The challenge of public sector pensions

With the expenses scandal overwhelming the pages of almost every newspaper in the country, other important stories have been largely overshadowed.

One of those which would normally have made front page headlines was the publication of a report by the accountants PWC which showed how the gap between the public and private sectors has widened enormously during the last thirty years.

It showed that, over the course of a typical working career, a civil servant starting work in 1981 will have accumulated £340,000 more in net wealth by the time of their death than his or her counterpart working in the private sector. This is mainly due to the long term job security offered in the civil service and a far more generous pension scheme.

For example, whilst the private sector employee and his employer would have paid between 4 and 6 per cent of the salary into his pension, the report shows that the civil servant does far better, paying in only 1.5 per cent of salary over the course of his career, but retiring five years earlier on almost half of his final salary and receiving a tax-free lump sum of three times his annual pension.

Of course, some would argue that it is only right that those in the public sector should be given job security and increased pensions because they are earning less than those in the private sector.

Unfortunately, that is a myth that has been promulgated by those who do not wish to change the current status quo.

The government’s own statistics, taken from the 2008 Annual Survey of Hours and Earnings, show that the average weekly wage for public sector workers was £582.

In contrast, the average private sector worker earned £574 per week.

Indeed, as the recession bites, it would appear that whilst many working within the private sector have been forced to take pay cuts to save their jobs, those at the top of the public sector pay tree have continued to see their salaries increase by over 10 per cent between 2007 and 2008.

Within local authorities, the number of employees on more than £100,000 has increased by 25 per cent and it is estimated that sixteen chief executives of councils were actually paid more than the Prime Minister last year.

Given this, there are many who are now arguing that the generous pensions given to the public sector and paid for by the UK taxpayer must be brought into line with workers in the private sector, especially when the current cost of pensions accrued in the public sector has been estimated at over £1 trillion.

With an estimated black hole of £175 billion in the public finances this year, the next government will have took carefully at the role of the state and it is clear that the cost of public sector pensions will need to be examined in detail.

Certainly, with unemployment set to hit 3 million by 2010, the pain cannot be limited to the business sector and it is becoming clear to many that we cannot have a society where one group of workers is protected and cosseted whilst another faces shrinking pensions, wage cuts and an uncertain future.

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