Private sector employees would have to increase their pension contributions ten fold in order to match the pensions offered to those in the public sector, a new report has disclosed. Many public sector employees enjoy lucrative final salary pension schemes (also known as defined benefit schemes) that offer workers an income for the rest of their life, based on what their salary is at retirement age. This is on average much higher than the pensions being taken from those who have worked in the private sector, as the average pension fund is only around £30,000.
The research was undertaken by the Pension Corporation who calculated that someone aged 35 paying into a defined contributions scheme would have to pay a whopping 55% of their salary to gain the equivalent retirement income of someone paying just 5.1% into a defined benefits pension. If in theory this were the case both workers could expect a retirement income at 50% of their final salary. Unsurprisingly perhaps, the vast majority of these DB schemes have closed in the private sector as they have become unaffordable for employers to fund. In fact 90% of DB schemes have now closed, including oil giant Shell who has recently closed their scheme to new members.
David Collinson from the Pension Corporation, said: “…leaving aside the far more generous employer contribution rates, the individual in the DB pension scheme benefits hugely from economies of scale in everything from pension administration to asset management fees.”
Because of the enormous cost of funding these pension schemes, the government has recently announced plans to reform public sector pensions to reduce the burden on the tax payer. However the reforms have been met with stiff opposition from the trade unions who want to protect the pensions of their members.