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Q&A: the truth about public sector pensions

More than 400,000 public sector employees are striking over changes to their pension scheme. But is the action justified?


by Michelle McGagh on May 10, 2012 at 00:01

Q&A: the truth about public sector pensions

Public sector employees are embarking on a fresh wave of strikes today over government changes to their pension schemes.

The row over public sector pensions has been rumbling on for 18 months, and both the government and employees refuse to back down. But by looking at the hard facts behind the debate, can we determine who is in the right?

Why are they striking?

More than 400,000 public sector employees are striking over the shake-up of their pension plans. Those who work in the public sector have been afforded very generous ‘final salary’ pension schemes (also known as ‘defined benefit’ schemes).

These schemes pay out a set, or defined, income at retirement based on a multiple of years worked and a proportion of the employee’s salary at retirement.

This pay-out is generous but does not require the employee to make a large contribution towards it, meaning the taxpayers have to fund the shortfall.

The government has said the level of pension being offered to public sector workers is unsustainable because of increasing life expectancy, and has decided public sector workers should:

  • Work until age 68 instead of age 60 before receiving their pension;
  • Contribute more towards their pension, an average increase of 3.2 percentage points (not percentage), although those earning under £15,000 a year will be exempt from the increase and those earning £15,000 to £21,000 will have contributions capped at 1.5%;
  • Receive less when they retire due to a shift away from final salary and towards a ‘career average’ scheme;
  • Have pensions increased in line with the consumer price index rather than the more generous retail price index.

What is the public sector saying?

The prospect of working longer and paying more to receive less has angered the public sector.

Their argument is that the pension changes are tantamount to another pay cut, one of which they have already suffered. It is predicted that more than 700,000 public sector job cuts will be made by 2017 on top of chancellor George Osborne’s plan to cap pay rises at 1% for the next five years.

The gulf between public and private sector pensions is often used to illustrate the unfairness of generous public sector pensions. However, those working in the public sector have argued that the lack of pension provision in the private sector – where employees fund their own retirement pots – should not be an excuse to lower their pension provision.

The government has been accused of starting a ‘race to the bottom’ where both private and public sector pensions suffer, rather than looking for ways to boost the private sector pension savings.

Public sector workers also feel they are being scapegoated by a government that has failed to tackle the real problems behind the UK’s economic slump. They say the bankers have got away with destroying the UK’s financial security.

They also object to pension cuts when the government has given tax breaks to the wealthy – most notably a reduction in the highest rate of income tax from 50% to 45% for those earning over £150,000.

What are the facts?

The government and the public sector are at a stalemate over pensions, and each is peddling their own propaganda. So what are the real facts about public sector pensions?

Debt: Public sector pensions are seriously underfunded to the tune of £1.2 trillion – that’s the equivalent of £45,000 per household, and the debt is increasing rapidly as the government isn’t putting anything aside to cover its obligations, not to mention the fact that people are living longer and pensions will have to be paid for longer.

Longevity: It is a fact that we are living longer. The Office for National Statistics says a man aged 65 today will live to 83 on average, and a 65-year-old woman to 85 – meaning a possible 20 years in retirement. The Hutton Report into public sector pensions provides even more frightening figures, stating that a person retiring from a professional occupation can expect to live another 28 to 30 years.

Private v public: According to a report by think-tank the Intergenerational Foundation, the gulf between private and public sector pensions is also increasing.

  • 88% of public sector workers are entitled to final salary pensions compared with fewer than 10% of private sector workers;
  • 78,000 retired public sector workers receive annual pensions of more than £25,900 – more than the average wage in the UK;
  • Over 12,000 retired public sector workers collect pensions of more than £50,000 per year;
  • The average public sector pension is around £7,000 a year, compared with £3,700 a year in the private sector;
  • 13 million private sector workers will currently get no pension other than the state pension.

Contributions: Although low-earning public sector employees have been spared a contribution increase, those earning more than £21,000 a year will see a noticeable jump in their pension contributions. Teachers currently pay 6.4% of their monthly incomes into their pensions, and as most teachers earn more than £21,000 a year they will see their contributions increase 3.2 percentage points to 9.6% – a substantial increase.

Public sector workers may have generous pension schemes, but they face the same financial hardships as those in the private sector while they are still in employment.

Future burden: Intergenerational Foundation also points to a looming ‘intergenerational injustice’ that will be caused by failing to curb the generosity of public sector pensions.

We have already seen the polarisation of public and private sector pensions, where an unequal balance has been created. Private sector workers are not afforded generous pensions and can ill-afford to fund their own but, as taxpayers, have to fund the generous pensions of the public sector.

Intergenerational Foundation said that rising longevity would mean younger generations – who face unemployment, high education costs and impossible house prices – will be shouldered with the burden of paying for an increasing number of retirees.

What schemes are underfunded?

There is a lot of debate about which public sector schemes are underfunded. Intergenerational Foundation states that pension schemes for the civil service, NHS, police, teachers and armed forces are all underfunded. It also mentions the local government pension scheme, which although funded is underwritten by the taxpayer ‘meaning it still increases the overall taxpayer liability’.

