From the TUC

Can John Hutton satisfy the public sector pensions critics?

06 Oct 2010, by in Pensions & Investment, Public services

Lord (John) Hutton’s initial report on public sector pensions is likely to recommend that public servants should pay higher pension contributions at a time when their pay is frozen and inflation is busting Bank of England targets. That is unlikely to be popular.

The more interesting question is whether he will satisfy the right wing critics of public sector pensions in the Tax Payers’ Alliance and their allied network of small-state think tanks. 

The most frequent complaint made against public sector pensions by their right wing critics is that they are more generous than private sector pensions and should be bought into line.

But this is an imprecise complaint. Are the critics saying that public sector pension provision should mirror provision in the private sector? Or are they saying that public sector pensions should be like private sector pensions where they exist?

These are two very different tests.

In the private sector there are stark differences in pensions provision. Fully two out of three private sector workers get no employer pension contribution. At the top end a small minority of top directors have pensions that are not so much gold-plated as solid platinum.

To make pension provision in the public sector mirror the private sector, you would therefore need to take away the pensions from two in three public sector staff, concentrating on women, the low-paid and part-time workers. Senior public servants would need to be given huge increases in their pensions to mirror those of top boardrooms.

This, to put it mildly, is unlikely.

So what would Hutton have to do to bring public sector pensions in line with private sector pensions? This is not an easy question to answer, as even this test can be defined in different ways.

But we do have some recent reasearch from ONS that can guide us (press release)   and full article on page 23 of the September 2010 issue of Economic and Labour Market Review.

Pensions are deferred pay, so a helpful way of comparing the two sectors is to look at total reward – the sum of pay and the contribution that the employer is making towards a pension. If we exclude employers’ NI and other benefits such as private medical insurance, this is the cost of employing someone.

This is what the ONS study did.  When it compared all staff, not surprisingly it found that staff in the public sector were better off. This is because the public sector employs a much more skilled and professional workforce than the private sector. Even before the expansion of public sector professionals such as doctors and teachers under the last government median pay was higher in the public sector.

There is nothing new about this. If we then factor in pension contributions the gap will be greater simply because pensions coverage is so much lower in the private sector than the public sector. Despite predictable Daily Mail outrage about this, it as much resembles a news story as the regular recurrence of apples falling from trees under the influence of gravity.

But the results get interesting when you compare staff with pensions.

    Staff with pensions Total reward £ per week  
         
  mean 1st quartile median 3rd quartile
Private sector        
Total 814 477 666 962
Men 873 522 712 1025
Women 658 387 542 779
Public sector        
Total 718 466 644 852
Men 808 522 708 943
Women 645 436 589 776

 

As the table shows private sector staff with pensions get higher mean and median total reward than public sector staff. The difference is most marked for men, while lower paid women do better in the public sector. The big difference between mean and median in the private sector flows from the small number of gigantic pensions pushing the mean up without affecting the median 

Of course the amount the employer contributes is not the only way of measuring the value of the pension (though it is at least easy to understand). Measuring the value of pensions paid in future in today’s money is one of the most controversial issues in the whole of pensions, and these figures here are subject to exactly the same dispute.

But while the employer retreat from providing pensions in the private sector certainly means that the average public sector worker gets a better pension than the average private sector worker simply because they get a pension. These figures suggest that making public sector pensions look like private sector pensions does not require any great change.

The challenge as ever is to improve private sector provision for those who get little or no employer contribution.

3 Responses to Can John Hutton satisfy the public sector pensions critics?

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  2. Alfie Noakes
    Oct 7th 2010, 10:15 pm

    Welcome to the real world lads (and ladies). The private sector has been dealing with pension reform, pay freezes, pay cuts and job losses forthe last 5 years. Now it’s your tue=rn and rightly so.

  3. Robert
    Oct 8th 2010, 12:14 pm

    What do you mean dealing with it, most firms do not bother with a pension plan, in my last factory it was up to the Unions to deal with it, when we finally had a plan the company said it was moving out of the country to Poland, it left with the loss of 450 jobs.

    The private sector is not doing well with pension in fact it’s bloody rubbish, but now people want the public sector to reform, well first of all reform the wages and the working conditions then perhaps talk about pensions and pension rights, decent wages normally leads to people having decent pensions.