17 October 2011

Public Sector Pensions - Some Myths

Public sector pensions are in the news. For the sake of fairness to everyone else, something has to be done about them. There are no good solutions, and the situation is complicated by the fact that there are actually a number of different public sector pension schemes - some funded (i.e. with a pot of money to pay pensioners) and some unfunded (where the taxpayer has to cough up each month for next month's pension payments - that's the principle anyway).

Overall, it's better to have an understanding of the facts rather than hearsay. So here's some myths to put to bed (thanks to Fiona Tait of pension experts Scottish Life).

1. Public sector pensions are better in order to compensate for lower salaries. Untrue.

This is no longer true. Office for National Statistics figures show the average public sector worker is paid 4% more than the average private sector worker in terms of gross pay. In terms of total reward the difference is even greater, at nearly 13% in favour of the public sector, and it is suggested this is understated.

2. The changes are not necessary; public sector pensions are well funded. Mostly untrue.

The majority of the big public sector schemes are not funded. There is no pension fund as such, so the cost to the government, hence the taxpayer, of providing pensions will continue to increase.

3. The government is stealing our [current] pensions. Untrue.

The proposed changes will only apply to future pension benefits. Benefits that have already accrued will not be reduced. Existing benefits will continue to be related to a worker’s final salary even after they have moved to the proposed new career average scheme.

4. Public sector members are being unfairly picked on. Untrue.

The reforms outlined in the Hutton report are aimed at public sector schemes but the ‘saving more and working longer’ scenario applies equally, if not more, to private sector schemes.

5. Public sector workers will have to pay more, work longer and get less. Mostly true.

Not all members will be worse off. Final salary schemes are most advantageous to workers who benefit from regular promotions and salary increases. Those with a more even pattern of earnings may receive more from a career average scheme.

6. Public sector schemes are relatively low. Mostly untrue.

It is likely that those in receipt even of modest pension incomes do not appreciate how much they cost to provide, or how good they are in comparison with the private sector.

The average NHS pension payable from age 60 would require a defined contribution fund of nearly £300,000. Since the average pension fund is worth £24,330, people in the public sector are getting a relatively good deal.

7. It is all the fault of the bankers. Mostly untrue.

It is true that the government has financial problems that affect its ability to keep increasing the funding of pensions for its employees. However, the question is also whether it should, even if it could. The main reason for the increasing cost of public sector pensions is increasing longevity.

8. Public sector workers will leave their schemes if the changes go ahead. Unlikely.

This is difficult to call but it would not be a good choice. Members who opt out will find it difficult to match the level of benefits of their current scheme in a private arrangement (see above).

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