Scheme Received by pensioners each year Official liabilities Funds to pay it
NHS £4.93 billion £257.7 billion Nil (unfunded)
Civil service £3.67 billion £153 billion Nil (unfunded)
Teachers £6.15 billion £192.4 billion Nil (unfunded)
Armed forces Unknown £120.7 billion Nil (unfunded)

Why is it described as a Ponzi scheme?

Unfunded public sector pension schemes have been described as Ponzi schemes. Ponzi schemes are fraudulent investments that do not invest the money they receive but simply pay existing investors out of the contributions from new investors.

Public sector pension schemes have been accused of passing on the contributions of current employees to pay for the pensions of those who have retired, rather than investing current contributions.

Will the strikes make a difference?

Those involved in previous strikes, today's strikes and strikes that have been threatened over the summer are hoping that this show of discontentment will push the government into a U-turn over the plans.

However, a change of heart now looks unlikely. The government has already made some concessions to the unions, but ultimately it has said that even with the changes the workers will receive very generous pensions.

The affordability issue has been long-running, and it is a shame that no previous government has tackled the issue. Unfortunately, in these times of austerity, everyone must make sacrifices, and although the public sector may feel it unfair, it is increasingly likely that the government will force them to bear that burden.

62 comments so far. Why not have your say?

Dylantherabbit via mobile

May 10, 2012 at 11:44

What an almighty mess. They should start building a funded scheme for new members, it can't go on the way it has been. How hard can it be. The lack of planning and foresight is beyond imagination. It's not just the current government but all of them going back thirty to forty years. Utter incompetence.

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May 10, 2012 at 13:33

Although I do support workers rights it does make me pretty sick that they are striking over such a generous scheme.

I work for a large pension provider in the private sector and our company pension scheme is quite simply pitiful - all I can do to change this is move jobs!

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Truffle Hunter

May 10, 2012 at 13:37

Ask them all to re-apply for their jobs, and then reduce their numbers. Strikes should not be allowed if you work for the public sector. They have become the State Mafia that is holding the rest of us to ransome. The private sector cannot afford to support them.

The propensity of our so-called democracy to generate successive waves of useless bodies that stand up and blab in the Houses of Parliament and run our country down defies belief.

Lee Kuan Yew once said " Britain is a very nice place , but it has just a bit too much democracy". When he said that Singapore was just a poor little emerging nation; now it is a dynamic and pleasant place to live. It looks like he was right.

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Dennis .

May 10, 2012 at 13:53

Who was it that said that the best argument against democracy is a five minute conversation wth the average voter?

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Tony Ash

May 10, 2012 at 13:55

The Government should simply agree to pay them whatever they want!

The reality is that they will only receive the cash in future years if

taxpayers are prepared to suffer tax increases to pay for it!

Therefore they will not get it anyway.

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michael johnson

May 10, 2012 at 13:58

Unfortunately it is not a simple matter of switching to funded schemes, because today's contributions are needed to meet today's pensions in payment (and they are falling behind: the gap was £200m four years ago & will be £10+bn in four years time). It is called a Ponzi scheme. In the meantime, grandfathering all those within ten years of retirement (as the Govt has agreed to do) wipes out any prospect of meaningful savings from Hutton-based reforms for at least a decade.

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Rob Walker

May 10, 2012 at 14:19

two points to ponder:

1. If the country's life expectancy was getting SHORTER would the Government adjust the retirement age so we all retired EARLIER?

2. Let public sector workers keep their current pension arrangements but make them promise not to live any longer than the previous generation.

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May 10, 2012 at 15:18

I don't remember any complaints when the private sector final salary pension schemes were based on n/60 and the public sector ones were n/80!

However with people living longer and fewer workers it can't go on.

I quite like the idea of moving all new employees to a properly funded scheme but it will take 70+ years to get all existing employees out of the current scheme and paying for that would be a nightmare. The government cannot compromise any further.

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Dennis .

May 10, 2012 at 15:29

" private sector final salary pension schemes were based on n/60 and the public sector ones were n/80!"

I was in a private sector 60ths scheme and my wife in a public sector 80th. The difference was that she got a lump sum as part of it and I didn't.

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May 10, 2012 at 15:53

Although I don't work in the Public sector, I must say that the whole tone & selective content of this article is disgracefully biased & inaccurate. First, it is not the fault of any worker that successive governments have decided to fund pensions (including the State Pension) out of current expenditure rather than reserving & investing pension contributions, so to say that all the deficit suddenly has to be accounted for is stupid. Secondly, Final Salary schemes are not "generous" in the context of living standards after retirement, and the closure of most private sector final salary pension schemes over the last 4 years does not in itself support their "generosity", but simply explains what happens after the combination of stock-market crashes, -ve interest rates, the extreme folly of FRS17, and employers (including government) being able to get away with anything in a drastic recession to wreck their employees' futures so that when stability returns, the increased profit to the bottom line will be gigantic. Some of us can still remember when employers had "Pension Contribution Holidays" for several years when the schemes were over-funded due to excellent investment returns - the employees had no such holidays; Just becuase the investments are yo-yoing all over the place doesn't mean that long term investments (eg Pension funds) should react in a draconian manner.

