Business

Tackling the defined benefit public sector pension question

Could a pensions shake-up be on the way for NHS workers?
Could a pensions shake-up be on the way for NHS workers? Could a pensions shake-up be on the way for NHS workers?

If you had high blood pressure, would you go to a doctor who was still offering leeches as a treatment? Of course not.

You’d look for someone who was bang up to date with the very latest developments, and offering treatments using the most modern drugs available.

It’s the same with advice on your pension. You would be better off taking advice from someone who’s in touch with the latest thinking at 11 Downing Street, rather than someone who hasn’t read a newspaper since the death of Elvis.

We know how quickly things are changing in the financial world these days, and so any advice we take must be based on knowledge of the very latest thinking, and of what is possibly coming our way in the future.

So let’s take a look at what’s going on at No 11 this month, in relation to our pensions.

One of George Osborne’s key advisers on this is Michael Johnson, a research fellow at the think-tank The Centre for Policy Studies.

Johnson quietly ventured an opinion lately that went largely unnoticed but which, if implemented, could shake our pensions system to its very foundations.

It would have a particular effect on you, if you are one of the 28 per cent of workers in Northern Ireland who work in the public sector: this includes workers in the NHS, in teaching and education, and in public administration. It will affect us more than other places in the UK, where the public sector accounts for just 19 per cent of working people.

Johnson’s comment related to final salary pensions, also known as defined benefit pensions, those very generous arrangements where the level of your pension is guaranteed based on your final salary and your number of years of service.

These used to be quite common in the private sector too, among larger companies, but they can be hugely expensive to maintain. As a result, in latter years final salary pensions have become almost the sole preserve of the civil service and public sector.

Well, Mr Johnson has now whispered under his breath that the current review of pensions would be a great opportunity to move away from final salary pensions for public sector workers. Instead, he suggests a move to schemes with no guarantee attached, that is, to defined contribution or DC pensions - just as offered to us mere mortals out here in the private sector.

Johnson quite rightly points out that the final salary system is a significant part of the bloated cost of pensions in general, and that, as a result, a good ‘footer’ will be necessary – or, as he more gracefully puts it, “we are going to have to confront the defined benefit public sector question.”

So he’s predicting not just a ‘footer’, it’s going to be a whole argy-bargy.

He also pointed out that there is a precedent for this, proving that it is not only morally defensible, but also logistically possible. He has been quoted as saying “Others have done it, and there’s a lot to learn from how they did it. New Zealand made some mistakes but they did it in the 1980s. It is perfectly doable; it’s just a question of whether there is the will to do it.”

Now, there’s no need for all you public sector workers to get out the fibre-tips and start drawing up the placards quite yet. This is all initial thinking that has yet to take on any substantial form.

What it does show is that public sector pensions are very much under review, given the ‘budget savings at any cost’ mindset over the road in George Osborne’s house.

:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005