The growing disparity between public and private sector pensions

“We must recognise that the Coalition reforms to public sector pensions do not go nearly far enough, are unaffordable – and cannot last. Why should future generations pick up the bill for the pensions of public sector workers, people who on average are likely to be far better off in their retirement than their wealth-creating private sector peers?” Centre for Policy Studies director Tim Knox

A ‘leading pensions analyst’, Michael Johnson, in a report for the Centre for Policy Studies (CPS) recommends that government should now “put all its modelling assumptions for the reduction of the [public sector pensions] liability into the public domain and to start to prepare the public sector for a risk-sharing arrangement such as a cash balance scheme, en route, ultimately, to a wholly defined contribution framework”. This report received wide coverage in much of the British media and I would say that it would now represent mainstream thinking in neo-liberal circles. It would also, no doubt, be unequivocally supported by the financial services sector which can see the potential of profit around the corner!

We have recently been looking nostalgically back to the 1980s when many of the assumptions that were in place in the then more than three decades after the Second World War were challenged and in some cases overthrown. In her time as Prime Minister Margaret Thatcher scrapped compulsory occupational pension scheme membership and brought in personal pensions. It was all part of her ideology of individual rights and the idea that fewer things should be ‘compulsory’ and there should be more freedom of choice. This is not the place to debate political ideologies but as a pension fund trustee director I have a duty not just to protect the interests of my fund’s members but also to try and understand the ideological and policy climate within which the pensions industry operates - and possible changes ahead.

The CPS is a useful weather-vane for those of us thinking about the pensions future not because its rather extreme views are certain to become the conventional wisdom but because they represent a point of view that one way or another must influence those deciding pensions policy. Aside from whether an Orwellian ‘private sector good, public sector bad’ helps very much, Knox, quoted at the head of this article, is right to draw attention to the growing disparity between public sector pensions benefits (even post Hutton) and those in the private sector. I have referred to this myself in this column in the past and would like to return to the issue again.

I recently asked the human resources director of a FTSE 100 company whether he thought that retirement benefits was an issue at the time of recruitment of new employees and, in particular, whether he thought that the far better pensions on offer in the public sector might allow that sector to cream off some of the better talent. He thought not and indeed said that his company didn’t see the public sector as a competitor for talent at all. Interesting! But might that change? Maybe not but that does not mean that that the differences are unimportant. Depending how you measure it between a fifth and a quarter of all workers are in the public sector and, as the CPS says, the taxpayer does have to underwrite the bill. Because a large proportion of the public sector defined benefit pension commitment is unfunded this means that they are a significant and growing liability. We the taxpayers pay not just contributions to the future pensions of existing public sector employees but we also pay the actual pensions of retirees in full with only a modest amount of the necessary funding (around 20 per cent) of these benefits being provided by accumulated employee contributions.

The old paradigm was that if you worked for most of your career for a blue chip employer OR if you were a civil servant or a teacher or a doctor the one thing that you could look forward to in retirement (financially anyway) was a comfortable pension. That paradigm has changed and whereas the CPS report is provocative and a bit contentious they are surely right to challenge the new status quo. Aside from the affordability question there is a bit of a sense of injustice in the fact that in the future those retiring from careers in the private sector will be disadvantaged compared with those in the public sector. How will our society respond to this? For sure we haven’t seen the end of pensions as a political hot potato.


Paddy Briggs is a Member Nominated Trustee Director of the Shell Contributory Pension Fund. He writes in a personal capacity and the views he expresses are his own

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