Learning from Indian public sector pension reforms (Joseph Mariathasan, Intcap)
One issue the new government needs to tackle urgently is the cost of public sector DB pension schemes. If the private sector now finds them too expense to offer to new recruits, why is it that the tax payer and local authority rate payers should find themselves guaranteeing a perk that will increasingly look ridiculously expensive when public sector salaries have themselves become much closer to the private sector's.
The obvious step would be to emulate the private sector in moving to DC schemes. Interestingly, India has already moved down this road for similar reasons. Civil service pension obligations were increasing at a compounded rate of 21 per cent per annum. The Central and State governments were paying out $15bn out of their budgets for pensions, which in 10 years, would have meant that 50 per cent of their total budgets would have been spent on pensions and salaries of their own employees. Not surprisingly perhaps, in the light of these statistics, the Indian Government ruled that Civil Service pensions would move onto a DC basis from January 2004, following the framework set out in report published 1998. The New Pension Scheme (NPS) is currently being rolled out for individual Indian State employees as well as the private sector more generally. There are certainly lessons to be learnt in the UK from this move. The unfunded pension obligations in the civil service schemes and the deficits in Local Authority schemes represent an additional debt for current taxpayers, alongside the gargantuan debt mountain that has been built up as a result of the credit crisis. If there is to be austerity all round for the next decade or longer, the public sector as well as the private has to bear some of the pain.