I agree it's unfair that "private sector" employees often don't have access to such schemes, but that should be a matter for correction in the private sector, whose employees will probably be reliant on the state, since they will have such a useless pension - with contribution rates of 3-6% total - whilst employers, many of whom avoid taxes relatively easily, will not be liable for it, will they? - Again passing the buck to the state.

And if you want 2 months of argument on CPI vs RPI, I'll certainly have something to say! But that's another day.

It is time, however, for the pensions industry and government to come clean with everyone in the country on the amount of contributions that are likely to be needed to fund a "reasonable" pension - something like the (not very generous) pensions associated with the Final Salary Scheme, and that is 15% of wages p.a., most of the time, and up to 20% in bad investment years. This may be made up of 6% from employees and 9% employers, or any other combination. If the old "criminal colony" of Australia can do it, why can't we, People?

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May 10, 2012 at 16:03


I agree that its not the fault of the public sector worker that this situation has arisen.

However, we are where we are.

What would you suggest that Government do to ensure that these schemes can be affordable in the future given that people are living longer and tax payers really dont want to pay even more taxes to fund the retirement of others?

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Dennis .

May 10, 2012 at 16:04

Johnny, I agree with most of your comments but Pension Holidays were necessary since the then government (conservative I believe) proposed taxing pension surpluses as they were seen as a way that companies could avoid tax. Oh and you forgot to mention dear old Gordon Brown's pension tax raid (which continues to this day).

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Truffle Hunter

May 10, 2012 at 16:10

The private sector pensions have been devastated by the actions of Gordon Brown robbing the private pension funds of bilions per year. There is little wonder that companies are are ditching the company defined benefit schemes. with governments constantly changing the goal posts for the private sector, it is about time the public sector had the same treatment.

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John Isaac

May 10, 2012 at 16:22

1. General comments about public sector pensions do not make much sense.To take two examples I know something about, the conditions of police pensions and teacher pensions are very different.

2.There have been clear statements in the press that I have not seen refuted that the teachers superannuation scheme is not underfunded -although there is in reality no "fund" at all as others have pointed out. The contributions are on a percentage basis, so as salaries of teachers have risen the amount available in theory to pay the pensions of those retired increases- although the calculations must be complex.

3.All state teachers pay into the scheme on first appointment and continue for forty years to get the pension then based on 40/ 80ths. The advantage that teachers do have is that the funding has not been subject to the theft, poor management and government changes in taxation of some private schemes.

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michael johnson

May 10, 2012 at 16:24

I proposed the reinstatement of the 10p tax rebate in a March 2012 CPS paper, paid for by eliminating higher rate tax relief. It would costs c.£4bn per year at prevailing interest rates and dividend yields, so it is a relatively cheap time to introduce it. Furthermore, although the cost would increase with rising interest rates, this would probably coincide with a strengthening economy; on-going affordability would be less of an issue. Such a move would trap the benefit of compounding income within people's pension pots, rather than the Treasury.

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May 10, 2012 at 16:39

If you want to do a piece of real journalism, find out and publish the conditions for MPs pensions.

As I recall we, their employer, pay in 30% of their salary very year (average employers pay 6%). After about 12 years their pension is about half pay. When they are sacked (voted our) they get obscene amounts of compensation and almost always have other jobs bringing in more money.

You might also investigate and publish the figures for our Prime Ministers. The last 2 were in Parliament for comparatively short periods and I bet their pensions make your salary look like a joke.

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May 10, 2012 at 16:43

I too am very disappointed at the steady demise of pensions in the UK and the loss, either in value or altogether in the private sector, of DB arrangement. However I see no point and I don't want to go into all the old dead ground of who is or isn't to blame and why. We are where we are.

BUT think about this.

In these proposals, anyone not within 10 to 14 years of the current normal retirement age will see their pension age increasing in line with the state pension age – to 66, then 67, then 68. This proposal is only in respect of pension built up after the changes take place and any other benefits built up before the change will be protected at the original retirement age. State Pension Age is due to rise to 66 for men and women by April 2020 – with police and fire-fighters spared. According to these calculations, if people retired at 60 under the new scheme (when all the entitlement is accrued under the new rules - 30 or 40 years from now), which they would still be entitled to do, they could, in some cases, be around 20% worse off than if they had done so under the existing scheme.

Workers in the Private sector would see these proposals as a massive benefit and far from striking would welcome such a change if it meant sustainability of the Defined Benefit pension offering from their employer.

"One man's meat...." and all that.

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May 10, 2012 at 16:47

Dave T

"You might also investigate and publish the figures for our Prime Ministers. The last 2 were in Parliament for comparatively short periods and I bet their pensions make your salary look like a joke"

As I understand it the Prime Minister and the Speaker of the House are entitled to full pension rights (20/40ths?) after only a day in the job.

I could be wrong!

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May 10, 2012 at 17:14


Thanks for responding. Perhaps we are NOT where we are told we are!

