What's all the fuss about...

/ 01 July 2009

Private vs public sector pensions
Could this be the end for final salary pensions?

Private sector final salary pensions have been dying a slow death for years, so recent announcements that both BP and Barclays are closing their schemes could prove the final nail in the coffin.

Until recently, most big firms have kept their final salary schemes open for existing members, only closing the doors to new recruits. But Barclays is taking it one step further by shutting the plan to existing members too. The bank is proposing to stop future accruals for its 18,000 existing members from the end of the year, effectively freezing the retirement benefits already earned and typically producing lower pensions than would have been awarded.

It’s no surprise that the private sector wants to get rid of final salary schemes, as employers end up paying for shortfalls in investment and rising life expectancy.

By providing a defined-benefit (DB) pension based on end-of-career earnings and years of service, employers bear this risk, while under alternative defined-contribution (DC) schemes, individuals shoulder the burden.

In comparison to the private sector, public sector pension schemes are far more generous. In 2007, the number of active members in pension schemes – largely DB plans – in the public sector was 5.2m, compared to just 3.6m in the private sector, of which only 2.7m were DB schemes.

Kevin Dickens, chair of the UK200Group, a mutual association of accountants and lawyers, is critical of the ongoing lack of movement to change public sector pensions. ‘Gold-plated public sector pensions have been under pressure for some time, but the current government has lacked the nerve to do anything positive. The governing party relies on the large public sector unions for much of its funding and it seems they have not wanted to rock the boat on this issue.’

In fact, a recent report by the Policy Exchange estimated the cost of unfunded pension obligations to public sector staff at £1.1 trillion, equivalent to 78% of GDP, though such estimates are sensitive to the choice of data used.

‘What is certain is that with the continued growth in the numbers of public sector employees the “merry go round” has to stop soon. The contributions needed from taxpayers are just too big to sustain,’ says Dickens.