Apartheid in the UK

University staff are striking and one of the reasons is a proposal to cut their pension benefits to maintain the funding in the scheme. 

Nearly everyone in a private sector final salary scheme - not many still exist - has long since had to pay in more, retire later, receive a lower pension or a combination of the above. The large increases in life expectancy seemed to catch pensions actuaries on the hop in the 1990s. Schemes were nominally overfunded and I recall employer's taking contribution holidays. I also remember the first time I realised that tide had turned as my company's employer's contributions had rocketed from the holiday level of 4% to the standard 7.5 and then on to 10 and 11%. This would have been 2001 and our pensions advisers briefed me on the reasons as we had to answer due diligence questions on a business we were selling. I remember predicting to Mrs H that we would read a lot more about pensions in the coming years. By the end of the decade most private sector pension schemes had been restructured, at best with individuals given a choice over pay more, retire later or take less. The more usual and more guaranteed solution for companies was to draw a line under benefits earned to date, preserving what individuals had already paid for and start over with a money purchase pension. But here we are nearly two decades later and the notional deficit on public sector schemes still yawns large even after some changes were made 6 years ago. I say notional but it isn't really - it means future taxpayers, our childen and grandchildren, will have to meet the shortfall. I doubt the university staff see themselves as inter-generational looters but I could easily argue that they are.

Much of the recent publicity about public sector pensions has concerned hospital consultants, where the NHS is so poor at administration that it allows key employees to inadvertently stumble into incurring huge tax bills for working extra hours and breaching the lifetime limit. Ah but you need to be a high roller to do that, I hear you think. Nope, not really.

And, while the NHS has a stonkingly good pension scheme, it's the judges and civil servants who have the best. Their benefits build up faster, they pay in less and their employers pay in more - equivalent to up to 30% of salary. When you read about public sector pay being higher than private this huge extra benefit isn't usually counted along with pay. Of course it should be as a pension is simply deferred salary.

Here are some numbers, courtesy of a recent Sunday Times article.

A civil service manager on average pay (I assume having worked the maximum 40 years that count at that average salary as even the civil service scheme isn't final salary any more) would receive a pension of £47,215 a year. For tax purposes that is equivalent to a lump sum pension pot of £944,300.

But to get that same payout from a money purchase pension, with inflation indexing and spouse's benefits, a pot of £1.77 million would have to be built up. In principle you could pay in about £1300 a month for 40 years to do it. However, the lifetime allowance is £1.073 million after which large tax charges are incurred, so it would actually be very difficult to achieve. The Sunday Times estimated that if you were auto-enrolled into a private scheme and earning the same as the civil servant you would have to pay into the scheme for 73 years to be able to afford equivalent benefits. I don't know if they've allowed for the tax in that hypothetical calculation but it seems academic.

You could do it more quickly if your pay package (salary plus pension) was actually equivalent to the civil service manager's. This would probably mean a salary of something like £65k to 'match' the civil servant's £50k. By paying something like 30% of your salary (and ending up with roughly the same take home pay) you would think it might be possible. But no. That lifetime limit and tax charge would make the hurdle much higher. There is a 55% tax above that limit, so I think that means you'd have to stash away a total of nearly £2.5 million to achieve the pot of £1.77 million. 

I might not have this quite right but you get the drift. To get the same pension as the civil servant the private sector employee might have to be earning 50% more and make colossal monthly contributions. For practical purposes it's impossible.

The gap between public and private sector pensions was reported to be the largest in the developed world 5 years ago. No wonder the comparison has often been referred to as a 'pensions apartheid'. 

I have friends who work or have worked in the public sector who say it's not their fault that the private sector can't offer equivalent pensions. I'm sorry but that's just not right. Public sector pensions are building up unsustainable deficits and are relying on being bailed out by future taxpayers while the tax playing field is rigged against their private sector equivalents.

What can be done?

Firstly, while the pensions regulator provides advice and information for those charged with running some public sector pension schemes I don't think it has powers to require higher contributions to maintain viability, as it does for private sector schemes. If not it should be charged with doing so, or at least reporting on it, a bit like the OBR  is there to keep the Treasury honest.

Secondly the pensions lifetime limit needs a serious overhaul. I don't know how much tax it brings in - I suspect not much directly though it probably increased income tax receipts by switching excessive payments free of tax into pensions to taxable income. But as there are limits on what can be paid in why is a lifetime limit also needed? Logically it isn't. It also penalises wise investment as no distinction is drawn between payments in and  investment returns. This has all gone badly wrong from Gordon Brown's tax on pensions to George Osborne's ill thought out impositions.

Thirdly all public sector pay ought to be quoted as its full package cost of pay plus pension. It would be an eye opener. The university lecturers are on strike over their pay and pension. OK, bring it on.  Pension is deferred pay and they should be considered together. Let's negotiate on their full package compared with private sector equivalents. 

Either that or maybe all the private sector baby boomers should go and stage a sit in back at their old universities. 

The current situation is indefensible.

• How to match a civil service pension. Clue: it may take you 73 years. Sunday Times 27 November