There are a number of variables which I think are unwise to "assume" correct, just because a statistician with a set terms of reference says so . The first is the life expectancy predictions: If one starts to look a bit more holistically at what's going on in the UK and the world generally, in elderly health and healthcare, mutating viruses, economic instability - which unfortunately I predict will result in major wars in the next 15 years, and the dire future for many of today's younger generation across the western world, one can't help but question these wild predictions about longevity. On another front, Europe seems inexorably keen on creating more and more layers of pseudo-government, civil servants, Mega IMF funding, and public spending (eg have you heard about the 6.9% Increase in the EU budget proposed recently?, Mayors all round, more devolution / /independence......). Simply scrapping the EU parliament, downgrading EU Directives to EU Recommendations and downgrading Devolution would solve half the debt crisis without losing anything. Oh, and by the way, the UK is now the most crowded country in the world, apparently. Time to invoice all those counrtries in Eastern Europe the £8600 a year it costs to have their 4 million citizens over here, and put up the NO VACANCIES sign to any non-British National who expects to work in the UK. If Employers want the people, they'll just have to train the British Nationals.

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Colston Hicks

May 10, 2012 at 17:52

The economists who said that public sector final salary pension schemes are unfunded also said that the private sector final salary pension schemes are unfunded, but said it in a different way. The declaration, just before the pensions Act 2004, was that the employer guarantees the final salary pension scheme benefits of the employees. No need for a fund, therefore, unfinded.

Of course the economists were absolutely wrong.

I challenge any employee, public or private sector, to produce a rule book that says, " you do not have to save for your pension as it is guaranteed by your employer".

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Dennis .

May 10, 2012 at 17:58

Have you ever thought about where these longevity numbers come from? We are told repeatedly that people are living longer yet think about your own family history, in my case lots of relatives in the 20th century lived well into their 80's and 90's. Now walk around a graveyard and you will see lots of very old graves with people who made it into similar ages. What is different is child mortality which has come down significantly and similarly for people who die "early" so I wonder if what we are seeing is that the average is creeping up but that life expectancy isn't?

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May 10, 2012 at 19:32

Dennis - Whilst I understand your argument I think that you will find that the actuaries use the number of years of expected life after retirement. Looking a gravestones is not a very sound scientific basis on which to draw a conclusion.

John Isaac - your point 3 does not point out that as teachers' pay rises, not only do their contributions rise (and also the taxpayers) but that the accrued liability riss to. And on top of this the taxpayer has to pay ALL of the added benefit of longer lifespan.

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Anonymous 1 needed this 'off the record'

May 10, 2012 at 19:44

As a public sector retiree I thought this was a clear, balanced and informative piece, with similar arguments to others I have read in the Economist over the years. The biggest risk to the nation's health is not terrorism, cancer etc but a flu pandemic that is overdue and it may be the fact that we haven't had one that is at last forcing some hard long overdue decisions on the political classes. People are definitely living longer, witnessed by the fact that hospitals are increasingly swamped by "frequent fliers." GPs used to deal with elderly patients with one to two problems. Now they deal with increasingly complex elderly patients with multiple pathologies that often require conflicting treatments.

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Dennis .

May 10, 2012 at 19:45

Jon, I take your point about it not being scientific but one often hears reports that in the 1950's people died within 5 years of retirement etc and it doesn't ring true with my (and my wife's) family histories. Also I guess that years ago only the better off could afford gravestones (on which they often recorded lots of infant mortality too).

One inescapable fact however, is the number of people getting 100th birthday cards from the Queen is rising as is the fact that my local post office has 90 and 100 year birthday cards for sale.

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Anthony Tinslay

May 10, 2012 at 20:00

Truffle Hunter - your reference to Singapore could go much further. When Lee K Y took over a fully funded State Pension Scheme was introduced. Since then ALL employees' compulsory contributions are paid directly into the scheme without any Government inteference. The scheme is now perhaps the wealthiest body in the country with all manner of investments including vital infrastructure and huge amounts elsewhere in the world including Britain. All these years later, retirees can expect a worthwhile income from the fund and NO political interference still

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May 10, 2012 at 20:24

Many valid points made and this govt is continuing the illegal thefts started by one Gordon Brown and Ed Balls, with sterling support from Y Cooper, and Red Ed Millband (aiding and abetting).

The nation cannot afford the PS pensions at the present rate.

Good point made above, about the strikers being forced to re-apply for their jobs (a lot of journeymen will then find themselves looking for another job, and the CS a lot, lot leaner and cost effective- here I would start at the MoD), and in the process they will be on a lower pay rate, and higher pension contributions (and more stringent terms on leave and sickies) which MUST be set aside and the contributors get what the money yields, not a defined benefit. No more Muggins turn, not just because of length of service.

Anyone with more than 10 years to retirement, must have their retirement date set back, starting with 2 years added for starters, and up their contributions with that being graduated for all with longer retirement dates, so we don't have to be burdened with the liability for anything like 70 years. If they are going to strike anyway, let them feel the pinch, and severely. Any work to rule, they are not doing their job, so they are shown the door. Incentivise them to work, not shuffle paper and tick boxes. Bye, bye the PC brigade, and any fire/policeman who will not wade into a pond to save anyone because they are not trained, and that goes for plod and bike tests. On that basis, elf 'n safety demands that no one get out of bed, quite dangerous.

