A pension gap which will see public sector staff retire on a THREE times larger retirement pot than their private sector counterparts is not sustainable, according to a partner of a financial services consultancy.
A huge disparity that will leave the blood of private sector workers boiling was revealed earlier this year, showing a whopping difference of more than £11,000 in pension pots.
According to research by the Taxpayers’ Alliance, a public sector worker earning an average of £28,600 a year will enter their golden years with an annual pension of £17,563.
But a private sector worker earning the exact same amount will retire on just £6,412 annually, highlighting a shocking inequality between workers in the same pay category.
Stuart Price, Partner and Actuary at Quantum, says:
“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.
With pressure to fund the NHS and other public services, I believe public sector schemes will eventually follow the path of the private sector, but maybe not quite yet.”
Mr Price explained “the reason for the pension gap is most schemes for public sector workers are defined benefit, a scheme which is agreed by the employer and guarantees a specific retirement benefit.
This means the amount you receive depends on the terms of the agreement, rather than how much a worker puts into their pot.
A defined contribution scheme is based on the worker’s contributions.”
Mr Price said: “Most public pension schemes are defined benefit (DB) which offer a far superior income in retirement than their defined contribution (DC) counterparts.
This is due to the relatively low contribution rates paid to DC pension schemes compared to DB pension schemes, which are the preferred option in the private sector.
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.”
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This piece first appeared in the Express, November 2018