When it comes to pensions, public sector workers are much better off than their private sector counterparts, a leading pensions expert says.
2:57PM GMT 28 Nov 2011
Many private sector workers retiring today will be 16pc worse off in retirement than private sector workers who retired a year ago because of falling annuity rates and volatile stock markets.
Someone with £100,000 at the beginning of the year would have been able to buy an income of £6,474. Today, that pension fund would be worth just £91,163 - this would only be able to secure an annual income of £5,387 - a drop of £1,087.
Unlike public sector pensions, private sector pensions in so-called defined contribution schemes are affected by stock markets and annuity rates, which dictate your pension income. Since the beginning of the year, the average balanced managed fund has lost around 8.8pc. At the same time, annuity rates have fallen from 6.74pc for a 65 year old man to 5.91pc (level single life annuity). The combined effect of these market movements has been to drive down the pensions purchasing power of someone in a typical private sector money purchase pension by 16.7pc.
Tom McPhail, pensions expert at Hargreaves Lansdown said that when it comes to pensions, public sector workers are very much better off than their private sector counterparts. They also earn on average 7.8pc more than private sector workers (source ONS).
He added: "Life expectancy in retirement has increased substantially in recent years, from around 14 years at age 65 in 1980 to around 21 years in 2010; to date this has not been offset by commensurate increases in member contributions from public sector workers. Members are receiving larger pensions simply by virtue of their longer life expectancy so for the unions to argue that their members are having to pay more to get less ignores the fact that they will be getting their incomes paid for several more years.
"We have a lot of sympathy with public sector workers who are being asked to pay more and work longer, especially as this is coming from politicians who haven’t had the good sense to reform their own pension first. However the uncomfortable reality for most of us is that we are going to have to work longer, save more, spend less and even then we may get smaller pensions than we’d hoped for."
Most private sector companies have closed final salary schemes or defined benefit schemes because of crippling deficits, rising life expectancy and poor investment returns. Just two FTSE 100 companies, Amec and Shell, still offer defined benefit schemes to new staff, according to Lane Clark & Peacock LLP, the consultants. Instead, workers in the private sector are now encouraged to join DC schemes, which are fundamentally different and inferior to defined benefit schemes.
