Public sector pensions deficit solution will not be straightforward

The solution to the public sector pensions deficit will not be as simplistic as moving from defined benefit (DB) schemes to defined contribution (DC) schemes in one fell swoop, experts have warned.

In a report released today, the CBI called on the government to switch public sector employees from a final salary model to a pay-as-you-go DC model.

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 said.

But the Chartered Institute of Personnel and Development (CIPD) warned that shifting from DB to DC would not be straightforward.

Charles Cotton, pensions adviser at the CIPD, told Personnel Today: “The problem is industrial relations. No-one has come up with a road plan for getting from A to B.”

Tony Dolphin, senior economist at the Institute for Public Policy Research (IPPR), agreed, warning that switching to DC would be “tough”.

“The government has to be careful that it doesn’t level down,” he told Personnel Today. “The answer is not to punish the public sector because DB schemes are closing in the private sector.”

The comments were borne out by a new report from conciliation service Acas, which warned that pensions will be one of the biggest flashpoints for employee relations in the post-recession employment landscape.

Employers will have to be more considered in the way they tackle pension deficits, according to Cotton, with a number of options available.

“[The] retirement age going up wouldn’t be too controversial,” he said. “You could offer to keep DB schemes in exchange for that. Employee contributions could go up, or you could give employees the option to use the employer contributions in other ways (such as supplementary pay).”

Cotton said the CIPD would support the creation of an independent commission to look into the issue and work out the scale of the deficit.

“There are so many facts being bounced around that it is difficult to work out how big the problem actually is,” he said. “Once we have got an idea of the size of the problem, we can start looking at the options.”

Dolphin concurred, pointing out that a commission – similar to the one on pension reform headed by Lord Turner in 2005 – would have a strong reputation for being independent, and would be likely to gain cross-party support.

TUC general secretary Brendan Barber hit out at the CBI, pointing out that most pensions in the NHS and Civil Service are below £110 a week, while a quarter of NHS pensions are less than £40 a week, and a quarter of civil service pensions are less than £60 a week.

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