Public sector pensions – unaffordable and unsuitable for low-earners?

I can only read the headline – I have no subscription. As Stephanie Hawthorne’s tweet gives me no clue as to further insights, I’ll assume this is another dig at the “pensions apartheid” between those who get a decent pension because they are in a public sector scheme and those that don’t.

And I expect it will remind us that the lucky public sector worker is going on strike while the unlucky private sector worker is made to make their best way to work, scrabble for a new passport and wait in A&E for an NHS paralyzed by strikes.

Which plays pretty well to the Telegraph readership who will either be outraged or comforted but not particularly engaged.

As this IFS chart shows, public sector pensions are the Government’s biggest liability. Yesterday’s blog on the SCAPE rate, explained that the Government are aware that unless GDP picks up, the cost of meeting these liabilities will need to be met by higher employer contributions. These higher contributions will be covered by more money to public sector employers from the taxman but at the expense of money for services like more police, libraries, hospitals and so on.

And while pensions may be bleeding the public sector dry, the public sector employers are not going to be up in arms on behalf of consumers, they are all too happy to see their pensions prioritized.

There is no obvious answer to this problem other than to recognize it and ensure that it is taken into account in wage settlements.  Unfortunately, the idea of “total reward” where the cost of pay today and pay tomorrow is added together, seems to have played little part in pay discussions over the past twelve months.

The sneaking feeling is that nobody in the pay negotiation process, really wants to consider what the pension inequality between private and public sector reward means.

Which is why some commentators have called for a system where pension accrual can be sacrificed for greater take home. There is merit in this, if only to show what total reward is.

But more insidiously, such a system of pension sacrifice could  lead to low-earners working out that their public sector pension and their state pension could make them overweight income in retirement and underweight income while at work.

The design of our great public sector pensions may have created a strange distortion which means that the highest earners cannot stay in their scheme for tax reasons while lowest earners cannot afford to stay in their schemes for cashflow reasons.

Just how little thought has been given to “affordability” is evident from the net-pay scandal. The bulk of low earners auto-enrolled into workplace pensions are accruing in public sector pensions. Those auto-enrolled in at the AE earnings threshold but earning below the lower income tax threshold are over-paying contributions by 25% (and will be throughout this new tax-year).

In short, a public sector pension system designed to meet the needs of everyone, is only really working for middle earners. The cost to low-earners of participating is too high (witness the numbers of nurses opting out of the NHS pension scheme).

Ironically, the design of defined benefit pensions that prevailed in yesteryear, excluded those on low earnings, people who regularly changed jobs and often younger workers.

We may find that the cost of being apart of ever more expensive public sector pensions – creates such pressure on low-earner’s take homes that we go full circle.

In 2016, an NHS Trust called Oxleas did try to introduce a low cost DC workplace pension as an alternative to the NHS pension.

At the time it was seen as a means to reduce Oxleas’ pension bill, but as these strikes persist , the problems of affordability within the public sector pension sector will persist.

While The Telegraph may be railing against the cost of public sector pensions to the tax-payer, a more interesting conversation could be had about the affordability and suitability of these schemes to many who are in them.

Oxleas may have been wrong in how they implemented their pension strategy, but they were asking questions about affordability which are being asked again today




About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Public sector pensions – unaffordable and unsuitable for low-earners?

  1. John Mather says:

    “Government are aware that unless GDP picks up, the cost of meeting these liabilities will need to be met by higher employer contributions”

    Watch what they do NOT what they say.

    The silence on the “value” of Brexit and its damage to GDP makes the outcome more certain.

    Add the LDI destruction of value and when do you think that GDP will improve?

    This statement is the triumph of hope over experience at best at worst yet more fiddling why Rome burns.

  2. K M Jeary says:

    I have commented before, Henry, being part of the doomed USS scheme, In 2008 I would gave been considered as a moderate to high earner and expected to be reasonably comfortable in retirement. Now? I am a moderate earner at best being part of a profession which has seen its salaries fall by (I estimate) by about 25 percent (similar I think to what I think in actuality has happened to the junior doctors) whilst our pension trustees have made cut after cut to our pension scheme and rewarded themselves with multiple figure bonuses when the best independent statisticians said the trustees had got the figures wrong. And now after LDI when we have no idea what the USS lost (and I do not trust them to be honest about it given their recent history) all I can say about 10.1 percent is HOORAY – BRING IT ON! Not because I am a vehement supporter of radical anti-capitalist organisations but because like a lot of other people in my situation I worked my guts out during Covid, and what thanks do we get for it? None. To say that I am angry is to use true British understatement. Oh and I am a WASPI woman.

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