State pensions generous even after reforms

Teachers and NHS staff will still receive generous pensions after the government reforms which come into force today, spending watchdog the Institute of Fiscal Studies (IFS) said yesterday.

Those with more than 10 years still to work will be made worse off, as their final payout will be based on an average of their earnings over their career, rather than their final salary.

“Despite these reductions, on average public sector employees still accrue more generous pensions than their private sector counterparts,” said the IFS.

“The vast majority [87 per cent] of public sector workers are members of an employer provided pension scheme but this was only true of 49 per cent of private sector employees in 2014.”

In a bid to make the generous pensions more affordable to the taxpayer, the last Labour government increased the retirement age from 60 to 65.

Now, the coalition is increasing that to 66, as well as reducing the payout level. Better-paid staff also pay in proportionally more of their income in pension contributions.

It follows similar moves in the private sector, where final salary schemes have long been abolished in the vast majority of businesses. Part of the reason was that former employees lived for longer than expected, straining resources.

Fluctuations in financial markets also put pressure on pensions funds both to gain sufficiently strong returns and then buy a suitable annuity.

“The new structure for public service pensions has considerable advantages over the previous system,” said the report. “The move to a career average basis is a sensible change; the previous final salary pension schemes were disproportionately beneficial to long-stayers who received pay increases towards the end of their career.”

Under the previous system, a teacher who became a headteacher in the final years of their career would receive a large boost to their pension despite similar contributions to a colleague who did not get that last-minute promotion, the IFS said.