An independent commission on public sector pensions (Guy Bailey, Confederation of British Industry)

The past decade has been a period of dramatic change in pensions. The final salary schemes which were once widespread have become increasingly unsustainable. While employers in the private sector have faced the facts, equivalent changes have not yet been made in the public sector. We therefore believe it is essential that, within its first months in office, the next government should establish an independent commission to investigate the true costs of public sector pensions, and to put forward principles for reform.

The first goal has to be transparency on cost. In 2008, we identified significant underpricing of liabilities in the public sector as a major problem; in 2007/08, for instance, £29 bn was accrued by members or schemes, but only £19 bn in contributions was collected from public sector employers and employees. There is therefore an urgent need to open up for scrutiny and discussion the assumptions used to calculate the costs of schemes. This would allow a genuine debate about what should be offered and what could be afforded.

Sustainability is also absolutely vital. Scheme members must have confidence that their pension is affordable for the employer and can be relied upon to see them through to retirement. When major changes – in longevity, for instance – threaten that sustainability, it’s far better to face up to the issue than to hide behind the long-term nature of the scheme and leave it to tomorrow’s taxpayers to sort out the problem.

The independent commission could usefully set out principles for reform and broad parameters for future provision, without getting into detailed scheme design or proposing changes to benefits that must be left to public sector employers.

Our new report1 explores the possibilities for reform, focusing in particular on the successful introduction of notional defined contribution schemes in Sweden. While we do not propose that such a system is the only way forward, we believe that it could be introduced in the UK relatively smoothly and deliver good pensions, while maintaining parity with good private sector practice.

(Guy Bailey, Confederation of British Industry)

1 For a copy of the CBI’s report ‘Getting a grip – a route to reform of public sector pensions’ visit www.cbi.org.uk/pensions