Commenting on the Public Sector Pensions Commission Report, John Prior, Principal and Head of Public Sector Outsourcing at pension consultancy, Punter Southall, said:
"As the Commission highlights, one of the main problems is the current lack of transparency surrounding the costs of public sector pensions. This “cost” is subjective and can be measured in a number of different ways, although I agree that a more realistic cost (including employee contributions) is around 40% of salary, rather than the 20% of salary assumed by the Government.
"The trouble with the current Treasury approach of using an artificial “discount rate” is that it uses a much higher interest rate than has actually been achievable in the market for over ten years. A Government promise to pay a future pension to a public sector worker is very similar to the promise it makes to someone who buys an index-linked gilt. In effect, by using an artificial discount rate, the Government is allowing public sector workers to “buy” index-linked gilts at half the price charged to other investors. This would matter less to those in the private sector if they were also able to buy half-price index linked gilts. They could then hold these in their (mainly defined contribution) pension funds, and be fairly confident that a 20% of salary contribution rate would be enough to provide them with the level of pension that a typical public sector worker currently expects. Until such time as the Government decides to issue half price index-linked gilts to private sector employees for their pension funds, they or their employer will need to contribute more like 40% of salary if they want to be confident of matching a typical public sector pension."
Ends
For more information or to speak with Punter Southall please contact:
Penrose Financial
André Flemmings
020 7786 4811
Trustee training - Pension scheme investment (September 2010)
