When Lord Hutton announced this week that he would recommend the Government adopt a more conservative discount rate to value its liabilities , we witnessed a defining moment in pensions policy in the UK.
Here was a labour politician accepting that the long-term cost of public pension is nearer the £1.2 trillion estimated by Watson Wyatt than the £780m that is the current Government estimate.
This discount rate is supposed to reflect the cost of Government borrowing which we know to be measured by the gilt-rate, if the gilt – rate is applied to the debt we the tax-payer have created from the over-generous final salary pensions we dish out to those in Government employ then we own up to the big skeleton in the cupboard.
The train has hit the buffers. A £450 bn increase in our long-term debt will come as no surprise to people in pensions but it remains to be seen how it will play with the financial markets. We can only hope that those who bankroll UK plc– the capital markets – will recognise this new found candour as a positive.
In the context of this financial bombshell, it is easier to understand the Treasuries’ determination to drive through a change to the way our pensions increase in retirement. There’s no doubt that linking pensions in payment to CPI rather than RPI will substantially reduce their long – term value but it will also reduce the impact of the restatement of liabilities. This is a sign of things to come.
That the switch from RPI to CPI was taken without consultation suggests that the Government mean business this time and after years of dithering we can expect the forthcoming spending review to be equally ruthless in tackling the growing inequality between total reward in the public and private sectors. Steve Webb was unapolagetic and more or less told the Conference to “get ovier it”.
Another restatement, the gravy train has hit the buffers.
The new realism among pensions folk was evident throughout the NAPF’s autumn conference in Liverpool. I had tweeted on my way up that occupational pensions are “incompetent, insolvent and in decline” I don’t take that back, though likening them to Liverpool was a mistake. Liverpool is a great town!
Away from the mandarins who have presided over the demise of our defined benefit industry, the conference was full of people getting on with reconstructing our pension industry. Steve Webb MP , Paul Johnson and Laurence Churchill were not able to say much but what they said was clear and to the point. Auto-enrolment will happen, NEST will probably happen and we have a pensions minister who both knows his subject and understands the context in which pensions policy is developed.
Webb was pretty brutal, making it clear that we cannot expect pensions policy to be created in a vacuum. Paul Johnson was even more direct, denying that the consideration of a Citizen’s pension had ver been on the agenda of his review. The fact is that a proper reform of tier one benefits will not happen in this economic climate.
The NAPF got most things right this year. They cannot expect to provide the platform for the big policy statements but they can give their members and those observing through the media, an insight into the state of the pensions nation. Throughout the conference, senior pensions people were openly stating that the final salary culture we have enjoyed for thirty years had come to the end of the line.
We may have hit the buffers and we aren’t derailed. We can be thankful for that.