Why ‘lavish’ public sector pensions can’t last for ever
It’s reported that, on average, public sector workers receive a pension three times larger than those in the private sector upon retirement. Stuart Price explains why he thinks this anomaly will change.
Stuart, Partner and Actuary at Quantum Advisory, said:
“The TaxPayers’ Alliance revealed that a 25 year old earning the national average wage could retire at 68 with an annual public sector pension of £17,563 compared to £6,412 per year if they had a pension from a private sector scheme. The disparity between the figures is quite shocking especially when the actual value of the difference in the pension is in excess of £200,000. However, I don’t feel the pension gap will last for much longer as the cost to run the public sector schemes is not sustainable.
“Currently, most public pension schemes are defined benefit (DB) which offer a far superior income in retirement than their defined contribution (DC) counterparts which are the preferred option in the private sector – hence the disparity. DB schemes are scarcely available to private sector workers now due to increasing life expectancy, low interest rates and previous scheme deficits pushing up the running costs, making them simply unaffordable. Even for those that are still available, for employees to get their full entitlement they have to hope that the sponsoring employer of the scheme remains solvent and continues to support the scheme now and well into the future. Public sector schemes haven’t got this additional concern as they are ultimately backed by the government.
“Unlike DB schemes in the private sector that have to be funded, public sector schemes are generally unfunded – or pay as you go – like the State Pension. Current taxes pay the pensions for those in receipt of pensions from these schemes, and the next generation’s taxes will pay for those in the workforce now when they retire. That’s if the current system continues, which I can’t see happening.
“Already, some public sector schemes, or quasi-public sector schemes such as the Universities Superannuation Scheme (USS), are looking into ways to drastically cut back the pension benefits they offer. Only time will tell, but in my opinion, with pressure to fund the NHS and other public services, public sector schemes will eventually follow the path of the private sector, but maybe not quite yet.”
Stuart Price is a Partner at Quantum Advisory, which has offices in London, Amersham, Bristol, Cardiff and Birmingham.
Established in 2000, Quantum Advisory provides pension and employee benefits services to employers, scheme trustees and members.