Steve Bee: The three crises at the heart of our pension system

By Steve Bee

Sep 12, 2018

pension systemThere has been more talk lately about the disparity between the value of pension entitlements accrued by public and private sector employees.

It appears many are still surprised how much more some public sector employees’ pensions are worth than those in the private sector.

There are many reasons for that but it is the confusion around it which epitomises the real problem with the UK’s pension system.

It is just not well understood. It is not understood by employers or employees, certainly, but I doubt it is properly understood by those in the government or the media either.

We regularly talk of the “pensions crisis” in this country without realising that we have, and always have had, three such crises going on here, not one.

The main one of these is that half the UK workforce has been completely reliant on the state for income in retirement for over half a century.

The state second pension (in all its many forms over time) being used to supplement the basic state pension entitlement was perhaps one of the biggest mistakes we have ever made in the field of pensions. That it has now been replaced by auto-enrolment for all is significant but, at the low levels of contribution currently required, it is unlikely to make a substantial difference to retirement income for many millions of workers.

Our second crisis is that most public sector pensions are paid for out of general taxation rather than being funded by money invested the way private sector pensions are.

So, in a world where generous defined benefit schemes are still being built up by public sector employees, most private sector bosses are unable or unwilling to cover such expensive schemes for their staff.

Our third crisis derives from that very point. Over the last two decades, private sector DB schemes have been phased out for new employees, as well as for some existing employees too.

The switch from DB structures to the simplicity of defined contribution has unfortunately come hand in hand with a general decrease in the amount that private sector employers are prepared to pay into workplace schemes.

This has brought the disparity with public sector pensions into sharp relief, leading many people to feel they are paying more in taxes for others’ pensions than they are in contributions for their own.

If we have one element that is common to these three distinct crises, it is the level of contribution that employers are prepared to pay towards their employees’ pensions.

Those in the public sector are clearly willing to pay more than those in the private sector.

So, with this in mind, is it not time to consider whether inducements could be offered to companies to increase the value of the contributions they make to their staff pensions?

Perhaps differing levels of corporation tax or other taxes on business? It is something to think about.

Steve Bee is director at Jargonfree Benefits

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