View the article online at http://citywire.co.uk/money/article/a868689
Pension 'apartheid' continues between private and public sectors
New figures show a definitive divide between the pension haves and the pension have-nots in the UK.
A stark line between the pension haves and the have-nots has been drawn, with men working in the public sector who have defined benefit pensions coming out on top.
The latest figures from the Office of National Statistics (ONS) show the wealth inequality prevalent in the UK today, with the top 10% of Britain’s wealthiest households owning half of the country’s £11.1 trillion of private wealth.
The figures show the average household was worth £225,100 between 2012 and 2014, the last period the survey covered.
The largest gap between the pension haves and the have-nots can be seen between private and public sector workers and before she became pensions minister, Ros Altmann described the gap between public and private sector savings as a ‘pensions apartheid’.
There has long been criticism that taxpayers working in the private sector are being forced to pay for generous public sector pensions that they have no chance of replicating for themselves.
According to the ONS figures, public sector workers have almost three times as much in their pension pots as those working in the private sector; £61,600 versus £24,000.
Public sector workers are also seeing their wealth grow at a quicker rate than those in the private sector. Since 2012, public sector pensions have increased from £41,800 to £61,600 but over the same period private sector pensions have risen just £300 from £23,700 to £24,000.
The country’s 5.4 million public sector workers are twice as likely to save into a pension as their private sector equivalents.
The crux of this inequality is the type of pension offered to different workers. In the public sector, 84% of staff enjoy a defined benefit (DB) pension. This means they receive an annual income from their employer, the state, until they die which is based on a percentage of final salary multiplied by the number of years worked.
In contrast, just 42% of the 25.3 million private sector workers have a DB pension, which have become too costly for companies to run as individuals live longer. The DB pensions have been replaced by defined contribution (DC) pensions which provide the employee with a pot of money at retirement rather than an income. The size of the pot is based on contributions from employer and employee and how well the pension was invested.
The ONS figures show the median wealth held by those with DB pensions was four times as high as those with DC pots; £63,400 versus £15,000.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, an investment broker, said the ONS numbers showed the gap left by the closing of DB schemes in the private sector had yet to be filled.
‘While the overall value of the UK’s retirement savings has increased, it is still very unevenly distributed,’ he said.
‘The gap left by the closure of final salary pensions hasn’t yet been filled, nor will it be for many years to come. Even with the auto-enrolment programme, which is now increasing pension membership, many millions of people still have inadequate private savings to provide for a comfortable retirement.’
One area of pension inequality which is starting to improve is the gap between the savings of men and women. Historically women have had smaller pensions than men as they were more likely to stay home and care for the family but now 32% of women contribute to a pension – the figure is only slightly higher at 37% for men.
Malcolm McLean, pensions expert at Barnett Waddingham, said the figures revealed ‘a large imbalance between different sections of the population’ when it came to pension savings but argued the nation’s savings were in a better state than they had been.
He said auto-enrolment – where workers are automatically placed into their employer’s pension scheme – would help increase the number of people saving overall, which is much needed as just 35% of adults save into a pension at all.
However, McLean said that if auto-enrolment was going to be a success then individuals needed to save far more than the 8% total contribution they will be paying in in 2017 (made up of 4% employee contributions, 3% from the employer and 1% from the government).
‘[The low savings figures] confirms the need for auto-enrolment which was introduced primarily to improve pension saving for lower earners, and hopefully will encourage and promote pension provision for those who previously would not have reaped the benefits of it,’ he said.
‘Despite that, it is still clear that the minimum contributions specified for auto-enrolment will not deliver the level of pensions that many people would aspire to have, and therefore at some stage there needs to be an increase in that.’
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