Belfast Telegraph

Tuesday 23 September 2014

Pensions: how the worst off will be in the private sector

Many thousands of private sector workers could face retirement on pensions less than half that of their public sector counterparts, according to research published today.

In a paper entitled ’The Tortoise and the Hare — a modern fable’ business advisors PricewaterhouseCoopers contrast the possible retirement fortunes of two workers, one each from the public and private sectors, but with otherwise similar life stories.

The economists and pension advisors who produced the paper concluded the public sector tortoise, despite peak earnings well below those of the private sector hare, wins both the wealth race and the pensions marathon.

The tortoise ends his life, aged 80, with both a higher disposable income and a larger non-pension pot to pass on to his dependants.

In Northern Ireland around a third of the working-age population and over 60% of all females are employed in the public sector - proportionately more than in either the rest of the UK or the Republic of Ireland.

PwC’s model of the race between the public sector tortoise and the private sector hare had both being born in 1960 and dying in 2040 aged 80. Both marry, have two children and own two different houses during their lifetime.

The analysis provided a striking illustration of the long-term value of job security and public sector final salary pensions.

At the same time the report illustrated the potential perils facing private sector workers, increasingly reliant on volatile financial markets for both their employment and pension income.

Philip McDonagh, PwC’s chief economist in Northern Ireland, said: "For the past 30 years, conventional wisdom has been that private sector workers, particularly those in the growing services sector, are doing better than their public sector counterparts in terms of salaries and bonuses.

"But our analysis suggests that, in many cases, the public sector tortoises will end up with much better pensions and greater wealth to pass on to their children.

"As private sector organisations find themselves unable to fund growing pension deficits and successive Chancellors face growing and potentially unsustainable public sector pension bills, funding retirement is gradually shifting from being a problem to becoming a crisis."

PwC said while the tortoise and hare illustration would interest future pensioners, policy makers, and young people thinking about future careers, it also highlighted the growing pension wealth gap between workers of similar status in the public and private sectors.

In PwC’s modern fable, the tortoise takes a job with the civil service straight after university, saves a higher proportion of his net salary in mostly safe assets and puts down a 10 per cent deposit when buying his first house.

The hare saves less, puts a higher proportion of savings into equities, takes out 100 per cent mortgages, but has consistently higher spending levels up to the age of 50.

However, the hare is no City high flyer earning million pound bonuses, but a middle manager in a clearing bank or an insurance company earning around £60,000 (including bonus) at his peak in 2007.

He loses his job in the current recession and becomes a self-employed financial adviser from age 50 with a significantly lower income - a not uncommon outcome.

The tortoise is no potential Sir Humphrey either. Rather he is a middle-ranking civil servant currently earning just under £40,000 per annum.

But when the tortoise retires at 60 he enjoys a projected total post-tax income of around £27,000 at today’s prices.

By contrast the private sector hare retires five years later at 65 with a pension of only £11,000 per annum at today’s prices.

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