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…

We have now had the full report which did not fundamentally differ from the Interim Report issued at the back end of last year. Workers will now have to work to 65, pay higher contributions and the final salary scheme will become a career average scheme, meaning that rather than a final salary figure being used in the pension calculation instead, a salary will be averaged over the working life so generally this will be a lower figure but actually fairer to most workers. The losers will be those who would expect rapid promotion over their working lives.

Why? Although this is not the main rationale set out in the Report, the reality is that simply the traditional FS scheme is unaffordable. We are all living longer so if pensions remain payable at 60 they will have to be paid for longer and the Govt has already announced an increase in state retirement age. Raising the age just makes sense. In addition it has proposed the removal of the default retirement age after lobbying from unions so it seems a bit odd that they now complain about having to wait a bit longer for pensions. Secondly, the taxpayers pocket is not bottomless and contributions from scheme members are historically lower than in the private sector. A member would have to find an additional 30% of salary to ‘buy’ an equivalent pension in the private sector. So essentially they are getting a 30% salary increase in pension contributions on a final salary basis. Not bad.

As far as a CARE scheme is concerned it is true that this is likely to produce a lower pension but this is still better than a pure money purchase arrangement which is often what is being put in place in the private sector as FS schemes are closed. The National Association of Pension Funds announced just a day or so ago that the closure of such schemes accelerated by over 17% the past year.

The howls of protest will be as predictable as they are wrong and there may well be marches and protest but I dont hear realistic alternative solutions being suggested. Remember that in London alone, the Local Government Pension Scheme is facing a £14.6 billion deficit. It is no longer the case that public sectors workers earn less based on the promise of a Final Salary pension. But if we are to avoid that ‘race to the bottom’ that Hutton wishes to avoid, we must do better than a Defined Contribution as they currently are. Come 2015 when these changes are due to bite, we may have improved the DC universe, but that’s by no means certain.

So, at long last we have Lord Hutton’s interim report on the future of Public Sector Pension Schemes (PSS). We are already hearing the entirely predictable howls from the Unions that they will fight any attempt to take away their cherished (and expensive) Final Salary benefits but maybe, just maybe, we need to have a little reality check here.

What is the Report actually saying. Well, for a start, it recognises that about one in five people in this country are covered in some way or another by a PSS. That’s an awfully large part of the population. Billions of pounds are paid out each year and that figure is likely to double or treble over the next 20 or so years. We are talking here of maybe £60 to 90 BILLION a year. Get real people – WE SIMPLY CANNOT AFFORD THIS IF NOTHING CHANGES.

Next, we are all living longer. When these schemes were established, retiring at age 60 meant we probaly had at best 5 to 10 years of retirement on average in receipt of a pension. Today, we can expect to live into our late 70’s or early 80’s and every year as improvement in health, medical breakthroughs and lifestyle continues, we can expect maybe 20 or 25 years on a pension. Just where to you think that money is going to come from? It doesn’t grow on trees. We have to SAVE for it, and yes, PAY for it while we are able to – in other words during our working lives.

Much has been made in the past of the fact that workers in the public sector have been prepared to sacrifice higher salaries available in the private sector for the fact that they will have a great pension at age 60. Another unpleasant fact for the Unions here – this is simply no longer the case. Many public sector workers are now earning higher salaries than their equivalents in the private sector yet private sector workers have been suffering the reality of closure of Final Salary schemes for many years now and the position shows no sign of changing. So another shibboleth bites the dust. Of course there are hundreds of low paid civil servants out there whose options for jobs outside the civil service may be limited but – and its a big but – ironically these are the very people who benefit least in fact from Final Salary schemes once the sums are done and various means tested benefits are factored into the mix. To quote from the Report

In assessing fairness the Commission also found that the reliance on final salary in the majority of public service pension schemes tends to favour those who receive rapid promotion and those who stay in public service for their whole career. The promotion effect alone could mean that high flyers can receive almost twice as much in pension payments per pound of employee contributions than do low flyers.

What Hutton is saying is essentially this:  Wake up and smell the roses. We are all going to have to make sacrifices and there is really no good rationale why the public sector shouldn’t share the pain. The default retirement age for everyone is gradually going up as we’re living longer. Why shouldn’t PSS normal retirement ages also increase? Contributions will also have to go up. It wasn’t that long ago that some PSS required NO contribution from its members bar a small percentage to cover spouses pension. Granted that has changed in recent times but there is a big black hole to fill. Moving to a ‘career average’ rather than a Final Salary basis and other more innovative risk sharing arrangements is more of a long term aspiration, but it works elsewhere in Europe, why not here? What make us so special? Our pension system – unlike those in Europe and elsewhere where the strategy has always been based on a more holistic approach to pension planning – has instead been incoherent and piecemeal. We have meddled and tinkered around the edges for years, resulting in the most complex, expensive and inefficient system imaginable.

