A leading pensions industry professional has warned of dire consequences for current and future tax payers should the Government and trade unions not reach a credible and sustainable solution to the funding of pensions for public sector workers.
David Davison, head of the public sector, charity and not-for-profit practice at UK pensions firm Spence & Partners has highlighted a report by the Association of Consulting Actuaries which shows union pensions valuations are being based on ‘highly speculative’ assumptions which are unlikely experienced in reality and which will result in more public money being required to plug funding gaps. Davison claims the report shows that regardless of the outcome over the current dispute between Government and unions, there is still a massive time bomb awaiting future generations over the affordability of public sector pensions.
His comments follow weekend reports from Labour Peer Lord Hutton, who conducted a review on the affordability of public sector schemes, saying the Government’s position on pensions was ‘perfectly credible.’
Davison said: “Following last week’s industrial action more light has been shed on the true facts behind many of the statements on which people are being asked to make important decisions about their future.
“The unions have claimed that there is money available to fund their pension demands but a new report throws up huge question marks over this. The Association of Consulting Actuaries has produced a paper which really clarifies the position and highlights the difference between Government and union financial assumptions over pension schemes.
“The unions are using a series of assumptions which significantly under-estimate the likely future costs of the public sector pension provision. This includes a forecast that the public sector workforce will grow by 0.25 per cent per annum which, given the economic conditions and the Government announcement about continued reduction in workers on the public payroll, appears to be rather disingenuous. Their financial assumptions also factor in annual real earnings growth of two per cent which is also highly speculative in the foreseeable future especially given recent limits imposed on public sector salaries, something already reducing contributions to these schemes.
“In the highly likely event that the unions have substantially overstated their assumptions, the impact on public sector pensions will be immense. It will make them even more unaffordable and simply creates a bigger problem that future generations will have to address. This represents a time bomb for the youth of today who will need to work longer and harder to fill this funding gap while the unions fight to protect their existing members from having to do the same.
“While Lord Hutton has described the Government’s current pension proposals to the unions as ‘perfectly credible,’ there is a very real concern that they have already conceded too much ground on this issue. Even if the current offer was accepted with no further negotiation, it is highly questionable whether it is sustainable given the current economic climate.
“I believe it is certainly true that little or no change on public sector pensions will mean huge tax increases for all workers – including the majority of those who are in the private sector and don’t qualify for the same, relatively generously funded retirement – or further reductions in education, police and health budgets. Failure to address this issue risks further alienation and disconnection between the public sector and their private sector counterparts.
“The unions do seem to have got their message across more effectively than the government however their arguments are far from convincing when you dig below the surface. For all our sakes the government really need to up their game on this issue and get their message out more clearly and concisely. We also need to move beyond the petty name calling and rhetoric and deal with the reality we face. Failure to do so will impoverish our children and other future generations and that is not an option.”
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