Why Cameron’s right on public sector pensions
“I can look you in the eye and say public service pensions will remain among the very best… much better, indeed, than for many private sector workers. ”
David Cameron, 28 June 2011
Cathy Newman checks it out
The Prime Minister struck a conciliatory tone on public sector pensions today. In a speech to local government bosses, he said his reforms were “fair” no fewer than ten times.
But millions of public sector employees feel a deep sense of injustice about being asked to retire later and contribute more to their pensions. They’ve always argued they deserve a cushier retirement, because they’ve made salary sacrifices throughout their careers.
Does this remain the case though, or do public servants no longer deserve special treatment on their pensions now they’re by and large better paid? We’ve been perusing the pensions debate.
In his speech to the Local Government Association, the Prime Minister claimed the Government’s proposals, based on recommendations made by the former Labour Pensions Secretary , Lord Hutton of Furness, were necessary, fairer to the taxpayer, and fairer to public sector workers too.
The Coalition wants public sector workers to pay more and retire later. Ministers also want to replace current schemes based on workers’ final salaries with one based on career average earnings.
The question of whether state-sponsored pension schemes will still outperform their private sector equivalents may well turn out to be a key factor in whether the strikes attract the sympathy of people who work for private companies.
Public sector workers have traditionally argued that what their opponents call “gold-plated” pensions make up for lower salaries.
The Office of National Statistics shows that, in fact, average pay is higher in the public sector. The latest figures from the Annual Survey of Hours and Earnings puts the median average gross salary of a public sector worker at £13.54 an hour (£446 a week).
The comparable figures for the private sector are £10.06 an hour (£388 a week), although the comparison comes with some caveats: there are likely to be significant regional variations, and of course it’s difficult to find jobs in each sector that are exactly comparable, since many private sector roles have no direct equivalent in public services.
What about the average pensions workers from each sector can expect?
As FactCheck reported before, this is where the business of making a fair comparison gets difficult.
According to figures from Lord Hutton’s report, the average public sector pension payout is around £7,800, or £5,600 as expressed as a median payout.
The unions have gone to great lengths to point out that many lower-paid workers will get substantially less than this, but they don’t dispute the overall figure.
How do we find a comparable figure for the private sector? The problem is that there are broadly two kinds of pensions: defined contribution (DC), where the pension payment depends on the pot accumulated by the person when they retire, and defined benefit (DB), where the level of final pension is fixed.
DB pensions, which are similar to the current public sector model, have tended to be much more generous and depend on a higher contribution from employers.
According to ONS figures, the percentage of salary paid into the pot by the average employer was almost three times bigger for DB pensions in 2008.
That’s probably the reason why very few employers still offer DB pension schemes as part of their pay and benefits packages.
In fact, as a new employee of a private company, your chances of getting enrolled on that kind of scheme are “nil”, according to the National Association of Pension Funds (NAPF).
NAPF figures from last year show that the mean annual average value of a DB pension was £7,467 – very slightly less than the public sector average. (The median payout was also very close at £5,860.)
But the average private employee entering work now cannot hope to get anything like as good a deal, according to NAPF. They put the average lump sum a newcomer to the world of work will acrrue in a DC pension at around £20,000, giving an annual salary of just £1,400.
A private sector worker in a DC pension would have to build up a pot of around £200,000 – ten times the current estimated average – to get an annuity in the region of £7,800 a year.
It’s the generosity of employer contributions in the public sector that will still make it a more generous package, according to many experts, even if the Government’s proposals are implemented.
ONS figures suggest that private employers contribute around six per cent on average to DC schemes. Accountants PricewaterhouseCoopers have estimated that the figure would have to rise to more than 30 per cent if a private employer wanted to match a current public sector pension.
And the generosity would continue if Lord Hutton’s recommendations were adopted in full.
While he’s proposed a cap on contributions from the taxpayer, he’s also proposed a floor for pension levels, saying that public service schemes, along with a full state pension, should add up to “at least adequate levels of income”, as defined by the 2004 Turner Commission into pensions.
According to that model, an adequate retirement income for someone earning the average public sector annual salary of just over £23,000 would be £15,538.
Strip out the state pension at the universal £140-a-week ministers say they want to implement and that leaves just over £8,200 which will have to be met by a public service pension scheme.
Cathy Newman’s verdict
You can see why the Prime Minister isn’t going to budge on public sector pensions. Private sector employees are now so much worse off in their retirement – and on average their salaries are no longer any higher.
Faced with those figures, David Cameron knows that most voters who don’t work for the state will back him on pensions reform.
Tonight I asked Mary Bousted, General Secretary of the Association of Teachers and Lecturers, what she thought of FactCheck’s figures. She said Ministers were trying to create a “race to the bottom” and that instead, private sector pensioners should enjoy the same retirement income as their public sector colleagues.
In less austere times, that might be worth debating. As it is, though, with the country struggling to pay off the deficit and householders fighting to make ends meet, it’s somewhat fanciful.
The analysis by Patrick Worrall