UK - Public sector pensions in the UK have become "unsustainable", with an estimated unfunded liability of £1.01trn (€1.14trn), according to the UK Confederation of British Industry (CBI). But one solution proposed is a move to a Notional Defined Contribution (NDC) system, similar to that applied in Sweden.

In a new report entitled 'Getting a grip: the route to reform of public sector pensions' the CBI claimed figures from the UK government suggesting unfunded public sector liabilities in March 2008 were £770bn, were based on "unrealistic assumptions" in part because they are based differing discount rates for the cost of benefits and contribution calculations.

Using pricing assumptions in line with private sector practice, as outlined in an earlier 2008 report on public sector pensions, the CBI has estimated that the total liabilities of these unfunded schemes was £915bn in 2008 and now stands at £1.01trn - around 24% higher than the government figure. 

The report acknowledged there have been some reforms to public sector pensions, such as cost sharing, increasing contribution rates and raising retirement ages in certain schemes, but warned these "do not go far enough".

The CBI noted while career average schemes might reduce costs in the short-term, more "radical reform is likely to be needed" to achieve the required long-term savings.

It admitted moving the public sector onto a funded defined contribution (DC) basis would provide the taxpayer with greater certainty, but warned "there are major funding issues which almost certainly render this option unworkable". 

The CBI has therefore proposed the public sector pensions system move to adopt an NDC system, as applied in Sweden, where employees pay 16% into a NDC. The money is noted as entering an individual account, but is used to pay existing pensioner benefits, while the value of the virtual account increases in line with the average wage and this virtual balance is converted into an annuity at retirement. This is supplemented by an additional 2.5% of earnings that is invested in a funded DC scheme  - the premium pension - where members can invest in up to five funds. 

The CBI argued this option for unfunded schemes such as the NHS, teachers and civil service pensions, would provide "stability, predictability and practicality", in addition to a degree of guarantee around investment return that will reduce risk for employees and provide an incentive to save. It also claimed once an NDC is in place, there would be long-term policy stability as the use of annuities will adjust to take account of factors such as changes in longevity. 

To help oversee this change, the CBI is echoing recent calls for an independent commission to assess the current cost of public sector provision and to set out and then monitor "principles" that would form the basis of new pension schemes, although the specific design would be left to employers in consultation with employees and unions.

It suggested the commission's remit could also include advice on the appropriate guaranteed rates of return for the NDC, and provide support and benchmarking to employers designing NDCs.  

The CBI also admitted it is "well aware of the complexity and magnitude of the issues" facing any potential commission, including the likelihood that if an NDC system is adopted there will be a "prolonged period when public sector workers will retire and receive benefits they accrued under the current system as well as those under a new scheme". 

John Cridland, deputy director-general at the CBI, said: "Countries like Sweden and Holland reformed their systems some 15 years ago. We think that for many public sector employers, shifting to a NDC pension could be the best way forward." 

Other recommendations from the report meanwhile included a suggestion that normal retirement ages across the public sector be harmonised, as they currently range from 55 for closed sections of the police and firefighter schemes to 60 in the civil service and 65 in the open sections of the NHS, teachers and LGPS schemes. 

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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