Pensions are just deferred pay

PwC compared the financial fortunes of a public sector employee who remains in civil service employment from age twenty-one to retirement at age sixty with someone born in the same year, who spends his whole working life in the private sector. The public sector worker would receive a pension of £28,900 compared to just £11,600 for the private sector worker.

And given that pensions are simply deferred pay we can no longer maintain the fiction that the public sector is badly paid compared to the private.

6 thoughts on “Pensions are just deferred pay”

  1. Does anyone actually still maintain that the public sector is comparatively badly paid? I can’t recall seeing such a claim in a good long while.

    Anyhow, £28,900 is a very good pension, but a strange choice if you’re trying to give a picture of the general run of civil service pensions. To get a Civil Service pension of £28.9k you’d have to be earning £59,282 at retirement at age 60 (if you started at 21). The great majority of civil servants earn less than £28.9k as salary, with their maximum pension (after 40 years service) being 50% of final salary.

    Of course that’s just civil servants, not all public sector workers. Local government employees pay at least 6% of their salaries towards their pensions – though when last I checked the employer contribution was 19%, so for any local government post you see advertised you should add 20% to the salary to get a real idea of the pay deal.

    Still, yes, it can’t be denied that the pensions are very good and you do need to look at the whole remuneration package, not just the headline pay.

  2. Pete

    I thought the same thing, though surely it’s 2/3rds final salary as the scheme has a 1/60ths accrual rate. So you’d be looking at someone earning about £45k at retirement. I still don’t think there will be many of them though (especially with a full 40 years in the scheme).

    Would also be interested to see what the assumptions are for the private sector employee. If they were born in 1960 as the PwC example seems to assume I would have thought there’s a pretty good chance they too have been in a final salary scheme for a good chunk of their working life. And if the salary assumption is the same too they will have built up a similar entitlement for at least part of their working life.

    It all rests on the assumptions, and I can’t find the PwC report to see what they are.

  3. Can I just point out that for public sector workers, the “employer’s contribution” must surely come from the taxpayer (ie private sector) anyway? And that pension contributions of 6% are 3/10ths or less of piss-all in the context of an index-linked pension from 60, where the shortfalls are guaranteed by, oh yes, the taxpayer?

    So let’s keep that in mind when we’re looking at “the whole package” from the safety of the North Island, shall we?

  4. Not just final salary pensions but index linked final salary pensions, which barely exist in the private sector. Only partly funded by employee and employer contributionS- underwritten by the tax payer.

  5. Is it 60ths now? During my brief stint as a sort-of civil servant (working in a national museum) it was 80ths, and the same was certainly true until very recently of local government – I’ve just checked and it is indeed now 60ths (since 1/4/2009), with the ability to commute some of that, exactly like the private-sector fund I was in when I started work many years ago (but rather stupidly took my money out of when I left, which is a whole other story).

    As for the specific example in the story, it is misleading. Yes a public sector employee _could_ end up with such a large pension, but the vast majority will end up with less than a third of that.

    I also suspect, though, that in comparison with private sector employees in similar sorts of jobs the distinction would be even more stark.

    formertory: there are differences between, say, local government pensions and civil service pensions. The former actually has a fund from which pensions are paid (yes all the contributions in the end are funded from taxes of various kinds, but that’s how the public sector is paid for), while the latter are paid directly from current taxes.

    The point here is exactly that you can’t just compare public sector _salaries_ with the private sector when the former are actually at least 20% higher than that in reality, and for the civil service even higher. The other thing to note is that this hidden additional salary has pretty well doubled as a proportion over the last 15 years from around 10% (at the time matching many of the then-existing private sector schemes) to 20% plus.

    As for the safety of the North Island, well we do now have a Labour-lite National Government, which is an improvement. And they haven’t been printing shedloads of dollars. But have you seen kiwi drivers? And I do still have some UK income on which I pay tax there, so…

  6. Pete, I understand about local government and civil service pensions (really!) and that some are funded and some aren’t. The real point, though, when looking at the overall cost of the schemes and so their value as deferred pay, is that whether or not there’s a fund, it’s going to be inadequate if the same accounting rules are applied as they are in the private sector. The public sector doesn’t have the deadweight of the pension scheme shortfall on its balance sheet – it just wanders off to the taxpayer money tree and gathers another basket or ten of low-hanging fruit.

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