Public versus private sector pensions: Is a two-tier system sustainable?
Pardon the Interruption
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As the gap between public and private sector pensions becomes apparent and the rhetoric around pension disputes now invokes the societal value of the workers accruing them, are we headed for a divide over public sector pensions?
The government finds itself fighting multiple legal and media battles on pensions. After it lost against judges and firefighters on age discrimination, the law firm that acted for these groups is now preparing to take the issue to employment tribunals on behalf of public sector workers more generally.
Meanwhile, the government was also forced to issue a consultation on pension taxation after doctors revolted against being hit with five-figure tax bills. But these disputes around preserving pension rights in the public sector have meant a new narrative around why they exist might be emerging.
Rhetoric shifts from salaries to societal value
In The Guardian, partner at law firm Leigh Day, Nigel Mackay, is quoted in the context of the age discrimination case as saying, among others: “Public sector pension schemes have been known to provide better than average benefits to reflect the valuable contribution that those in the public sector make to society.”
A few weeks earlier, doctors’ complaints about being hit by an annual allowance tax had the government considering an exception to these tax rules, which prompted Aegon’s pensions director Steven Cameron to wonder whether pensions tax was now linked to the perceived societal value of people’s work.
“Some have argued that doctors should get concessions because of their contribution to society. Without doubting that huge contribution, if we start linking pensions tax breaks to a judgement over societal good, where on earth do we end up?” said Cameron.
Could statements resorting to the value of a profession be indicative of a bigger storm brewing – between public and private sector pension scheme members?
“The differential between public and private sector workplace pensions has got much greater in recent years,” said Cameron. There are now very few DB pensions open to accrual in the private sector, but they continue to be common in the public sector, albeit with some movement from final salary to career average.
DC dominates in the private sector, with many employers paying just the minimum of 3%, while employer contributions to DB are easily five times this level – often more. The bigger role of trade unions in the public sector – which have failed to engage younger members in new industries – is likely playing a role in this.
Generous public sector pensions were sometimes explained with the often lower salaries workers receive, but more people are starting to query whether that argument still holds true, particularly as pensions disputes affect highly paid doctors or judges.
“Even if it were ever the case that public sector employees got more generous pensions to make up for less generous salaries, it would be a brave person who claimed that today,” said Cameron.
Just another way of sowing discord?
So far, the gap between public and private sector pensions has not come to the attention of the wider public, but this could change. For a taster of what the rhetoric could sound like, look to Irish financial adviser and TV presenter Eddie Hobbs. Hobbs is of the view that in Ireland, the ‘deep state’ is protecting its interests by preserving privileges such as generous pensions, referring to the gap between public and private sector benefits as pensions “apartheid”.
Hobbs argues that tax contributions from private sector workers are needed to finance public sector pensions and considers it an unfair transfer of wealth, saying: “Jobs for life and, with them, guaranteed pensions can only be sustained by a transfer of wealth from the majority to a minority.”
He has called for a cap on public sector pension at an affordable level, overriding property rights.
But is such inequality greater nowadays or simply more in focus? For Malcolm McLean, senior consultant at Barnett Waddingham, division is a sign of the times and “not particularly healthy”.
There is “a trend at the moment to make comparisons between different sectors for whatever reason”, he observed, adding that this might even be linked to Brexit and the fact that it has brought divisions in society to the fore, including intergenerational strife, a north-south divide, executive and worker pay, and public and private sector pensions.
But McLean warned against reducing public sector pensions “simply because they are better than private sector pensions”; rather, the latter should be improved – or if the former were reduced, it should be purely down to affordability.
But neither system is perfect in his view. “I do think that aspects of both systems need looking at,” he said.
Can a society sustain a two-tier pension system without creating division?