Barings Asset Management has proposed moving public occupational systems to fully funded institutions run along the line of CALPERS (the Californian Public Employee Retirement Scheme).
The move could have a knock-on effect of reducing the number of defined benefit scheme closures while cutting the cost of pensions provision for the public.
In a white paper entitled “Solving the UK’s Pension Problem”, Barings says the change is vital as over £600bn of unfunded public sector occupational pension deficits will be brought on-balance sheets later this year as part of the move towards Whole Government Accounts. This will raise the UK debt-to-GDP ratio to around 90%.
Toby Nangle, director of fixed income at Baring who has presented a paper on the subject, says: “Gordon Brown showed great foresight in setting the Whole Government Accounts project in motion back in 1998. As this project comes to fruition, the likely Brown government has an historic opportunity to move the public occupational pensions system to a fully-funded basis.”
The fully-funded institutions would be scheme-specific with the largest four schemes sizeable enough to be included in the top 15 global pension funds. They could be managed along the lines of ABP (the Dutch civil servants fully-funded scheme), or CALPERS (the Californian Public Employee Retirement Scheme) and would reduce the cost of pension provision to the public, Barings suggests.
“This move could also remove the UK yield curve distortion, providing relief to the private sector, and potentially enabling them to halt the tide of defined benefit scheme closures,” Nagle says.
Other benefits of the plan include increasing accountability in government spending departments and focusing public sector employers on ‘whole-cost’ remuneration. The proposal would also help increase annuity rates for retirees, boosting the income of pensioners while reducing the cost of public sector occupational pension provision and moving the UK into line with OECD best-practice.
Nangle adds: “At present only Local Authorities and the Members of Parliament benefit from fully-funded pension schemes. Rolling this out across the public sector would be a bold move of similar magnitude to the granting of independence to the Bank of England ten years ago.”
The white paper “Solving the UK’s Pension Problem” is available on request from Baring Asset Management by calling 020 7214 1243.
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