LORD Adair Turner, head of the Pensions Commission that recommended pension reforms being introduced in the coming years, re-entered the debate last week saying he wishes he had been more radical and recommended raising the state pension age to 70 alongside a higher and simpler state pension.
Now chairman of the Financial Services Authority, he also regrets not being more radical over public sector pensions and believes they cannot continue in their present form.
The thorny issue of public sector pensions has been appearing in the news
more and more regularly in recent months, though there is more to it than might meet the eye.
It is definitely the case that a much higher proportion of workers in the public sector – over 80% – are members of pension schemes, compared with workers in the private sector where fewer than 40% are members. In addition, the vast majority of public sector workers belong to defined benefit pension schemes (which pay out a pension according to how much you were paid and how many years you worked) that are often regarded as the best type of scheme for an employee and which are becoming much less common in the private sector.
It is also true that, on average, public sector pension schemes are more generous than those on offer in the private sector. Our own calculations at the Pensions Policy Institute suggest that for an average worker in the public sector, the pension is worth the equivalent of an additional 20% of salary. In the private sector, allowing for the difference in state benefits that public and private sector workers might receive, the pension (where there is one) is worth closer to 10% of salary.
But it is also true that most members of public sector pension schemes will not get a very large pension. For example, the average pension in payment from the main public service schemes is less than £7,000 a year.
Perhaps the most difficult issue to untangle is whether better pensions in the public sector make up for lower pay when compared with the private sector. Although on a very basic comparison it appears that public sector pay, at an average of £25,600 for full-time workers, is in fact higher than private sector pay at an average of £23,300, this comparison is not a fair one.
To make a proper comparison you need to take account of the different mixes of education, skills, experience and working conditions in each sector, as well as the other types of remuneration that might be available, including share schemes, bonuses and private medical cover. For example, compared with the private sector, men in the public sector are more likely to have higher educational qualifications and to work in most of the occupations associated with higher pay, and so may be expected to earn more than their private sector counterparts.
Taking account of the differences between the public and private sector workforce is difficult, but it appears that while pay in the private sector is higher for skilled men, it is higher in the public sector for unskilled men and women. This suggests that pay and pensions may be better in the public sector at low skill levels. But is this because the public sector pensions are too generous, or because pensions in the private sector are not generous enough? This is really the crux of the matter.
It is undeniable that public sector pensions are worth more to public sector workers than the pensions that are on offer to most private sector workers. But it is also true that many people who will receive a public sector pension will not have high incomes in retirement. So if there is any further reform of public sector pension schemes, it will have to consider these two important, and to some extent conflicting, issues.
This conflict can be seen in the different attitudes towards pension provision in the public and private sectors. In the private sector, where good final salary schemes are closing as employers view them as too expensive, there is concern that private sector workers may face hardship in retirement due to inadequate pensions. In the public sector, where these schemes are still open, there is concern that the schemes are not affordable or sustainable in the long term.
There is, however, one area of pension scheme reform that may help lead the way to a better balance between public and private sector pensions. A very small public sector scheme – in fact one of the most generous – has just had its contributions frozen, with a promise to look at ways of making pensions more affordable, for example through higher contributions from the members, higher pension ages or needing more years for a full pension. This is of course the pension scheme for MPs. Perhaps this is an area where reform for MPs may be able to lead the debate.
Chris Curry is research director at the Pensions Policy Institute