Furthermore, a calculation should be done for those affected as to have their defined element fixed as of, say, today and the remainder what is yielded by the combined contributions income, not a mythical figure plucked out of the air, And the higher contributions set aside and invested (so that they too will be affected by the thievery of govt on pension income whilst in the pots as well as market forces) That way all will the be equal in the treatment meted out by the govt.

BTW, the MPs pensions should be part of the same regime, but also that the accretion rate must be based on 45 years service to earn a full pension, just like every other 'sucker' in the private sector.

If that happens, you will soon see that MPs will the more readily be open to less stringent and costly regulations on pensions, and that the pots are subject to the same excessive charges as obtain in the private sector. Perhaps then they will ease the burdens they impose on the private sector.

Additionally (gee, I am getting more ideas as I go on) if the pensions are payable beyond 75, then there must be an element to be charged @56% for IHT. C'mon, fair is fair.

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May 10, 2012 at 22:03


I'm afraid you are not going to get a very generous final salary pension scheme with employee contributions of 6% of pensionable salary and 9% of pensionable salary from the employer.

Dependant upon the age structure of the scheme, the basis of benefits , salary escalation, investment returns and mortality tables used, total contribution levels of 20%to 30% of the total pensionable salaries would be more realistic. This is why so many private sector schemes have closed. If the public sector schemes were on a funded basis I think these would be the contribution rates require, ignoring any past liabilities.

By lowering gilt yields QE has had the effect of reducing annuity rates and increasing pension costs. To provide a pension for a man aged 65 of just over £3000 per annum increasing by RPI with a 50% spouses pension the cost would be £100,000. So when it is said the average public sector pension is £7000 pa, we are talking of a cost of £233,333 and for those on pensions of £50000pa a cost of £1.6 million! This is why the tax payer can no longer meet the cost of these pensions

Clarifying the accumulation rates under most public sector schemes, they are on the equivalent of n/60ths. Pension is calculated on the basis of N/80ths with the addition of a cash sum of 3/80ths for each year of service. So for someone on a pensionable salary of £10,000 having served 40 years service they would receive 40/80ths of £10000 ie £5000pa pension plus 3/80ths multiplied by 40 ie 120/80ths of £10000 = £15000 cash sum. The commutation rate used is £9 cash for every £1 of pension. Therefore, the tax free cash is equivalent to £1666pa pension ie £15000/9 which when added to the £5000 pension amounts to £6666pa, the same as 40/60ths of £10000 ie £6666pa

I would like to see the Government being much more informative with all the figures. Give some examples of peoples' pension entitlements before and after the proposed changes, how do final salary benefits compare with average lifetime benefits but with a later retirement age? What are the actual costs to the tax payers and employees taking into account tax relief on their contributions? More transparency please.

Finally good article Michelle McGagh, well researched.

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May 10, 2012 at 22:50


Interesting, but I have a pension exactly like your model, and the nominal contribution rates were 6% and 9% until the employer started using the pension scheme to partially fund 10,000s of redundancies, surprise surprise.

If you work in the Financial Services industry, your estimates of contributions are up to twice those agreed with my brother who does, in Investment Mgt, which is closely linked to Pension funds. And given the historically unprecedented recent interest rates and annuity rates and QE, yet again, one cannot use these as being typical for the next 40-60 years of pensions - if it is going to be typical, we might as well abolish the concept of Retirement today.

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Anonymous 2 needed this 'off the record'

May 11, 2012 at 00:08

For me and I suspect for many others in the private sector, the concept of retirement has already gone, thank you to Mr Brown and to QE. Following redundancy, how can I contribute to any pension scheme? My savings are being used up on bills. My only hope now is that my new company will thrive and that I will remain healthy enough, long into what would have been my retirement years, to be able to work sufficiently to pay the bills. If all goes well, I will regard it as a blessing that no employer will be able to give me the push at the age of 67 before I can afford to leave.

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Robert Lake

May 11, 2012 at 08:16

As a retired Army Officer drawing a pensions for which I am very grateful. I would point to the terms of service that were offered when I first was attested in 1967. Pay conditions then were not good but we were encouraged to serve by the prospect of a fair pension at the end of our service.

Later although told that our pensions was non-contributory, the Armed Forces Pay Review body adjusted our salaries to account for this 'perk', so pensions effectively became a contributory pensions. Terms of service over the years were also tweaked and fortunately salaries improved, but I feel its somewhat short sighted to criticise public sector workers as if they had any choice in the matter anyway.

The real problem with contributory private pension schemes is that Gordon Brown took away the the tax benefit of Advanced Corporation Tax in his 'raid on pension funds'. Thus undoing the possibility of future planning by Trustees and leaving pension funds with black holes. I therefore blame one man for the parless state of private pensions schemes, a fact that is little understood by so many people in these schemes.

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Dennis .

May 11, 2012 at 09:04

Robert, I totally agree and the fact that Brown's raid was retrospective meant that existing liabilities could never be met as planned for. It beggars belief that this fact is so little mentioned in the media. I actually wrote to my MP (conservative) about it but got a neutral response no doubt they are hooked on the revenues too.

