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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.

 
Pension 'apartheid' continues between private and public sectors

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 The DB pensions have been replaced by defined contribution (DC) pensions which provide the employee with a pot of money at retirement rather than an income.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.’

17 comments so far. Why not have your say?

Andy Poole

Dec 28, 2015 at 10:11

The real issue is that the money paid by the public sector for their pensions goes into the Government's current account and is spent on salaries/welfare payments and other daily expenditure. It is not ring fenced and 'saved'.. If the private sector did this, they would be closed down and the directors locked up.

This is turn means that the working population has to keep increasing to pay for these pensions hence the concerns over ever increasing immigration to the UK.

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DAVID ARBUTHNOT

Dec 28, 2015 at 10:49

Andy,

Using your argument, won't the immigrants supply the working population you require?

As after WW2.

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Peter B

Dec 28, 2015 at 11:34

Michelle writes "just 42% of the 25.3 million private sector workers have a DB pension, which have become too costly for companies to run"

I'm amazed that such a comparatively high percentage of workers have employers that value them sufficiently to pay for DB pensions - and that the remaining 58% work for companies that frankly couldn';t care less.

In the meantime, public sector employers are lambasted for maintaining their DB systems - not the private sector which has reduced its pension contribution rate. This has allowed them to accelerate their management pay away from the hoi polloi, since they make such a valuable contribution to their organisations. We should all be pleased and very thankful.

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Rob Walker

Dec 28, 2015 at 12:15

Michelle, you are looking down the wrong end of the telescope. It is not something extra we are giving public sector employees, it is what the private sector has taken away from their own workforce. Directors and senior executives still do very nicely thank you, but the average employee up to middle management has lost out as the private sector declared their DB pension schemes 'unaffordable' when they actually meant 'a drain on profits'.

We can argue the rights and wrongs of keeping businesses 'lean and mean' but there is no need to knock the public sector for trying to keep its promise to their longer-term workers.

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xxxxx

Dec 28, 2015 at 13:58

With pensions, the picture is always more complicated than it appears at first. The fact is public sector employees one way or another "contribute" more of their salary towards their pensions than private sector employees. Public sector employees are also auto enrolled to the pension scheme when joining their employer, a practice that has been in place for decades. On average public sector employees are paid more than private sector employees because they have higher skills eg hospital doctors and teachers - the low skilled, lower paid jobs have been contracted out by the public sector. It is no surprise therefore that public sector employees have bigger pensions pots - they have paid in more for longer.

While there is a large tail end of public sector employees entitled to final salary based pensions on retirement, this benefit is disappearing for current service. Pensions will accrue based on career average salaries which is far less generous. Public sector employees have also had their retirement age increased in many cases from age 60 to 68. Their pension contributions for these reduced benefits have been substantially increased.

Even with these changes public sector pensions are still better than those in the private sector. There is one notable exception - senior management in the private sector - who manage through various means to make sure their wealth is protected at the expense of their employees and the ordinary taxpayer. In many examples they seek to ensure their companies avoid tax/ pay their employees a wage on which they cannot live requiring them to seek welfare benefits at the taxpayers expense and cut benefits to employees to ensure their own remuneration remains generous. This is the real scandal of our age.

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john_r

Dec 28, 2015 at 14:50

Rob Walker your information seems to come sraight out of Labours tattered little red book. The True facts are that despite two attempts to reduce long term indebtedness the public pension DB scheme still has unfunded liabilities over £500Billion. (Yes, that's four times the national deficit from which we have all been suffering). That's a far cry from the prudent management of private sector schemes. I might add that if anyone from the private sector ran a DB pension scheme along these lines they would be closed down within 6 months for fraudulent use of employees funds.

Long live the tax payer - for they must continue to make up the public sector shortfall!

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Jon

Dec 28, 2015 at 14:55

I am amazed that 42% of private employees have DB pensions taking into account the number of small & medium sized companies.

I also dispute the fact that public employees are on average more skilled than private employees and can therefore command better salaries and thus expect a higher pension pot.

The point that is missed above is that life expectancy has increased considerably such that an average retirement has grown from around 5 years to 20, thus increasing the cost of pensions fourfold. This has nothing to do with how much senior employees are rewarded. The overall cost has become unaffordable to some companies who have closed their DB schemes, and obviously it is also out of the question for other companies to start a DB scheme. Meanwhile the public sector has maintained its schemes, albeit with some increases in personal contributions and an overdue increase in retirement age, but with no loss of accrued rights. Therefore it will take very many years for the public sector pension cost to decrease, and then not by a great deal as public sector pensions are still very generous.

I also dispute the pension pot figures given above for DB schemes as it takes a fund of some £35,000 to buy a £1,000 index linked annuity. Thus a retiring teacher with no promotions may enjoy some £25k pension pa which would need a pot of around £900,000.

I presume that some of the previous commentators would always buy British rather than cheaper imports as they seem to approve of a move to UK companies increasing their costs very significantly. The bottom line is that we live in a competing global economy, and we have to live within our means be it salary or pension.

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Rob Walker

Dec 28, 2015 at 16:03

Well John_r there is nothing leftie in my comment. There are plenty of private companies who honoured their commitments just like public services for those already in schemes and, like the private sector, many public sector pensions are run with different conditions for new members. However, a promise is a promise and if a civil servant joined 40 years ago with a promise of a 50% inflation-proofed pension then that, along with salary, holidays and 'perks' were taken into consideration when deciding on that job as a career. I just don't see why they should somehow be despised just for enjoying what they expected in the first place. I would not have wanted to work as a civil servant for the last forty years for ANY pension - but I made my decisions and whatever came my way whether it was a company car, share options, cheap mortgages and the rest I took without public condemnation so why single out a good pension perk that someone was entitled to and bang on about it as if they are as bad as greedy bankers?

