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UK roundup: Towers Watson, Lord Hutton, KPMG, contracting out, Tower Hamlets

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  • UK roundup: Towers Watson, Lord Hutton, KPMG, contracting out, Tower Hamlets

UK - As much as £70bn (€82bn) could be saved by a shift away from public sector final salary pensions, Towers Watson has estimated.

Speaking ahead of the publication of Lord Hutton's report into public sector pensions, John Ball, UK head of pensions at the consultancy, said that if the former Work and Pensions minister recommends breaking the final salary link, it may result in savings, but at the expense of public sector employees.

He predicted that, if the change happened, the final salary for workers would be the salary at the date of the changeover, with any further increases instead linked to the inflation rate.

"Implementing the move away from final salary pensions this way could reduce the combined liabilities of the civil service, NHS and teachers' pension schemes, as recorded in official accounts, by around £70bn," he said.

He added: "This is because, despite being held below inflation at the moment, public sector pay should rise faster than prices in an average year.

"What sounds like a technicality could have a far bigger impact on the public finances and on the incomes of the people affected than some of the most contentious deficit-reduction measures."

Meanwhile, KPMG has criticised as a "bolt from the blue" suggestions to abolish the contracted-out rebate for defined benefit schemes, warning it would undermine current auto-enrolment proposals.

Mentioned in a report by the Office of Tax Simplification (OTS), the consultancy warned that any such changes would increase the burden on the state pension system in the long term, regardless of any short-term savings that may be achieved.

Mike Smedley, pensions partner at KPMG, said: "It is very surprising such a major change to the UK pensions framework is being recommended in what is, essentially, a tidying up and simplification exercise for the tax system."

He went on to say that any changes to contracting out should only be considered as part of a wider review into pension policy, as it was a "central plank" of DB provision.

Furthermore, contracted-out status is a key condition for employers wishing to use their DB scheme for compulsory automatic enrolment, due to come in from October 2012, so scrapping it would mean the government would have to go back to the drawing board, he said.

Additionally, Smedley warned that the reintroduced national insurance costs would negatively impact DB schemes' future viability.

"An extra 'tax' of 3.4% of pay for most employers with defined benefit schemes could well be another nail in the coffin for remaining final salary schemes - providing yet another reason for reducing benefits or closing schemes completely," he said.

Finally, the London Borough of Tower Hamlets has appointed two managers to a £60m absolute return mandate, accounting for 10% of assets in the council's local government pension scheme.

The traditional multi-asset absolute return mandate will be managed by Baillie Gifford as well as Ruffer.

The original tender, released early last year, stated that no hedge funds or hedge fund of fund solutions would be considered in applications.

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