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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
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.
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