Sunday, 6 January 2008

The UK's most generous pension schemes

Based on some of the commentary you hear from the Tories (and sometimes the Lib Dems), and unfortunately also from the pensions industry sometimes, you might assume that public sector pension schemes were somehow uniquely and unjustifiably generous.

Not so. Luckily, because unions are still strong in the public sector, we have managed to retain decent final salary schemes, but even here there have been 'reforms' (ie higher normal retirement age for new starters). Public sector schemes were comparable to typical private sector schemes until a few years ago when the pension crisis kicked in. It's not public sector pensions that are unjustifiably generous, it's private sector pensions that have become unjustifiably poor. As I have argued many times before, the withdrawal by employers of decent pension provision in the private sector is a massive defeat for the labour movement and, in my opinion, effectively a significant (but unrecognised) pay cut.

This isn't so say there aren't some outlier pension schemes with extremely generous terms still out there - there are. Most people will be familiar with the example pf the MPs pension scheme. This is a final salary scheme with a normal accrual rate of 1/50ths, although members can opt to pay a higher contribution rate to gain an accrual rate of 1/40ths. I think the normal retirement age is 65. As much as I hate agreeing with the likes of the Daily Mail, I do struggle to see the justification for MPs getting a pension scheme that is more generous than those for almost all other people in the UK. Maybe they should have a scheme that reflects average final salary provision across the workforce as a whole?

I say that MPs have a pension scheme that is more generous than those for almost everyone else with good reason. Because directors of large companies award themselves pensions that are more generous than any other I have come across in the UK. Where they are offered final salary schemes, a large number of directors have an accrual rate of 1/30ths, and most have a normal retirement age of 60. And even when they do get offered defined contribution provision, directors get a much higher contribution rate from the company - on average 20%! What makes this worse is that employees in the same companies get a much worse deal. See the TUC's annual Pensionswatch report for more details.

Now I accept that those with significant responsibilities in charge of large organisations are going to be paid more than the rest of us, but that already means that they are going to get larger pensions. Why should they also get better accrual or contribution rates to boost their provision further? To me that really is unjustifiable. Incidentally the TUC argues that the solution is for directors to be in the same type of scheme on the same terms as their employers. So if directors get DB, staff get DB, and if directors get to draw an unreduced pension at 60, so does the rest of the workforce. Sounds sensible to me?

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