Pension gulf widening between public and private sector

2 January 2008

Public sector workers are getting better pension deals than their private sector counterparts as more private firms abandon defined benefit pension schemes.

Figures from the Association of Consulting Actuaries show only 900,000 private sector employees are members of salary-linked schemes open to new employees, compared to five million in the public sector.

The ACA also says that only one in five private sector defined pension schemes are open to new employees down from seven in 10 just three years ago.

Defined pension schemes mean members are guaranteed a certain pension, usually a proportion of their salary. Members of defined contribution schemes have no such guarantee.

Other figures from the National Association of Pension Funds show only around one third of private firms had defined benefit pension schemes open to new members in 2007.

Joanne Segars, chief executive of the NAPF, says the Government must use the Pension Bill - due for its second reading on 7 January - to bolster current workplace pensions.

She adds: "More must be done to offer support to employers offering good workplace pensions to ensure they remain open and can afford to invest more than the minimum required under the coming Personal Accounts system." 

Meanwhile, the ACA is calling for radical pension schemes reforms to encourage private employers to continue to offer workplace schemes that are better than personal accounts. It calls for amendments to the Pensions Bill to allow employers to offer conditionally indexed pension schemes which it claims would give employers certainty over long-term costs and give employees a more stable platform for their retirement income than money purchase schemes.

Ian Farr, chairman of the ACA, says: “Most private sector defined benefit schemes are closed to new entrants and there is mounting evidence of closures affecting existing members. The Government can check this trend with changes to defined benefit scheme legislation, requiring no extra layer of legislation.

“It can simply remove the ban on employers being able to offer middle way conditionally indexed pension schemes.”

Conditionally indexed pensions, which are the main retirement product used in the Netherlands, link the level of pension to average career earnings.

Farr adds: “If the current legislative opportunity is lost then we will see over the next few years a dangerous gulf growing in provision between those working in the private and public sectors, a gulf that we believe will be seen to be unsustainable.”

Nicholas O’Shea, director of Pharon IFA, says the research is part of an ongoing trend as more employers decide it is too expensive to run defined benefit schemes.

But he adds: “A lot of private firms still offer very good defined contribution schemes and these shouldn’t be overlooked.

“Proposing conditionally indexed schemes doesn’t solve the problem of employers being unwilling to pay into schemes.”

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