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Michael Stevens

Dec 28, 2015 at 17:26

Would Michelle please say what the figures are. Are they pensions per year or

The fund value.

Last week at a dinner I sat next to a retired Policeman. Retired at 50 on a full pension and now aged 70. 30 years working 40 years retirement at the expense of the taxpayer perhaps

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Jon

Dec 28, 2015 at 17:58

Rob

When the "promise" was made no one thought that it would be as generous as it has turned out to be. So to bring the benefits into line with the cost of what was "promised" at the time is perfectly reasonable. The problem is that strong trade unions and governments afraid to lose some votes took far too long to address this matter.

Against this, private DC pensions have take many knocks when "promises" have been broken. For example Gordon Brown decided to double tax pension funds by withdrawing the tax credit on dividends, but still taxing future pension income. This did not just apply to new contributions, but to any existing funds, thus changing the "contract" on which people had taken out pensions, and to which they were locked into. So unlike changes to public DB pensions where accrued rights were maintained, no such principle applied to DC pension funds.

Then, again, pension funds took a big hit when the banks collapsed - the government had had all the tax generated by the bad loans which far exceeded the cost of the bailout such that over the long term there was a capital transfer from pension and savings funds to the Treasury. And now, the artificially low interest rates supporting the overspenders has hit annuity rates

So just forget "promises". The world changes.

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xxxxx

Dec 28, 2015 at 19:01

Jon above says "I dispute the fact that public sector employees are more skilled than private sector employees."

Office for National Statistics data on Public and Private Sector Earnings shows that overall 63% of public sector employees are classed as either high skilled or upper middle skilled compared with 47% of private sector employees.

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geoffrey mulford

Dec 28, 2015 at 19:13

TBH this is more of a story of how badly private pensions have done than the generous public pensions. Private pensions have increased £300 in three years?????.

The 50% increase in three years for the public is good but my investments have done better

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Jon

Dec 28, 2015 at 19:20

Thanks XXXXX for the info.

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Pilgrim

Dec 28, 2015 at 19:27

Lies, damned lies and statistics?

The relative numbers of employees by level of employment is clearly essential information if trying to make a detailed comparison between employment in the Public sector and the Private sector.

The Private sector also involves important subdivisions as between employment in larger companies, small companies, and self employment. Other distinctions will also be relevant, as, for example, between employment in manufacturing, employment in agriculture, and employment in services.

The situation in the Boardroom bears little similarity to that on the shop floor. Occupations with strong union representation may do better in the pension stakes than those without.

No simple general comparison can be made of pension provision in Public versus Private employment.

What is often true, and is the general perception, is that the Public Sector adopts a generous paternalistic attitude to its employees. The Public sector employee may have relatively secure employment (jobs for life culture) and needs to give little thought to provision for the future as his employer does that for him! Public sector employments lie almost entirely within the service sector and contribute little to the production of trade goods or to the balance of payments.

Private sector employment lacks the stability of the Public sector and the Private sector employee enjoys much less job security than is general with the Public sector. It is the Private sector that that makes the main contribution to production, and to the balance of payments.

The Private sector experiences the pressures of international competition. In consequence, cost overheads, in the form of pension provision or otherwise, can pose an existential threat to Private sector employments. This results in a situation in which, while it is the Private sector that contributes most to the immediate generation of our national wealth, it is the Private sector employee who is most at risk, and who receives the lowest level of protection in the form of pension provision.

The Public sector versus Private sector divide contains fundamental systemic flaws that are ultimately very damaging to the whole economy. The absence of of a complete and sustainable systemic design for the economy threatens all our futures.

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xxxxx

Dec 28, 2015 at 19:33

I agree with you geoffrey. You may then ask why private sector pensions are so poor. My contention is that senior management of companies have looked after themselves at the expense of their employees and the economy in general.

Andrew Smithers, a leading economist, recently concluded that the way senior management are paid seriously damages the economy and that shareholders appear to have received no benefit from the massive rise in the remuneration of senior management. The remuneration package has "encouraged senior executives to take more risks than before by cutting costs (one assumes that includes employee pensions - my comment) and holding down investment in innovation and productivity to bolster short term profits and the company share price."

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xxxxx

Dec 28, 2015 at 19:45

I see Pilgrim's comments above.

The problem with categorising jobs as public sector/ private sector is that they look as if they are entirely separate when in fact one relies on the other to function effectively - the private sector needs roads etc for transport/ police to maintain law and order etc. There is also no reason why jobs should necessarily be in the public sector as with political will they can be transferred to the private sector as has been done on numerous occasions.

The many hundreds of thousands of jobs taken out of the public sector over the last 5 years would suggest that security of tenure no longer exists.

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john_r

Dec 29, 2015 at 10:24

XXXX

The same greed, as you put, which exists in the private sector is also matched across the public sector. I am also quite sure that Andrew Smithers would also agree that the high salaries in the public sector don't benefit its stakeholders either.

Both sectors have leaders and CEO's that milk their employers for all they can get as well as those who serve with dedication. Employees continue to switch between both sectors for all sorts of reasons.

What we are talking about here is not the individuals but the the difference in the pension systems where the private sector workers are now 'effectively' subsidising unaffordable public sector pensions. As has been explained previously what was affordable 50 years ago certainly isn't in todays world.

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