Magazine article Public Finance

Occupational Hazards

Magazine article Public Finance

Occupational Hazards

Article excerpt

Over the past few months, the cost of public sector pensions has been the subject of intense debate. Pensions industry commentators, the CBI and the Institute of Directors have all drawn attention to the longterm financial implications of public sector pension liabilities. Picking up on this theme, the opposition parties have called for the government to review public sector pension arrangements. So far, the government has resisted this.

On reflection, this is perhaps for the best The longterm cost of financing public sector pensions is a significant issue but an inquiry that focused only on this would be in danger of overlooking something equally important It would not address the long-term implications for the public finances of the wider decline in occupational pensions provision.

We have become accustomed to seeing and hearing the phrase 'gold-plated public sector pensions'. However, not so long ago final salary pension schemes for public sector workers were not so out of step with the private sector. It is only in recent years that this term has been used to highlight the widening gap between the pension benefits available to public and private sector workers.

However, this gap has not widened because public sector schemes have become more generous. In fact in recent years, public sector schemes have been scaled back, with their average value to new entrants reduced by around 3% of salary, according to the Pensions Policy Institute. Rather, the gap has been created because of the significant decline in the provision of pension schemes in the private sector, particularly defined benefit schemes.

This decline, which began in earnest in the mid1990s, has accelerated in recent years. In contrast public sector pension scheme membership has risen during this period. This growing disparity has evolved to the point where the CBI, IoD and others have described a 'pensions apartheid' between public and private sector workers. Data from the Office for National Statistics reveals that between 1991 and 2007, the active membership of public sector defined benefit pension schemes grew from 4.2 million to 5.2 million, a rise of 24%.

However, what is more telling is that over the same period, active membership in private sector pension schemes fell from 6.5 million to 3.6 million, a decrease of some 45%. The vast majority of the lost 3 million members were in defined benefit schemes - ONS data shows that defined contribution scheme membership has remained relatively stable over this period.

So where have all these private sector pension scheme members gone? The latest ONS figures show that in the private sector there has been a massive rise in the number of preserved pensions (already-earned pension benefits now frozen and due to be paid on retirement), a direct consequence of the large numbers of scheme closures in recent years. What is less clear is how these missing millions are planning to make provision for their retirement.

As both the appetite for pensions and their availability through occupational schemes has decreased, many have sought to make their own arrangements for providing an income in retirement Research by the Association of British Insurers shows that property, such as buy-to-let and speculative purchases, cash deposits and stock and shares are the most popular investment choices outside of pension schemes.

However, those relying on these alternative investments will likely face a shortfall against their expectations as rental income, dividend payouts, stock values and interest rates have all plummeted.

Even those in pension schemes might not receive the level of income they expected. …

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