While Hutton is not the complete response to what is an enormous problem, it is a start. If only Steve Webb has the guts to do what he always spoke about in opposition and begin the take that holistic approach, sweeping away years and years of bad law, bad strategy and bad implementation  and give us that New Deal in pensions,  we will be condemned to suffer a poorer old age. The PSS are part of the problem, maybe now they may become part of the answer.

Well back from my holidays and time to catch up with what’s been happening in the wacky world of pensions! The ‘honeymoon’ period of our current Coalition Government seems well and truly over and as we approach Conference season, the militants are flexing their muscles. Despite a new offer to their members, the BBC pension arrangements look set to provoke a strike by members of Unite and BECTU leading to the blacking out of the Conservative Meetfest.

This will not be the only industrial action over pensions I suspect. The TUC has said that public sector pension reform is in meltdown and has become a ‘critical issue amongst unions’. While I have on other fora called for more active involvement by citizens regarding their pension arrangements, this was not exactly what I had in mind I confess. Witholding labour that leads to further financial difficulties for one’s employer is not frankly the best way to find a solution in the current economic climate. Mind you, the BBC deserves a good kicking but for entirely other reasons!!

As I write this, the Work and Pensions Select Committee is due to meet to discuss the 2012 reforms. We expect that Auto Enrolment will remain but perhaps with some modifications so that a window before enrolment will apply rather than immediate on employment. NEST will essentially remain as is – more’s the pity – if anything needed a radical rethink that was it – but yet again, a government may have chosen to ignore the well argued comments of those in the industry in favour of some ‘policy adviser’ who has never been involved with the actual running of a pension scheme in their lives but is great at getting appointed to government think tanks.

But perhaps the most worrying news item of the week is research from Baring Asset Management which has revealed that 47% of women who are not retired do not have a pension. The total number of women who have yet to retire without a pension is increasing year-on-year, and clearly more needs to be done to ensure that women do not end up retiring in poverty and dependent on State benefits (which of course, they probably won’t actually get since NEST will take them out of means tested benefits and the State pension will be worth the price of a lettuce leaf-) oops!

It has long been a bit of a joke in the pension world that BA is a pension scheme that occasionally flew a few planes. Well, many a true word spoken in jest it seems.

Although the immediate threat of a strike over the Holiday period has been averted, it is almost certain that a fresh ballot will produce the same result. What’s that got to do with pensions you may ask? The answer is painfully simple.

BA has a combined £3.7 billion black hole in it’s pension scheme funding.The law requires that the Trustees and the Company reach some sort of agreement on how that deficit is going to be dealt with by June 2010.

It is a problem being faced by many if not most final salary schemes at the present time. And while the figures may be somewhat larger at BA, the princples remain the same. How can a company fulfull its obligations to fund a scheme while it is struggling simply to remain in business. It is in no one’s interest to force a company into the hands of the insolvency practitioners by making unreasonable demands for payment. The Pension Regulator (which needs to approve any agreements – called Recovery Plans in pension industry speak) has tacitly accepted this in its guidance to Trustees.

Yet tPR speak with forked tongue since while claiming to understand the problems schemes are facing, it is questioning perfectly sound deficit reduction plans for fairly minor deviations from what it considers appropriate. But that is bye the bye.

The problem for BA – and potentially any company in a similar position, is how can the company continue to pump money into the scheme while maintaining a viable business and preserving salary and benefit levels.

One of the obvious ways of beginning to manage a deficit is to limit ways of it getting any bigger. By controlling it’s growing liabilities. And the simplest way to do that is by closing the scheme to future accrual. It is not of course an instant fix. It can take several years for any direct effect of ceasing accrual to be seen.

But (and this is the conflict) no union likes to see it’s gold plated benefits being reduced. So they fight, and by fighting, risk the financial stability of the company and ultimately the jobs of those they purport to serve.

It ain’t rocket science. But it does seem a lesson that some unions and even poorly advised boards of trustees seem unable to understand. If you squeeze an orange too much, all you get left with are squeaking pips!!

I’m flying Virgin in future…Happy Holidays and see you next year!