Are public sector pension contributions too high for low earners?
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The Institute for Fiscal Studies has called for rebalancing public sector remuneration towards take-home pay, as more than one in 10 low earners in the sector opt out of their pension scheme.
In a new report published on Friday, ‘Pressures on public sector pay’, the IFS found that 13% of public sector workers earning between £10,000 and £16,000 a year opt out of their pension scheme, more than twice the rate among those earning over £31,000 a year (6%).
The institute said there was therefore “a good case for increasing flexibility in pension arrangements and carefully rebalancing public sector remuneration away from pensions and towards pay”.
Public sector pension schemes, unlike most private sector schemes, offer a lifelong secure income financed largely by the employer – on average, public employers contribute 23% – but employees also need to sacrifice a relatively high percentage of pay if they want to be in the scheme. Minimum contributions vary; they range from 0% for the Armed Forces scheme to as high as 12.44% for low-earning police officers, according to the thinktank.
“Public sector pensions remain far more valuable than those in the private sector, but significant numbers of lower-paid staff miss out as they cannot afford to make the required employee contributions,” said IFS research economist Andrew McKendrick.
“Government needs to structure remuneration to make sure it is getting the right people in the right roles to help deliver public services. That might mean carefully rebalancing away from pensions and also towards higher-paid professions,” McKendrick said.
Higher paid public sector workers have experienced the biggest fall in the pay distribution, according to the IFS. Lower-paid public sector workers have not seen their relative position worsen to the same extent, except for entry-level police officers, the report found.
The researchers also pointed out that public sector employer contributions, though valuable, did not prevent doctors, teachers and police officers slipping down the overall pay distribution.
In 2022, the institute already proposed allowing public sector workers to flex pension contributions down, to shift the emphasis more towards take-home pay.
