mail scheme could be a test case for other ‘gold-plated’ final salary schemes in the public sector including NHS, local government, police and teachers pensions.

When business secretary Peter Mandelson introduced a Bill in the House of Lords last Wednesday, designed to “make provision for the restructuring of the Royal Mail Group and of the Royal Mail pension plan”, he also confirmed the government would take on the huge pensions liability, rather than any private sector firm, if part-privatisation went ahead.

But the pensions deficit is so high that, as the chairman of the trustees of the Royal Mail pension fund, Jane Newell, warned, the scheme could only provide as much as 50% of members’ benefits in its current state. Regardless of privatisation, the government may need to renegotiate the pension benefits that employees can expect to get: even if they have been paying into a final salary scheme for years their overall ‘earnings’ may need to be reduced.

According to McPhail, the Royal Mail scheme will stay in the public sector, becoming “ring fenced” as part of the privatisation deal. “Although on-going employees may no longer enjoy final salary benefits,” he warned.

Jeopardy

This is on top of Royal Mail already closing its final salary scheme to existing staff and new entrants in May 2008. It also moved current scheme members to a career average pension for future contribution contributions up to that date were supposed to accrue on a final salary basis although this may now be in jeopardy.

Mandelson’s Bill went through first reading in the House of Lords essentially as a formality to allow MPs access to its full details. It will be debated in full at its second reading, expected on 10 March.

Public sector pensions liability

The public sector is estimated to have unfunded pension liabilities of £650bn, although many analysts say the real figure may be double that.

The lucrative final salary pensions perk, still widely on offer across the public sector – and with some schemes including Royal Mail’s only recently closing – has traditionally been accepted because employees were thought to earn less salary than their private sector counterparts. But as the latest Office for National Statistics figures show, people on the public payroll were paid a median of £523 a week compared to £460 a week in the private sector last year.

Final salary pensions in the public sector have long been doomed, but the recession appears to be speeding this up.

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