Defined Contribution  

Think tank calls for DC pension for public workers

Think tank calls for DC pension for public workers

Right-wing think tank the TaxPayers’ Alliance is calling on the government to introduce a funded defined contribution (DC) scheme for public employees to replace their final salary plan, saying these workers retire on pensions three times larger than their private sector counterparts.

The think tank said the new DC schemes should be funded, which would make liabilities "gradually cease to be passed onto future generations".

In a report out yesterday (27 August) the TaxPayers’ Alliance also argued the true value of public sector employee pension entitlements was part of the worker’s total remuneration, and should be recognised as such in future pay negotiations.

Article continues after advert

According to research from the think tank, a new employee - aged 25 and with a salary of £28,600 a year – would have a public-sector pension worth £11,151 a year more than if he had contributed the same amount into a private sector pension.

In 2018 prices, this would mean an average pension of £17,563 a year in the public sector and £6,412 a year in the private equivalent.

The TaxPayers’ Alliance, which used the civil service, NHS and teachers’ pension funds as a basis for the public sector defined benefit (DB) schemes, and considered the current average levels of private employer pension contributions, concluded the private sector worker would have to save 30 per cent of their salary (£8,606 a year) to retire with a pension as large as the public-sector employee.

According to figures from the Office for National Statistics (ONS) published in February, the difference between the median value of pension wealth of employees in the public sector, when compared with their peers in private companies, almost doubled in two years.

Public workers typically have an average pension pot of £80,600, while private sector employees had savings of £15,300 in July 2014 to June 2016, a difference of £65,300. In the previous period - between July 2012 and June 2014 – the gap stood at £37,500.

According to the TaxPayers’ Alliance, almost five million public sector workers are enrolled in a final salary plan which is unfunded - meaning there are no funds set aside to cover these pensions when they fall due, and that the costs will be met from future general tax revenues.

John O'Connell, the TaxPayers' Alliance chief executive, said: "Workers in the private sector are paying for their public sector counterparts to enjoy a retirement they can only dream of, and that disparity has been brutally compounded over the years by politicians continuously launching raids on private pensions.

"What's more, pension promises made to public sector workers are unfunded and will continue to be paid out of general taxation - that is unsustainable as people are living a lot longer than when these schemes were cooked up.

"To stop kicking the can down the road, reforms must ensure that new public sector pensions are properly funded and not paid for by the taxpayers of the future, namely our children and grandchildren."

Martin Bamford, chartered financial planner and managing director at Informed Choice, agreed with the think tank's proposals.

He said the pension liability being accumulated within the public sector was "beyond comprehension".