We’ve had some meat on the bones of the Hutton proposals today with a statement from Treasury Minister Danny Alexander too. You can read my earlier thoughts on Hutton in my blog “Hutton Speaks…and Makes Sense” below. But despite this, the knee jerk reaction of the Public Sector unions is, to paraphrase the late Miriam Karlin’s character Paddy, “Everybody Out”

The Government have now guaranteed that despite scheme pension age rising from 60 to 66 to logically coincide with State pension age rises – and dare I say it, most private sector pension arrangements – low paid public sector workers on less than £15000 will not have to pay contribution increases and those earning less than £18,000 will have a capped contribution rate of only 1.5%. Obviously, all benefits earned up to the date of any change will also be unaffected.

My very clever actuarial friends also assure me that many of the lowest paid – and those likely to remain so, will in fact probably be BETTER off under the Career Average model than under the old Final Salary scheme which tends to favour high earners or those with a steep career progression. Reform is clearly needed – that much is obvious, at least to most of us who have a memory longer than that of a flea and who remember the ‘Dear Chancellor – there’s no money left’ note from the previous administration as they walked out the door. So are the unions deliberately misleading their members to ferment discord or are they just badly advised? You tell me…

First the good news is we are being told that the recession is over and the FTSE 100 has risen to over 5300 at at 17th of November. You would think then that pension scheme trustees would be expecting reducing deficits when their scheme actuary comes to look at the figures.

On the other hand, other observers are telling us that pension deficits could have been underestimated by nearly £270 billion, and far from things getting better, in reality the funding position of schemes is getting far worse. And it is beginning to effect not only defined benefit schemes but defined contribution schemes too are also showing severe underperformance.

The reasons for this are complex – isn’t everything in pensions? The Bank of England quantitative easing program has led to a sharp decline in corporate bond yields. Why is this important? Simply because the value of a schemes liabilities are assessed by reference to corporate bond yields. Quantitative easing has released far more corporate bonds on to the market making them cheaper. As the value of these decrease, the size of the liabilities increase. It has acted as a counterbalance to any value that the increase in equity prices may have produced.

There will be no quick fix to the funding problem. Many DB schemes are taking the opportunity to close to future accrual in an attempt to control pension costs. But in a typical scheme, this can take 5 to 10 years to show any significant effect. In the meantime, no government seems able or willing to grapple with the thorny issue of simplification of the pension regime here in the UK. Yet another layer of complexity in the form of Personal Accounts is just around the corner and even were there to be a change of government within the next six months, it is unlikely that any new administration will tear up entirely what is already on the statute book. More’s the pity.