UK - Expected savings of around £1bn (€1.1bn) a year on public sector pensions, following the introduction of a cap on taxpayer contributions, is a “scam” according to a pensions expert.

Dr Ros Altmann, an independent pensions adviser, argued the announcement by Alistair Darling, chancellor of the exchequer, in yesterday’s Pre-Budget Report is not a cap on public sector pensions at all because it only applies to longevity assumptions. (See earlier IPE article: UK gov’t hints at auto-enrolment delay to pensions)

The cap is expected to come into force by 2012. However, Altmann claimed the details of the measure outlined in the PBR documentation revealed the cap will only apply to longevity assumptions and not if pension costs rise because of changes in interest rates or inflation.

The government stated in the PBR report that since 1997 it had “introduced reforms to tackle increasing pension costs arising from longevity; these include higher pension ages and reform of ill health benefits. In addition to these cost saving measures, the government is implementing further significant reforms to public service pensions.”

But Altmann claimed the whole reform of public sector pensions has been based on “misleading information”. She told IPE: “When you look into the detail, they have been - and still are - trying to hide from the public that this cap only applies to cost increases arising from changes in longevity. If costs change due to other economic factors, then taxpayer costs are not capped at all and members will not be expected to fund the extra.  Even the MPs did not realise that this applies to their own scheme too.”

Therefore she argued: “Given that current assumptions used to calculate pension liabilities in the public sector do not reflect realistic discount or inflation rate assumptions, it is highly likely that public sector pension costs will keep overshooting Budget forecasts - as they have already done in the past few months.”

For example, the PBR figures revealed the net cost of paying public sector pensions is forecast to rise from £3.3bn in 2008-09 to £4.8bn in 2010-11, which Altmann claimed is equivalent to a 45% increase.

She added: “I am calling for honesty and transparency - an independent assessment because we clearly cannot rely on the government to be open about the costs of public sector pensions for future taxpayers. We urgently need an independent review of public sector pension costs and a proper comparison between arrangements for public and private sector workers.”  

Elsewhere, Chris Johnson, head of UK human capital at Mercer, meanwhile noted that public sector pension schemes are already subject to a cap on employer contributions, which is expected to impact public expenditure in 2012. He therefore suggested the report “does not appear to announce anything new, and simply reflects the current position.”

Darling also announced in his speech that public sector workers earning over £100,000 would be expected to make a greater contribution to their pension. However, Johnson pointed out some schemes already have differentiated contribution rates, and while it seems fair that the higher paid should pay more, many of these will be paying tax at the 50% rate from 2010 as well as on their employer pension contributions from 2011.

He warned: “Changes such as this should be part of broader public sector pension reform rather than as a stand-alone development.”

Joanne Segars, chief executive of the National Association of Pension Funds (NAPF), added that although the cap is one way to help the scheme deal with costs associated with increased longevity, she suggested the decision to increase contributions from high-earners “will only achieve very small savings”.

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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