The Pension Schemes: Two classes of pensioner.
With the plight of defined benefit (DB) pensions making prime time news this week and only three FTSE 100 companies left still offering this generous plan to new recruits, the demise of the final salary pension appears imminent (see The Defined-Benefit to Defined-Contribution Transition).
The latest British institutions to announce the closure of their DB pension schemes to new members include BP and Barclays. And even more disturbing, Barclays is to suspend further contributions by existing members from December, preventing any further accrual and freezing retirement benefits, which results in lower pensions.
Until now, only Rentokil has taken this precaution with all other companies allowing continued accruals by previously registered members, but this could be an ominous sign for those in company final salary and pension schemes.
However, one sector has seen a rise in the number of participants in DB pension schemes over the last several years. Of the 7.9 million members saving through final salary occupational pensions, 5.2 million are employed in the public sector, but this sector only represents a fifth of the total workforce.
The disparity between the return of pension schemes in the private and public sector is undoubtedly going to raise political debates. Especially considering the Policy Exchange report recently published estimates the cost of unfunded pension obligation of the public sector to be around £1.1 trillion, approximately 78% of GDP.
Although the precise figure is difficult to calculate even government estimates put the cost at around 50% of GDP. This split is going to become even more prominent with the closure of more corporate DB schemes as rules dictate that they cannot ignore the impending crisis unlike their public sector counterparts and the parsimonious pension of those employed in the private sector.
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