Recent strikes by public sector workers over their future pensions would have us believe that they are getting the short end of the stick, but how true is this?

Public sector pensions are considered to be very generous compared to anything in the private sector as they still offer a final salary pension scheme despite this system largely disappearing in the public sector.  A final salary pension offers the person a percentage of their salary as a pension depending on how many years’ service they have given. 

85% of current public sector workers, not only benefit from a final salary pension, but also having this index-linked as well, so their pension will keep pace with inflation during retirement. Less than 15% of private sector works can look forward to a final salary pension, but they do not benefit from it being index-linked in retirement, so have no guarantees around inflation. Other workers must rely on the investment returns, which offer no certainties to the level of pension as they are based on market conditions. So when markets are poor, like at present, this offers the prospect of having little to retire on.

A common myth is that public sector pensions are better as they have lower salaries. In fact until you higher management levels, public sector pay is higher, with the average public sector salary being £25,600 compared to£25,300 in the private sector according to Pension Policy Institute.

The government currently put the cost of the public sector pension scheme at £650 billion, though actuarial firms out this closer to £1 trillion. It is estimated that after deductions of employee contributions the annual cost to the tax payer is £16 billion or £551 for each member of the UK workforce.

The government’s plans to address this are to introduce a number of schemes. These changes are only going to save £13 billion over the next 50 years according to the government’s own figures.

Under the old scheme a teacher or nurse would receive a pension of half their final salary, plus a lump sum of three years' pension, if they worked for 40 years. So if someone retired on an average teacher's salary, they might receive a pension of around £16,000 a year and a lump sum of around £40,000. The new arrangements offer a better pension but no lump sum. Such a teacher retiring today might receive a pension of £21,300 a year

It is estimated that, on average, a private sector worker would need to put 37% of their salary into their pension to match the retirement income paid to a public sector worker on a similar wage, according to a report by accountants PricewaterhouseCoopers. So who has the short end of the stick? 

About the Author

Clive Andrews

Clive Andrews is a journalist in the financial sector, always looking for new ventures.