How to reform public sector pensions

Today, the Public Sector Pensions Commission - which was established in autumn 2009 by the IEA, the Institute of Directors and other groups - has released its report, Reforming Public Sector Pensions: Solutions to a growing challenge.

A key finding is that the true value of the main unfunded public sector pension schemes is over 40 per cent of salary. However, the combined employer and employee contribution rates are set at around 20 per cent of salary – the result of the government using artificially high discount rates in its calculations.

The report calls for greater transparency on the true costs of public sector pensions and sets out a series of reform options that would bring costs down. These include:

  • increasing employee contribution rates
  • switching from final salary to career average earnings
  • reducing accrual rates
  • raising pension ages
  • reducing index-linking
  • ending the contracted-out status of public sector pensions
  • switching to funded defined contribution arrangements

 Click here to download the report.

An excellent and comprehensive report from the Commission.For what it’s worth I would like to add that the more difficult task will be the implementation of these reforms in what are very challenging times. In particular, raising pension ages will need to be accompanied by changes regarding the perception of older workers, and concepts such as job sharing,and partial and phased retirement will need to be brought to life so as to reduce the pain of adjustment.I would also add that hybrid pension systems i.e. those that combine DB and DC could help to provide an appropriate trade-off between affordability for the State and risk to workers.

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