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Laying down a fresh agenda

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The economic woes of Greece have turned the spotlight on some eye-catching retirement behaviour.

One of the Papandreou government’s reforms is to seek to increase the average pension age of a Greek public servant from a jaw-dropping 53 years up to 67. It is perhaps not surprising that the nation is revolting.

The World Health Organization calculates that the life expectancy of a 53-year-old Greek is 85 years, implying that the average pension is in payment for 32 years, about as long as their working lifetimes. The economic maths simply does not add up. Aristotle, Euclid and Pythagoras must all be turning in their graves.

The moves in Greece follow in the footsteps of the Republic of Ireland. To close the shortfall in its credit-crunched economy, the ailing Celtic Tiger introduced a levy on public sector pay (see table) to help it pay for public sector pensions.

This is essentially a tax on the wages of current public sector workers to help foot the bills for previous generations now in receipt of a pension. It might not be deemed fair by everyone, but it was certainly a pragmatic and effective way of helping to balance the books.

The Irish government is now working on implementing a series of reforms. These include a career average pension scheme for new recruits. More radically, it floated the idea of altering the annual increases to former public servants’ pensions, which are linked to pay growth rather than price increases. But it appears to be retreating from pushing this measure - for now.

So to what extent is this a taste of things to come in the UK? In this country we arguably start from a stronger position, for two reasons.

First, the UK started to take gradual steps towards raising retirement ages in the mid 1990s, with increased scrutiny of practices in awarding early retirement pensions. The publication of the Audit Commission’s Retiring Nature report was a seminal moment for local authorities.

In the teaching profession, the introduction of a charge on schools for the considerable cost of early retirements caused much unrest, an unseemly rush to beat the rule change, but then an almost immediate change of behaviour.

Second, UK pensions are inflation-proofed: here pensions increase in line with the RPI index, rather than earnings, so they are less generous than the Irish.

So there are grounds for some optimism that the UK is in a more durable position. However, we should not be complacent, as there is still a need for change to secure our futures. Here are four areas to consider.

First, the speed of increases in life expectancy is profoundly game changing. Data from analysts Club Vita shows that life expectancy is currently rising at the rate of about two years a decade. Longer working lifetimes seem essential to keep the economy stable.

Second, the membership of some public schemes, particularly the local government pension scheme and NHS, has increased hugely by the admission of part-timers after a series of legal cases in the 1990s. This is right and fair, but the extra costs have never been fully thought through.

Third, there is poor appreciation of the true value of pensions across the public services. There are few hard facts - but plenty of ill-informed opinion - about the remuneration packages in comparative employments in the private sector. It is particularly disappointing that the value of pensions is not fairly taken into account in pay negotiations.

Finally, public sector pensions are unnecessarily fragmented, with different schemes delivering near identical benefits. There is considerable scope for a programme of thoughtful simplification, as in the Isle of Man where the government is replacing about 20 different schemes with a single scheme for public servants.

The new Con-Lib Dem government has announced its intention to establish a commission to review public service pensions. Thankfully, there is no need to rush to implement emergency measures as in Greece and Ireland, but there will still be plenty on the agenda.

Douglas Anderson is a partner at Hymans Robertson

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