Sting in the tale - public or private?
Our voluntary pension savings of GBP1,300bn may dwarf the funded pension assets of the rest of Europe, but are themselves dwarfed by the unfunded liabilities of our state pension system and the pension promises made to public sector employees. I am not sure this was generally understood before this report came out.
In 1995 there were 5.2 million active members of defined benefit (DB) schemes in the private sector, but by 2000 that had fallen to around 4.6 million. The Commission's best estimate is that active membership of open DB schemes in the private sector has fallen by 60% since 1995 and by 50% since 2000. That's a bit depressing whichever way you look at it and the end result is that we now have far more people in public sector DB schemes in the UK than in the private sector. Private sector final salary schemes seem to have smoke coming out of the back and look unlikely to make it back to the airfield.
Public expenditure on state pensions and benefits in 2002 was 6.1% of GDP. That included the basic state pension, stae earnings related pension scheme benefits, second state pension benefits and the minimum income guarantee. But the surprising statistic, to me at least, was that we also spent 1.5% of GDP on unfunded pension payments to retired public sector employees in that year too. Or to put it another way, nearly a quarter of what we paid out in state benefits in total. Given the relative number of public sector pensioners to the universe of total UK pensioners, that seems a high percentage. To me that means we are either paying too little in state pensions in general, or too much in public sector pensions.
Coverage is a big issue too. In the public sector, it's good with around 85% of public employees enjoying employer-sponsored pension scheme membership. There seems little hope for similar coverage in the private sector. Quite the opposite, in fact, with this year's Pensions and Finance Acts driving employers and the industry to concentrate their efforts on rebuilding our ever dwindling number of existing schemes to a new post A-day model, rather than distributing new employer-based pensions to those who don't have them. This is still referred to as simplification, although anyone who has had the time to wade through the acres of legislation that has been drafted so far, knows that the resulting tax regime will be far from straightforward.
The apparent craziness of this has led many people I know to say that politicians don't seem to understand pensions, but I disagree. The pension scheme for MPs themselves is about as good as it gets. It is a DB scheme providing 40ths of salary for each year of service. That's the kind of benefit very few private sector employers could match, even in the heyday of private pension provision. I doubt any workforce in the private sector would be offered membership of so generous a final salary scheme these days. So, I would argue that politicians do know a good pension scheme when they see one. What we all need to hope is that they will eventually sort things out so that the rest of us can look forward to receiving good pensions too. That would be nice.
First published in Pensions Week, 1 November 2004