Pension reform is inevitable

Tweet The recommendation to end final salary pension schemes in the public sector can come as a surprise to no-one. If there is any element of surprise, it’s that it didn’t happen sooner; after all it was the previous government which presided over the closure of such schemes in large areas of the private sector. Indeed, it was a decision taken by Gordon Brown early on in his chancellorship which proved to be the final straw for so many schemes, and the public sector is no more immune to that decision than was the private sector.

Removing the tax exemptions from pension funds, and doing so suddenly with no transition period, raised billions of pounds in extra revenue for the then government. It also completely undermined the careful financial planning of pension fund managers. Coupled with diminishing returns, increasing longevity, and the reluctance of both employers and employees to pay more into their pension funds, something had to give.

That is not to say that I disagree fundamentally with Brown’s decision – in principle, he was simply ending a tax break which disproportionately benefited the better off. But it didn’t only benefit the better off, and, as ever, it is not the better off who will lose most in the end. His mistake, I feel, was in not giving notice and phasing the change in so that employers, employees, and pension fund managers had the time to make more gradual changes to ensure that schemes remained viable.

Reform is inevitable. It doesn’t have to be the simple abolition of defined benefit schemes, although I suspect that is the natural tendency of the present government. Higher contributions probably are inevitable, and there is room for debate about how much of that is paid by the employers and how much by the employees – and both sides need to recognise that proper funding of pensions is part of the total remuneration package of staff, and treat it as such. It’s not just some sort of ‘overhead’ which can be arbitrarily cut.

Even worse than the situation with funded pension schemes, of course, is the crazy situation of certain schemes – such as the police and fire service – where pensions are not separately funded, but paid for out of current revenue. This is madness, and the situation can only get worse. Putting it right by moving to a proper funded scheme will be costly, but the longer it’s left, the more costly it will get.