MYTH # 3. The discrepancy between private and public sector pensions needs to be tackled by punishing the public sector

REALITY. We should level up pensions – not level them down

What are the Facts?

Many justify attacks on public sector pensions by the decline in the number and quality of private sector defined benefit pension schemes.

Around 85% of public sector employees are members of an employer-sponsored pension scheme, most of whom have a Defined Benefit scheme. However, in the private sector 40% of employees are members of an employer-sponsored pension scheme but only 15% of employees are active members of a Defined Benefit scheme.

Private sector employees have been hit hard by the employer retreat from good pensions. But this does not justify punishing public sector workers. Two wrongs do not make a right.

Public sector pensions support lower-paid members of the workforce. Well-paid private sector employees are likely to get a decent pension on top of their pay. The real difference between public and private sectors is among the low and average paid. The attack on public sector pensions may be wrapped up in rhetoric about fat-cat public servants, but it is really an attack on the low paid in the public sector. Only 20% of private sector employees who earn between £100 and £200 a week are members of an employer-sponsored pension scheme whereas 70% of public sector employees in the same pay range are pension scheme members.

The recent economic turmoil has had a huge impact on private sector DB and DC schemes. Savers in DC schemes have seen the value of pension pots plummet, while the private employer sponsors of DB schemes now have to make up the deficits. Unfunded public sector schemes have not been hit by market turbulence. Tax payers have not suddenly had to find funds to make up scheme deficits, and government can plan for the future funding of public sector pensions.

Private sector schemes need to be funded because there can be no guarantee that the sponsoring employer will still be around when staff retire. Public sector employers, ie the state, will exist in perpetuity and, as in other countries such as the USA, we tend to have unfunded pensions for central government functions such as health and the armed forces but funded schemes in local government.

To protect future pensions, private sector schemes (and funded public sector schemes) are regulated to ensure they have sufficient funds to meet their future commitments. But this tends to be on a cautious basis and deal with stock market volatility thus pushing up private sector pension costs. Funded public sector schemes can plot a more stable long term course. All schemes have to deal with issues such as increased life expectancy. The public sector has done this with the cost-sharing agreements backed up with a ceiling on employer costs described above.

As public sector schemes operate on a sustainable basis and employer contributions are capped, there is no financial justification to reduce benefit levels simply because employers have savaged private sector schemes.

Just how generous are public sector pensions?

Five million employees working in the public sector qualify for pensions, including 1.3m in NHS, 1.6m in local government, 600,000 teachers, 600,000 civil servants, 200,000 in the armed forces, 150,000 police officers and 50,000 firefighters.

The mean average public sector pension is £7,000 but the majority of public sector pensioners have pensions of less than £5,000.

The value of the main schemes in the public sector for new entrants are similar to a medium private sector final salary, at around 21% to 24% of salary on average.

Index – Media myths about civil and public services.

5 Comments CherryPie on Mar 7th 2010

5 Responses to “Exploding Public Sector Pensions Myths – Part 4”

  1. Steve Hayes says:

    When our pension scheme (at a university) switched from Defined Benefit to Defined Contribution, many people raged that the government insisted that pension funds hold a certain proportion of their assets in less volatile investments. Pensions were losing out because of red tape, they cried. But if you retire in the middle of a recession, the boot is on the other foot.

    • CherryPie says:

      For Civil Servants they were happy to accept a lower wage throughout their working life because they had the guarantee that it would be offset when they received their pension in later life.

      Now the government propose to alter the rules and rip up contractual agreements.

  2. AH well let;s see how we are pilloried in the pres today!

    • CherryPie says:

      We had quite a lot of positive responses on the picket lines and from passers by but of course the odd there were some negative ones too.

  3. [...] Exploding Public Sector Pensions Myths Part 4 MYTH # 3. The discrepancy between private and public sector pensions needs to be tackled by punishing the public sector [...]