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Anonymous 2 needed this 'off the record'

May 11, 2012 at 09:41

Robert and Dennis: I agree with you both. Today I called HMRC with a question. After hanging on for over 20 minutes from 8:00 hrs, the first individual could not answer my question. The second individual was incompetent. This became clear by his first answer, which I had to challenge. A solution has now been found and a letter will solve the problem. These are the guys who were objecting to their work and pay conditions yesterday.

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May 11, 2012 at 09:43

Whilst the Brown tax significantly reduced pension fund growth, and as Dennis has pointed out, was retrospective in that it applied to existing funds, not just new contributions (and it hit funds twice as companies had to top up their funds for the shortfall, thus depressing dividends and share prices), there are other very big factors Robert.

The financial crisis saw the transfer of wealth from pension funds which held financial shares to the taxpayer as the bad debts had been spent and most spending ends up eventually with the Treasury. Unfortunately Brown spent this money (and more)

Atrificially low interest rates mean that annuities are terrible value. So pensioners are subsidising mortgagees so that house prices remain too high and fewer people who borrowed beyond their means lose their homes.

But the biggest factor is longer life expectancy as the fund has to stretch to around twice the time anticiipated 20 years ago.

So those with personal pensions have been hit by at least 4 whammies,whilst those on DB schemes have suffered none of these, but expect the rest of us to not only bear the cost of these, but also to pay them for their over generous benefits.

DC pension members are bearing a huge proportion of the costs of excessive spending by the Labour Government and some individuals. But few care or want to know as it affects only those who are retiring now, The others affected have too many other issues to think about the future. And should MP's care :-)

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Robert Lake

May 11, 2012 at 11:15

Jon, thanks for your deeper understanding,

Did anyone else like me get the feeling that during the 'have it all today years' of easy terms lending, it was all rather obvious that it was going to end in tears.

I think Mervyn King did, but only now confesses his regrets that he didn't 'shout it from the roof tops'. I thing Mr 'no more Boom and Bust' must have been told some home truths occasionally when back home at the Mance.

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Truffle Hunter

May 11, 2012 at 11:59

The Bank of England was afraid of telling the truth because politics got in the way. Politics should be separated from the B of E. It should be given full independence and be allowed to have its voice without fear of politicians breathing down their neck. There was a time when the B of E Governor would call bank chairmen in when lending needed to be controlled. If he raised his eyebrows during the meeting, that was sufficient warning for the banks to reign in their excesses.

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May 11, 2012 at 14:15

QUOTE FROM ARTICLE.......'Public sector pension schemes have been accused of passing on the contributions of current employees to pay for the pensions of those who have retired, rather than investing current contributions.'

If only this were true. I would love a situation where the current public sector workers were paying for their predecessors. One day it would all come crashing down on their heads and their heads alone.

What the article fails to take account of in that quote, is that the reason it does not come crashing down (yet at least) is that it is the poor private sector working taxpayers that have been sucked in as guarantor for this stupid system.

We are the ones who are paying for it - not the current public sector workers with their 6% of salary (all of which ultimately comes from the private sector anyway).

If I could design the country from scratch then I would make it illegal for a government or employer to get involved with the provision of workplace pensions. T

The government can do the basic state pension and both public and private employees alike can top this up with private pension funds - if they decide this is what they would like to spend their money on.

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Dakky24 via mobile

May 11, 2012 at 14:24

Michelle, in order to complete the picture how many retired public sector workers receive annual pensions of less than £25,900? It's important to strike a balance when you trot out statistics in this way.

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Dennis .

May 11, 2012 at 14:27

Not many people know this but in parts of India, elephants that have worked for the government get a state pension. I don't know about private sector ones.

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Dakky24 via mobile

May 11, 2012 at 14:31

Golfalot - do you really believe that public sector workers and public sector pensioners do not pay tax in the same way as private sector workers? If you do believe this your post makes sense but it is actually untrue!

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Dennis .

May 11, 2012 at 14:39

There are only three groups of people in society, those too young to work, those old enough to work and those too old or ill to work. No matter how you divide the resources (either via taxation or investment returns or both) then the reality is that the old and young need to be supported by the middle group.

And please no smart comments about benefit scroungers etc

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May 11, 2012 at 15:12

Hello Dakky,

I believe that private sector workers and public sector workers both open their pay packets and see the same deduction for income tax and national insurance.

The difference is that the entire salary entry on the public sector employee's payslip has come from private sector employees paying tax.

It is the money that the private sector worker pays in that ultimately funds the public sector employee and therefore funds the public sector employee's, NI contribution, income tax and pension contribution.

Naturally, it never works the other way. The public sector worker's taxes do not go towards the private sector employee's wage packet.

If you just had public sector workers taxes going round the system it would fall apart very quickly. You need to have the private sector generating the money to keep the public sector going.

The point I am making is that even the tax that the public sector worker thinks he pays is just the private sectors tax recycled and regurgitated through his pay packet.

I don't see how that can be argued against but I am open to you telling me.

