Many in the private sector are looking to replicate the move announced by the UK government which will see future public sector pensions linked to the consumer prices index as opposed to the retail prices index. Historically the consumer prices index has been lower than the retail prices index with some experts forecasting that up to £100 billion could be taken from the current £239 billion black hole in private sector final salary pension schemes. But will it be that easy?
Over the last couple of days we have seen some momentous decisions regarding public sector pensions which on the surface appear fairly innocuous but will have major consequences for those working in the public sector. Some doomsday scenarios suggest that by changing the inflation index from the retail price index to the consumer price index some public sector workers could see their pension payments reduced by up to 25% in the long-term. So is David Cameron right to attack public sector pensions?
There are many different forecasts regarding the potential liability that UK taxpayers have towards public sector pension schemes but one thing appears certain, the liability is in the billions of pounds and will likely grow in the longer-term. We are now looking at a situation whereby local authority taxes and nationwide taxes are being used more and more to fund pension fund liabilities thereby taking away much needed funding from public services.
The UK government has today announced a new measurement which will be used to increase public sector pension payments year on year to allow them to cover the ongoing increase in the cost of living. Instead all using the retail price index to increase the value of pension payments year on year, the government will be using the consumer price index which does not include housing costs and is therefore generally lower than the retail price index. So what impact will this have on public sector pensions?
As the UK government gets set to tackle the UK public sector pension deficit, with rumours that employees will be asked to contribute more in the future, there is growing concern about a similar situation in the European Union. Estimates with regards to Europe suggest that the ratio of pensioners to workers in Europe could double in the next 50 years which would place massive pressure upon state pension funds around Europe.
A report by the Public Sector Pensions Commission, set up by the Institute of Directors and Institute of Economic Affairs, has today accused previous UK governments of "hiding" the true cost of public sector pension schemes. It was widely accepted that employee and employer contributions totalled around 20% of salary but the Public Sector Pensions Commission believes this figure is nearer 40% when you take into account the discount rate based on current index-linked yields. So did the government hide the true cost of public sector pension schemes?
As the UK government readies itself for the release of various changes to public sector final salary pension schemes many are asking who will subsidise future private sector pension schemes which continue to struggle. The UK government took away various tax incentives some time ago and many believe this situation needs to be reversed in order to give the private sector an opportunity to replenish pension funds and allow people to plan for the future with confidence.
One subject which is hitting the headlines at the moment is retirement and the very fact that many people in the UK are not putting sufficient funds aside for their retirement. This is a growing problem for the UK government, UK workers and those entering retirement because ultimately if you wait until the final years of your employment there may not be sufficient time to put money aside for your retirement. So what should we do?
British Airways has this week announced an agreement with Goldman Sachs to effectively insure £1.3 billion of the company's £3.7 billion liability between the two open final salary pension schemes. In what is a slightly complicated transaction, the agreement with Rothesay Life (a subsidiary of Goldman Sachs), the company has managed to match future cash flow requirements in any inflationary and interest rate scenario.
It is believed that the largest 200 pension schemes in the UK, all final salary schemes, could hit a combined deficit of around £140 billion within the next 12 months. This comes at a time when the UK final salary pension scheme, at least in the private sector, is under serious scrutiny with many companies looking to close their schemes to new entrants and also, where possible, transfer to money purchase arrangements.
