Pensions Inequality

TPA reveal public sector workers retire on pensions three times larger than their private sector counterparts
  • Amid the debate on public sector pay, this report shows that the real inequality is felt by private sector workers.

  • Unfairly-generous public sector pensions are paid for by private sector workers, who would have to contribute nearly a third of their income to get the same for themselves.

  • Government liabilities for all existing, unfunded public sector pension obligations was £1.7 trillion in 2017. To put this in context, the official national debt (public sector net debt) is £1.8 trillion.

  • The annual cost of public sector pensions was £38 billion in 2017. That compares to, for example, total UK defence spending in the same period which was £37 billion.

New research from the TaxPayers' Alliance reveals that new workers in the public sector* will retire on pensions nearly three times larger than those joining the private sector.

Click here to read the full paper

For example:

A new employee aged 25 on the national average wage (of £28,600 a year) and making the same level of employee pension contributions:

  • The public sector pension will be worth £11,151 a year more than the private sector pension

  • The market fund value of the public sector pension entitlement will be worth £1.9 million more than the private sector worker’s pension fund upon retirement.

  • The private sector worker would have to save 30% of their salary (£8,606 a year)** to retire with a pension as large as the public sector worker’s pension.

  • That new employee would retire at 68 on an average pension of:

61 per cent of final salary in the public sector

22 per cent of final salary in the private sector

  • In 2018 prices, this would mean an average pension of:

£17,563 a year in the public sector

£6,412 a year in the private sector

  • The new public sector employee could expect to retire on an index-linked, combined occupational and state pension equal to 91 per cent of their final salary.

  • Public sector total remuneration including the value of pension entitlements pension contributions is on average, 23 per cent higher than the private sector for comparable workers.

Commenting on the findings, John O'Connell, Chief Executive of the TaxPayers' Alliance, said:

"Workers in the private sector are paying for their public sector counterparts to enjoy a retirement they can only dream of, and that disparity has been brutally compounded over the years by politicians continuously launching raids on private pensions.

"What's more, pension promises made to public sector workers are unfunded and will continue to be paid out of general taxation - that is unsustainable as people are living a lot longer than when these schemes were cooked up"

"To stop kicking the can down the road, reforms must ensure that new public sector pensions are properly funded and not paid for by the taxpayers of the future, namely our children and grandchildren." 

Click here to read the full paper

Unfunded liabilities

How then can the government afford to pay “gold-plated” defined benefit pensions to nearly five million public sector workers, while the wealth-creating private sector has all but ceased to offer such pensions?

The answer is that the government does not fund public sector pensions in the way, by law, it requires the private sector to finance pensions.

The main public sector pension schemes are 'unfunded' meaning there are no funds set aside to cover these pensions when they fall due. The cost must, therefore, be met from general tax revenues of future years (as much as 70 years ahead). Put simply, they will be paid by our children, grandchildren and beyond.

TPA Recommendations

  • All new public sector employees should join on the basis of a defined contribution pension, not a defined benefit pension.
  • These new, defined contribution pensions should be funded, not unfunded. In this way, the liabilities for this current expenditure will gradually cease to be passed onto future generations.
  • The true value of public sector employee pension entitlements are part of total remuneration and should be recognised as such in future pay negotiations. This is in line with the recommendation of the Hutton Report that states “The government should make clear in its remits for pay review bodies that they should consider how public service pensions affect total reward when making pay recommendations.”

Click here to read the full paper


*For the purpose of this report, the civil service, NHS and teachers’ pensions schemes are used as the basis to illustrate public sector pension schemes in general

**At current average levels of private employer pension contributions 

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