The real insult is that the public sector has given itself gold plated pensions that are unobtainable to the private sector worker. It has better conditions than the private sector with more holidays and paid sick days and has over one million non jobs. That is 1 in 6 of the entire public sector workforce.

Something has to give and pensions an public sector pensions is a good place to start.

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Dennis .

May 11, 2012 at 15:48

Golfalot you ignore two things,

1. you use services provided by public sector people (defence, police, fire, ambulance, schools, hospitals, getting your bins emptied etc etc.). A section of society is required to do these things and they need feeding and housing too.

2. the fact that in years past, most people in the private sector also had good pensions to match public ones. We have successive governments and Mr Brown in particular to thanks for screwing them up. I recall a headline in the 1970's that the UK had the best funded pensions in the world; where did that go?

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Truffle Hunter

May 11, 2012 at 16:11

The public sector is, and always has been, a heavy weight pulled by the private sector. It has got to the point where it needs downsizing to reflect the decline in the nation's fortunes. There are may hard working and dedicated people in the public services but there are an awful lot of substandard time-servers that add no value.

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May 11, 2012 at 16:37


I am aware of point 1. I did start to address it in my previous post but deleted it as it was getting too long.

If public sector just did the things you listed then I would be chuffed to bits. Sadly they have grown and grown and now touch every aspect of society with their dead hand and inefficiency. They are a brake on my business everyday. Today I have completed their requests for information from the valuation office, vosa and a department of our local council that deals with a proposed restriction on our access road. Why should I have to do this? It is the same most days

There are people employed as equality and diversity officers in every council up and down the land. If they don't feel like turning up for work for a month then they still get full pay and no one bats a eyelid. I know this to be true since I used to work in local government where my manager was off work for a year with stress.

I once heard a striking 'worker' tell a radio show ' if you don't want to pay my pension then take your bins to the tip yourself, educate your own kids, pay for health insurance'.

At no point did it occur to him that I would be willing to do all of these things if it meant not having to keep him in his job for 40 years and an indexed linked final salary pension for 20 years or more.

To answer point 2. Times change. Gordon was a idiot but even without him private sector pensions would not be a good as public ones.

Now the people who fund the public sector do not have the pensions that are remotely the same as public sector and there is no way for them to get there.

Consequently the public sector pensions will have to come down a bit. They will still be better than the private sector by a long way so the public sector employees should consider themselves lucky to live in a country that is still prepared to fund their pensions at all.

I have said it before on citywire. There should be no jobs for life in local government and you should not be even able to apply for a job as a teacher politician or civil servant etc until you have worked for at least 5 years in the private sector.

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May 11, 2012 at 16:59

" should not be even able to apply for a job as a teacher politician or civil servant etc until you have worked for at least 5 years in the private sector."

Agree. It should be a prerequisite.

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Anonymous 3 needed this 'off the record'

May 11, 2012 at 17:35

Agreed, I worked in the private sector and had lots of public sector clients, issues like booking sick leave in advance (what?) etc. One current problem in teaching (I was told this last week by a deputy head) is women teachers timing multiple pregnancies such that they get paid maternity leave and return for a minimum time and then get pregnant again. Evidently it's possible to have a couple of years fully paid (and pensioned) leave if you play your cards right.

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May 11, 2012 at 18:01

Compare that with Jon's descriptions of 4 whammies hitting some individuals and Anon 2's inability to pay into a pension scheme.

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Jack Belfitt

May 11, 2012 at 20:03

I have read the the entire contribution andit would seem that those presenting the Private element are in the majority! As a long serving 'Privateer' I can only observe that seemingly but inevitably the people who have been paying the piper these long years past will deservedly , in my opinion be 'Calling the tune' . Me, I thought the day would never come and that fairyland was here to stay! Oh, What is meant by the oft used word 'Fair? .........You've guessedi! It is that someone else takes the hit!

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May 11, 2012 at 20:42


If you google 'average contribution levels to defined benefit pension schemes' and go to the UNISON website it shows the average defined benefit contribution level as 23.2% from the employer and 6.3% from the employee, so I stand by my previous comments.

The major factor in the increase in cost of pension provision is improving mortality and this is a factor that the public sector pension schemes have to take on board. Public sector employees need to be given full details of the costs of these schemes. There is a lot of misunderstanding. One UNITE strike official this week thought that his pension was 'self funded' ie the current employee only contributions were sufficient to meet the current pension payments and he could not understand why contribution levels have to rise and benefits reduced.

The tax payer can no longer afford to pay for the public sector to receive n/60ths final salary pension schemes in the same way that private sector employers have not been able to meet the rising costs of such schemes.

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Truffle Hunter

May 11, 2012 at 21:20

The public sector will soon find that the knife will have to be sharpened and even more of their ilk will be without a job. Otherwise, where is the money coming from to pay for them? Taxing a few high earners will never raise anywhere near enough money, but it will convince some of them to go and live elsewhere. The politics of envy will wreck this country.

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May 12, 2012 at 10:09

Yes, Sage, but as I said before, if we base all the thinking on the last 4 years' market, investment, and annuity rates, (these figures come from 2010) and assume that these will be the norm, then Retirement as such will be abolished, because such contribution rates are unfundable.

