Former Labour Minister: UK Public Pension System Desperately Needs a Makeover

(December 4, 2011) —  Britain’s bleak economic outlook has made the need to overhaul public-sector pensions especially imperative, John Hutton, who carried out a review of the system for Prime Minister David Cameron, recently said. 

In an interview broadcast on BBC, Hutton noted: “Change is going to be the order of the day.”

Hutton’s comments come as a report by consulting firm Mercer showed that UK pension deficits hit a 2011 high of £80 billion at the end of November — their highest level this year.

Hutton’s remarks also follow a recent analysis by consulting firm Lane Clark & Peacock (LCP) that found that accounting changes and Solvency II are tremendous threats to pension plans in 2012. Despite record levels of contributions, the analysis noted that combined scheme deficits of FTSE100 global firms have grown by 70% in 12 months to €290 billion (£248 billion).

“The year ahead looks like it may well bring one burden too many for European pension schemes. Pressure to deal with new pensions accounting under IAS19, volatile markets and regulatory uncertainty are likely to lead to further pressure for organizations to reform pension plans in every one of the many countries where our clients operate,” noted Alex Waite, partner and head of LCP Corporate Consulting. “Going into 2011 the world’s largest 100 companies disclosed pension deficits of €170 billion. To put that in perspective, it’s equivalent to the cost of the Greek bailout. And as 2011 has proved, just because it’s bad at the start of the year, doesn’t mean it can’t get worse. In last year’s European Pensions Briefing we estimated that a one-in-ten-chance outturn could increase deficits by €100 billion or more. In fact, over the year so far, the combined deficit has increased by over €120 billion.”

In the US, the public pension environment is under similar stresses compared to the UK’s system. A recent analysis by Mercer showed that the aggregate deficit of S&P 1500 pension plans increased by $134 billion in September, hitting a post-World War II high. Mercer showed the aggregate deficit in pension plans sponsored by S&P 1500 companies increased from a deficit of approximately $378 billion as of August 31, 2011, to $512 billion as of September 30. “The end of September marks the largest deficit since we have been tracking this information,” said Mercer retirement risk and finance partner Jonathan Barry in a statement. “Over the past three months, we have seen nearly $300 billion of funded status erode. This will have significant consequences for plan sponsors. It will be particularly painful for organizations with September 30 fiscal and/or plan year ends.”