David Davison: Time tide turned on pension attitude

King Canute, the tenth-century monarch of England and much of Scandinavia, is forever remembered for sitting in his throne on a beach, supposedly trying in vain to stem the tidal waves he had commanded not to wet his feet or robes. The image of the uncontrollable water inching towards Canute is one that comes to mind when I see government and trade unions response to the current state of UK public sector pension provision. Both sides are exhibiting an alarming degree of delusion and denial over what is, by any standards, a growing crisis.

In February it was revealed that the amount Scottish taxpayers are paying into local government pensions has increased by nearly half since 2007. The figure has gone from nearly £700 million to £1.03 billion in the 2011-12 financial year. That amount is equivalent to 54 per cent of the £1.9bn collected in council tax in that year. Local authorities are now spending nearly as much on pensions as on policing and a significant amount more – hundreds of millions of pounds more – compared to the funds being allocated to roads, bin collections or sport.

The UK’s largest local government pension scheme, Strathclyde Pension Fund, announced earlier this year that it had, for the first time, reached a point where pension payments to pensioners now exceeded contributions received. This evolution will require adaptation of the funds’ investment policy as this has arisen approximately five years ahead of the expected time frame.

No-one disputes the need to provide for public sector workers in their retirement but what is alarming is the rapid growth of this financial burden. The figures show that the amount being paid out in pensions has almost doubled to £955m over the past four years, a significant impact on the public sector’s ability to maintain key services like health, schools and policing.

Michael Johnson of the Centre for Policy Studies is a formidable figure with a distinguished track record in grasping the major issues facing the UK’s pension sector. He has highlighted the extent of unsustainable public sector scheme funding in an excellent paper entitled A Toxic Tangle: the Public Service Pensions Bill. Johnson has estimated that the future cost of public service pensions could be more than £9bn a year above current expectations.

His overall assertion is that the Public Service Pensions Bill simply will not deliver the changes that are needed and we need to go back to the drawing board.

The starting point in addressing this problem is to acknowledge that it does indeed exist. Trades unions, which have been effective in fighting to maintain a virtual status quo on members’ pensions, need to look at the wider impact of this increasing funding gap as it will inevitably lead to cuts in public services, reductions in staff numbers and an increased tax burden for everyone. Is this really the legacy they want to help create?

Government must implement a cost cap on benefit provision for the public sector and also introduce a defined contribution option within public sector schemes for employees who do not wish to, or cannot afford to, participate in a defined benefit option. This would provide employees with a greater range of choices than the all or nothing option which currently exists and would work well alongside the new plans for auto-enrolment pensions.

Fair Deal provisions – the non-statutory policy which prescribes the level of pension provision offered to public sector staff when they are compulsorily transferred to a non-public sector employer should be brought in line with transfer of employment rules as was envisaged by Lord Hutton in his 2011 report outlining proposed reforms to public sector pensions.

This would allow out-sourced contractors to fund benefits using defined contribution schemes which would make the market for out-sourced contracts more competitive. In addition, public sector schemes should no longer be allowed to dump their past liabilities on newly-formed, out-sourced organisations or contractors ensuring the public sector deals with any issues it has created.

Hard questions need to be asked. Is it sensible to protect the pensions of existing workers at the expense of public services and future public service jobs? Is it fair to protect relatively generous pensions which workers in other sectors are forced to fund at the expense of their own retirement provision? Why are unions fighting to retain a defined benefit pension scheme for lower paid workers when they could be “over-pensioned” through the changes to the state pension system? Why are highly paid medical professionals fighting for a pension, most of which will disappear in tax? Are we prepared to leave future generations with a legacy of debt just so that existing public sector workers can maintain the status quo?

While we all want to ensure that we have a comfortable retirement, the public sector pension numbers simply do not add up. It is time to accept the tide of change and move to a fairer system for all workers.

Even King Canute had the good sense to leap backwards as the sea rushed over his feet and acknowledge: “How empty and worthless is the power of kings.’

As the tide of public sector pensions affordability continues to rise beyond our control, it is time for both government and the trade unions to heed those words and agree a realistic and sustainable plan of action for everyone’s benefit.

• David Davison is head of public sector, charity and not-for-profit at actuarial firm Spence and Partners