However, if we look back over the last year even, when the FTSE was nearer 5900, and in 2006-7 at 6900, in some months pension fund deficits were negligible or positive. In other words, the values go up and down with such volatility that policy - and contribution rates - need to be looked at over 30-40 years, like all long term pension investment, which makes a mockery of using annual or snapshot comparisons including FRS17 provisions.

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May 12, 2012 at 13:49

Not very nice for the workers but something the private sector has already gone through, so they aren't going to get a lot of sympathy from them.

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May 12, 2012 at 13:53

This is an extremely poor, biased and slovenly article.

Public sector pension schemes exist in a multitude of formats. The one in which I am a member takes contributions and the money is invested; on current projections it will not show a deficit for the next 25 years (the extent of the projection). My contribution is 7.5% of salary and I believe the employer is 12.5%. The pension is paid at a rate of 1/80ths.

Previously I worked in the private sector. I still retain a pension commitment from the company. for which I paid 4% and will receive 1/60ths.

Plainly, the private sector pension is better than my current public sector scheme.

Perhaps the most difficult issue for HMG will be that rather than increase my contributions to remain in the scheme my most likely course will be to freeze my pension as it is now and have all my salary paid to me in future. I know that in theory this is turning down a still worthwhile benefit but quite simply I no longer have any faith that pension contributions are safe and will not be stolen long before I come to being able to access the pension. If I am wrong I still have significant pension rights amassed and in taking the money myself can put it in alternatives - ISAs, property etc.

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May 12, 2012 at 19:30

Some comentaters to this article are under the delusion that the Government has a stockpile of cash somewhere that it draws on to pay pensions, the health service and defence to name but three. You are under an illusion. As was observed at the time the National Insurance Fund was established, the clever trick was that no such fund exists, and never has existed. All government expenditure is funded on a day to day basis from taxation. So if public employees paid into a fund, like road fund licences and National Insurance, the Government would immediately spend it on whatever it choses to spend it on.

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john errington

May 12, 2012 at 21:46

The key problem is that people are living too long and needing to be looked after more. How long can this country afford to wait before legalizing voluntary euthanasia?

And why should we be paid a healthy salary for doing nothing? I've been retired from university lecturing for 15 years (I'm now 65). I would have been very happy to have the choice of continuing work on a part-time basis, which would have allowed me time to do some research. The terms of my pension did not allow this.

Many unemployed cant afford to work because of the benefits they lose.

Our society cant afford these stupid limitations on peoples freedom to work.

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May 13, 2012 at 01:38

Lawny - I would be interested in which fund you are a member. With a 20% total contribution it must have some pretty good fund managers not to have a deficit under current actuarial valuations let alone over the next 25 years.

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May 13, 2012 at 01:51

Anonymous - not sure why the number of public employee pensioners receiving under £25,900 is an issue - the maths is still the same pro-rata. Many recive small pensions as they have worked for only a few years on low salaries. But the proportionate benefit is still gold plated when compared with someone in the private sector with a similar history.

And those on say £50k pensions would need a pot of some £2m to retire at 60 with index linking if they bought the pensions privately. But in the private sector there is a limit far below this when tax relief is lost. And, of course higher rate tax payers who have to pay their whole contribution to their pension funds have limitations on tax relief, whilst those whose "employers" pay in large conrtibutions face no such limits.

We need to educate journalists on the real facts on pension funds, so that they can start to write articles which put everything into perspective. Then we might get a level playing field.

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May 13, 2012 at 08:22

Yes, including the source of the pension commencement lump sum for many (most?) public sector employees, when discussing 60ths vs 80ths.

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Jack Belfitt

May 13, 2012 at 09:51

Re John Errington, John, you are very right and the system that brings this about is very wrong. Wasting talent and competency due to beaurocratic idiocy when the country is in such a dire strait is little nothing short of criminal. It also reveals the level of political incompetency that this corrupted system of democracy brings go the fore.

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Truffle Hunter

May 13, 2012 at 11:36

The UK democracy is just mob rule dressed up in a coat and tie!

"Freedom" died along time ago; those of us outside government and quasi government are latter day slaves to those in the public sector that supposdely "serve" us. If you add those that that continuously suckle at the teat of the State, the private sector is out numbered. We are at a critical tipping point. UK democracy no longer exists when those that generate the wealth are in a minority. The attitudes and behaviour of the productive will change to reflect this. Expatriation becomes very attractive.

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May 13, 2012 at 13:42


Spot on.

The ignorance of many of the journalists and almost all of the public sector pension beneficiaries,is staggering.

There's an excuse for the latter,fed disinformation by their unions,none at all for the journalists though Michelle McGagh and Ian Cowie(Telegraph) are honourable exceptions.

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Jack Belfitt

May 13, 2012 at 17:49

I would not mind the public sector getting everything they expect and desire providing it was wealth that the public sector had itself created and not product of the private sector. When one gets down to basics, money is demanded of the private sector with menaces! Were we to apply this personally it would be described as blackmail!

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