Automatic enrolment  

Private pensions dwarfed by public sector

Private pensions dwarfed by public sector

Official data has revealed the growing gulf between pension provision in the private and public sector.

The difference between the median value of pension wealth of employees in the public sector, when compared to its peers in private companies, almost doubled in two years, according to the Office for National Statistics (ONS).

Public workers typically have a medium pension pot of £80,600, while private sector employees have savings of £15,300 in July 2014 to June 2016, a difference of £65,300.

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In the previous period - between July 2012 to June 2014 – the gap stood at £37,500.

This distortion is a consequence of auto-enrolment, as a large proportion of recent members in the private sector are contributing the current minimum level into their pensions – 2 per cent, 1 per cent from the employer and the employee.

Also, as recent joiners, these savers have had a small-time period to accumulate their wealth when compared with public sector employees, ONS stated.

As a result of auto-enrolment, which was introduced in 2012, active membership in the private sector increased from 42 per cent to 53 per cent.

There are now more than nine million people auto-enrolled in a workplace pension scheme, according to figures from The Pensions Regulator.

Defined benefit (DB) schemes – which are responsible for the majority of savers in the public sector - also saw membership levels increase, but at a much slower pace than the private sector, from 84 per cent to 87 per cent.

According to Alistair McQueen, head of savings and retirement at Aviva, pension participation is rising, and that is great news

He said this has been driven by automatic enrolment and it is benefiting the private sector.

However, he added the challenge that we have got in the private sector is that people are traditionally being automatically enrolled at the minimum levels, and that is just no match for the generous occupational pensions that we see in the public sector.

From April 2018, the auto-enrolment minimum total contribution will increase to 5 per cent, with the employee paying 3 per cent.

One year later, it will increase again to 8 per cent, with the worker paying 5 per cent.

A total of £17bn a year will be going into workplace pensions by 2019 to 2020 because of auto-enrolment.

Mr McQueen argued, however, that even with an 8 per cent contribution "there will still be a gap between what someone in the private sector and someone on the public sector can expect" from their pension.

He said: "This is not a criticism of the public sector, the challenge here is for auto-enrolment.

"This is another wake-up call that the system that we see today is going to be inadequate for many people when it comes to retirement.

"We believe that 8 per cent minimum is not sufficient, we think it should rise to 12.5 per cent - including individual and employers' contributions."

The Department for Work & Pensions (DWP) published its review of auto-enrolment in December, where it announced that the minimum age for workers to be included into workplace pension schemes will be reduced from 22 to 18-years-old, and it will change the way pension contributions are calculated by the mid-2020s.