Is Career Average Greek Debt Restructuring in Slow Motion? By Mark Childs. Total Reward Solutions

In a week dominated by proposed fixes to Greek debt and public sector pensions, the credibility of the two solutions might just feature some unwelcome comparisons. Most commentators expect the current Greek debt crisis to be solved, only to be replaced by another in the year ahead. Might it be that the introduction of a career average formula solves the public sector pensions’ crisis for this generation, only to be replaced by another for the next generation?

 If we have faith in the Hutton Report then the public sector pensions’ crisis is overblown. On page 23 of the report we are told that public sector pension costs have already peaked at 1.9% of GDP and will fall steadily to 1.4% of GDP by 2050.

However, these arguments rest on assumptions about life expectancy, public attitudes, the bargaining power of trades unions and future salary growth; all of which must at least be open to question. We know that even current demographic projections suggest the long-term future will be associated with higher levels of personal taxes than the past. Who is to say therefore that the public mood will tolerate the continued funding of defined benefit pensions, even if they are career average rather than final salary in nature? The gap between the haves and the have-nots will remain and is set to become starker once a cohort of public servants retire on adequate career average pensions , alongside private sector workers who look on in disbelief at how little pension their defined contribution pension pot will buy.

By the mid-1990s it was self-evident that final salary public sector pensions, in their traditional form, were unsustainable. Equally predictable was that the politics suggested little would be done to reform pensions for a generation. As it happens, proposed changes emerged a few years earlier than I expected, but strangely in the worst of times. To increase employee contributions during a period of rising taxes, falling real earnings and a public sector pay freeze is the worst of timing, making the challenge of change much harder than public sector pensions’ reform during a period of rising real incomes.

Without doubt a move to a career average defined benefit formula will make a material difference to the value of pension for long service senior public servants; those who start at the bottom of the career ladder and work their way up. Unlike final salary formulae which apply pensionable salary increases to the entire period of past service, the proposed career average formula will add only incremental cost to a pension calculated on the basis of average employment earnings. The irony is that among the most highly unionised section of the public sector workforce, the impact of career average might be quite modest. Someone joining and retiring as a clerical officer will likely see little difference in the value of their pension.

Aside from the competing numbers, many private sector reward practitioners will instinctively doubt the credibility of the proposed solution, because it flies in their face of their own experience. After all, if career average is so obviously the answer, why did the private sector not embrace this formula?

Too many of us witnessed the closure of defined benefit pension schemes to new entrants as the supposed solution to private sector pensions’ funding issues, only to observe widening deficits and the eventual cessation of future service accrual to existing members. Having found these two former solutions to be insufficient, we are now embarking on a third round of change. This involves removing the link between future salary growth and the indexation of accrued pensions and inducing deferred members to leave our schemes via enhanced transfer values. Perhaps this will be the end of the matter?

So, where do you stand? Is career average the solution or am I the only one waiting to book a cheap holiday in Greece once the Drachma has been restored to its rightful place?