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Public pensions cuts “out of line” - Watson Wyatt

GLOBAL – The increased focus on the costs of public sector pensions, triggered by lower investment returns and increasing longevity, is getting “out of line” compared with the private sector — according to a survey by Watson Wyatt.

Stephen Yeo, a partner at the consulting firm, said: ”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.”

Yeo warned that changes to public sector pension arrangements “that may be desirable from a funding perspective” should be weighed against the need of public sector employers to offer “competitive total compensation”.

“The security of a defined benefit pension promise is a major factor contributing to public sector employers’ ability to attract and retain skilled staff,” suggests the survey, carried out in March 2005 in 14 countries in Europe, North America and Asia.

The study stresses that reviews of public pension arrangements are under way globally, with countries like Australia and Italy already providing a defined contribution offering to most new employees.

Pressure to cut pensions is not strong in countries where it is common for employees to share in any increase in pension costs such as Canada and Switzerland.

In France, private sector pensions that are supplemental to mandatory pensions are moving towards DC. Public sector pension plans were likely to stay defined benefit - but with reduced benefits and higher employee contributions.

The German private sector is also moving towards DC while reforms to public sector plans involve reduced DB, benefits and higher employee contributions.

A wholesale shift towards DC in either sector seems “unlikely” in the Netherlands, although the study says that adverse investment performance and a further drop in bond yields may change this in the longer term.

The survey also mentioned a variety of approaches to meeting the cost of public sector pensions naming countries like the Netherlands and Switzerland as well as US and Canada, where public sector pensions are fully funded and backed by real assets.

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