Friday Highlight  

The inequality of public sector, defined benefit pensions

The public-sector pensionable payroll totals around £175bn, meaning the annual taxpayer’s cost is about £95bn.

Comparing the funding level of public sector DB schemes with that of private sector DC arrangements, the disparity further manifests itself.

It is estimated that for the larger private sector DC schemes, the employer funding level is around 10 per cent; bear in mind that with auto enrolment, the obligation is set at just 3 per cent. 

Coming back to the myth of lower public sector salaries, if we aggregate salary and the average for pension funding, then for the local authority roles I reviewed, the ‘package’ is not £34,000, but an estimated £52,700.

This contrasts with the package for someone in a private sector role on the same salary and a member of a DC scheme, of just £37,400.

To put it another way, to have a comparable total package, the individual in the private sector would need to receive a salary of £47,910, which is fast approaching the higher-rate tax threshold in England and Wales. 

There is much made of the overall cost of tax relief for pensions to the Treasury.

In the past I have certainly called into question the government figures that are cited, as for one thing they include the ‘lost’ national insurance, because the money is being directed to pension, rather than being paid as salary. 

Equally, the largest portion of tax relief is enjoyed by employer contributions to DB schemes. 

Therefore, in summary, are we meant to conclude that due to the majority of funding of public sector DB schemes ultimately coming from the taxpayer that we, the taxpayers, are the beneficiaries of this largesse?

Now, that is a different way of thinking about how we personally benefit from pension tax relief.

Neil MacGillivray is head of technical support at James Hay Partnership