For years Final Salary pensions were the norm in both the private and public sectors. But things started to change back in the late 90’s as successive governments started to raid pension schemes for tax revenues. As a result, private sector Final Salary lump sum pension schemes quickly started to close down to new members. So much so that now there are almost no private sector Final Salary schemes open to new members. The public sector has not followed suit.
The argument was always that public sector wages were far lower than the private sector and so the pension schemes acted as compensation to balance out the benefits and keep the public sector competitive. This is no longer the case. In fact, the situation has been turned on its head.
The average salary in the UK is currently £26,266 which is far lower than the average public sector salary in most (although not all sectors). In local government for example the average is now £34,000 according to Neil McGillivray of the James Hay Partnership. But it’s much higher when you factor in the value of the Final Salary pension.
Current estimates put the average cost of public sector pension schemes at 63% of salary. The average employee contribution is only 8% which means that the employer is contributing 55%. The employer in public sector is of course the taxpayer. At current levels that means that the government is paying out £95 billion a year in public sector pensions. A figure that continues to rise year on year.
It’s a huge liability and one that raises questions about sustainability.
If you look at the private versus public sector packages. The average £34,000 public sector salary is worth almost £53,000 when you add in the 55% government pension contribution. Compared with a package of just over £37,000 in the private sector taking into consideration an average employer pension contribution of 10%. To level things up the private sector employee would have to paid almost £48,000 to get an equivalent package. That’s £14,000 more. It would also take them into the higher tax bracket.
Things really have turned on their heads with public sector Final Salary schemes being real “gold plated” benefits.
How sustainable is this going forwards?