There’s been a topic that’s been on my mind lately: the ongoing conversations about the potential ‘raiding’ of private pensions. Yet, there seems to be limited discourse surrounding the financial implications of public sector pension schemes, like those for the Civil Service, NHS, and local government employees.
For those of us who have diligently saved for retirement, the fear of sudden financial instability looms large. We find ourselves vulnerable, facing the risk of having our financial safety nets abruptly removed.
Unlike public sector workers, we don’t enjoy the comfort of a guaranteed income in retirement. Now, it feels as if we’re being penalized for our prudent financial planning.
With the Chancellor grappling with a significant deficit in her Budget and contemplating raising the state pension age, the question arises: why isn’t there a consideration to reform the generous pension schemes of public sector workers?
If public sector pensions were aligned with the realities faced by private sector savers, wouldn’t that create a more equitable system that benefits everyone?
For more insights or to share your thoughts, feel free to reach out at pensionquestions@thisismoney.co.uk.
Steve Webb: Scroll down to find out how to ask him YOUR pension question
Steve Webb replies: There is no doubt that there is now a big difference between the pensions available to people who work in the public sector and those who work in most private companies.
In most cases teachers, nurses, civil servants, local government workers and people in the ‘uniformed services’ are members of traditional salary-related or defined benefit pension schemes.
The key feature of these schemes is that the pension you get is based on how many years you pay in and what you earn. The pension is paid for as long as you live and is fully protected against inflation.
By contrast, the vast majority of private sector workers are building up a different type of pension known as a ‘pot of money’ or a defined contribution pension.
In DC pensions the worker and the firm typically pay money into an investment fund, the money is invested and then at retirement you have a range of choices.
One is to use the pot to buy an income for life (an annuity) but you can also take it all out in one go (subject to tax) or take some out and leave the rest invested.
In many ways modern DC pensions are quite attractive in that you can often access them sooner (typically at 55, rising in 2028 to 57) and you have more flexibility about how you use them.
But the downside is that whilst you are building them up and while you are managing them in retirement, all the risk is on you as an individual.
This means you have to think about things like the ups and downs of investment markets, how inflation might erode the value of your savings, and how to manage the money when you do not know how long you will live.
More fundamentally, the big attraction of public sector DB pensions is that your employer is generally making a very large contribution as well – far more than the typical private sector employer.
As a result, for any given salary level, the public sector worker will typically build up far more pension than their private sector equivalent.
One option, as you suggest, would simply be to change the rules so that everyone moves to a DC pension.
But there’s a catch.
Most of the public sector schemes (excluding local government and the Parliamentary pension) have no fund sitting behind them.
Instead, this year’s contributions by workers and employers are used to fund the pensions of today’s retired public servants.
If we moved to a system where, for example, today’s nurses and hospitals put money into a DC pension pot belonging to the nurse, then we couldn’t use those same contributions to pay for retired nurses. So we would have to raise taxes on everyone to meet the pension promises we have made in the past.
This is the main reason why successive governments have let the system run on as it is.
It would be fair to say that efforts have been made to reduce the cost of public sector pensions.
Some of the big changes in recent years have included the following moves.
– The *age* at which you can draw public sector pensions has been increased; someone starting work today will not be able to draw their full public service pension until state pension age.
In the past, many public service pensions could be drawn at 60 or even earlier, so this is a big cost saving
– The way public sector pensions are protected against inflation has been changed; in the past pensions were linked to the Retail Prices Index (RPI) but now they only go up in line with the generally lower Consumer Prices Index (CPI).
This resulted in a substantial cost saving for the taxpayer.
– Rather than being based on people’s final salary when they leave the scheme, modern public sector pensions are based on people’s ‘career average’ salary.
This isn’t fundamentally a cost saving but it is rather fairer to workers on more modest wages or those whose career does not end up at the top of the public sector.
Fundamentally, good public service pensions are part of the package we offer to people to encourage them to become teachers, nurses, civil servants or local government workers.
We obviously could make those pensions less generous if we wished. But we might find that this would lead to demands for better wages now to compensate, and that would again lead to increased short-term costs for the taxpayer – something most governments are keen to avoid.
SIPPS: INVEST TO BUILD YOUR PENSION
AJ Bell
AJ Bell
0.25% account fee. Full range of investments
Hargreaves Lansdown
Hargreaves Lansdown
Free fund dealing, 40% off account fees
Interactive Investor
Interactive Investor
From £5.99 per month, £100 of free trades
InvestEngine
InvestEngine
Fee-free ETF investing, £100 welcome bonus
Prosper
Prosper
No account fee and 30 ETF fees refunded
Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.
