AXA calls for clarity on way forward for public sector pensions

With the balancing of public sector finances a key general election issue, AXA is calling on all political parties to specify exactly how they plan to tackle the rising cost of public sector pension provision, and how a sustainable approach to financing this can be achieved.

New research from AXA has highlighted real concerns over public sector pensions amongst those who will be voting in the general election.  Six in 10 voters (61%) believe it is unfair that people working in the public sector generally receive better pensions than their private sector counterparts.  The research also highlighted that 44% of public sector workers agree.

Figures calculated by AXA show that a 25 year-old woman working in the private sector would have to contribute almost a quarter of her annual salary every year to receive a pension on a par with her public sector counterpart.

This is more than double the 10% figure generally assumed for private sector contributions.  The NEST scheme put forward by the Government - formerly known as Personal Accounts - will eventually phase in a contribution level of 8% of salary.

56% of people say that pensions will be an important election issue and 36% want the party leaders to address in their TV debate how they plan to tackle the imbalance between public and private sector pension provision.  At the same time six in ten people (59%) are concerned they will not have enough money in retirement.

Paul McMahon, Managing Director of AXA Corporate Benefits, said: "There is widespread public policy debate acknowledging that something needs to be done about the rising cost of public sector pensions, but very little detail has yet emerged on how this might be addressed.   AXA's research confirms that voters are looking for direction from the main political parties on what solutions they can offer to achieve sustainable funding of pensions in the public sector and, at the same time, to achieve greater equity in the pension provision people will receive when they retire."

Around 90% of people working in the public sector are in final salary ‘Defined Benefit' (DB) pension schemes, while new joiners are generally being provided with average lifetime salary schemes - both provide significantly enhanced pension provision than is provided by most private sector employers who generally have switched, or are switching, to Defined Contribution (DC) schemes.

The impact of this difference is significant.  A 25-year-old woman earning £25,000 in the private sector today will need to earn a staggering £450,000 per year at the age of 65 (assuming her pension contributions remained at a combined total of 10% per year throughout her career) if she wanted to be able to enjoy the same pension provision as her equivalent in the public sector.  This would require a 7.7% pay rise every single year for 40 years.

Paul McMahon continued: "Historically the more generous nature of public sector pension schemes was put down to the fact that salary levels were lower than in the private sector. However this is no longer the case, with the average salary in the public sector now exceeding the private sector.

"Like anybody else, public sector workers deserve good pension provision; the question is one of the rising costs to the public purse.  An affordable solution for the country would be for the public sector to migrate towards offering DC schemes as the private sector has already done.  Provided that members begin saving early enough, and increase their contributions moderately during their lifetime, DC plan members should receive good pension benefits when they retire."