GLOBAL - Substantial reforms to public sector pensions have already taken place, or are expected, in most developed countries, new research by Watson Wyatt has found.
The consultant carried out a survey of trends in public sector pension provision in 14 countries across Europe, North America and Asia.
“Lower investment returns and increasing longevity have led private sector employers in most countries to cut back on pension obligations in recent years,” said Stephen Yeo, partner at Watson Wyatt. “This is leading to an increased focus on the costs of public sector pensions, which now seem out of line when compared with the private sector.”
The survey found the shift from defined benefit (DB) to defined contribution (DC) pensions was a major issue in most countries.
“The security of a defined benefit pension promise is a major factor contributing to public sector employers’ ability to attract and retain skilled staff,” Yeo said. “Changes to public sector pension arrangements that may be desirable from a funding perspective must be weighed against public sector employers’ need to offer competitive total compensation.”
Watson Wyatt said some countries were ahead of others in the shift to DC. Public sector pensions in Australia and Italy are already provided on a DC platform for most new employees. In the US, California governor Arnold Schwarzenegger is pushing to introduce DC only for new employees.
Yeo said: “Pressure to cut pensions is less in countries such as Canada and Switzerland where it is common for employees to share in any increase in costs of pensions due to greater longevity or lower investment returns.
“Some countries, including France and Germany, have completed or are proposing reforms that would retain the defined benefit formula but with less generous benefits and higher employee contributions. This is the same approach that was under consideration in the UK until the government announcement on March 18 that negotiations were to be restarted.”
The survey also showed great variety in approaches to meeting the cost of public sector pensions. In countries such as the USA, Canada, the Netherlands and Switzerland, public sector pensions are fully funded and backed by real assets. In France and Japan, liabilities are unfunded and in the UK, most public sector pension liabilities are unfunded.
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