UK pensions schemes divide private and public sector workers

• Funding status for UK pensions is in surplus
• UK pension triple-lock will disproportionately impact young people
• Britain’s pension schemes deepen the divide between the public and private sector
• How to monitor and review your state pension’s performance

According to PwC’s Pension Funding Index , on average, corporate defined benefit (DB) pension schemes in the UK are in a surplus position, meaning they have more assets than they do liabilities.

Although liability remained stable in June 2021, PwC notes that asset values increased month-on-month, resulting in a surplus growth of GBP 50BN, courtesy of ongoing recovery from COVID-19.

PwC’s research highlights the relative stability in the market, with DB pension schemes rising for the third consecutive month in June and recording a GBP 20BN increase on the previous month.

The professional services network also noted that Britain’s pension schemes displayed a surplus of GBP 230BN when incorporating strategic changes, evidence that most pension funds are in a good position.

However, with UK Chancellor Rishi Sunak’s furlough scheme tapering this week, concerns have been raised about the next generation of pensioners, who are likely to experience substantial challenges amid heightened financial uncertainty.

State pensions for the next generation

From July 1st, employers will have to contribute 10% towards employee furlough pay, which increases to 20% in August and September until the scheme terminates on September 30th.

Given that many industries are still reeling from the impact of COVID, experts fear that the winding down of the furlough scheme will trigger a spike in unemployment levels, with young workers in the hospitality, tourism and entertainment sectors most at risk from job losses.

Leading British think tank, the Resolution Foundation, notes that young people have been disproportionately affected by the coronavirus pandemic. Many are also struggling to find work despite reports of worker shortages and wage hikes.

The Resolution Foundation said figures revealing wage increases are “artificial”  as the data is measured against the period when approximately 10 million workers were placed on furlough and discounts earners made redundant due to COVID-19.

With almost every minister pressing the Treasury for funds in the Autumn Spending Review, the question as to whether pensions will be uprated remains elusive.

The Conservative Party made a triple-lock commitment back in 2010, promising to increase the state pension every year by the highest out of three measures: average UK earnings growth, inflation or 2.5%.

However, Mr Sunak is facing a GBP 4BN bill to commit to the Tories triple-lock pension pledge. Many savers are now concerned about the safety of their retirement income amid rumours that the UK government will ditch the triple-lock guarantee to help pay COVID costs.

Although data from PwC shows that most pension schemes are in a relatively good position, there are still some impoverished retirees, with new data showing approximately 2.1m pensioners in need of urgent support.

Even though many pensioners can access pension credit top-ups, almost 1 million retirees never claim, meaning approximately GBP 2BN sits in the Treasury unclaimed each year.

Even though the Department for Work and Pensions are aware of who these non-claiming poor pensioners are, not enough work is being undertaken to reach out to them, and as a result, this group is missing out on an average of GBP 32 a week.

Pension-aged claimants could face further headwinds in the years to come, given that the UK government has launched a consultation into raising the legal age for discounted NHS prescriptions.

Months after the British government changed the law on TV license discounts for concessions, ministers are now deliberating whether to raise the cut-off point for free prescriptions to 66-years old.

The Resolution Foundation has criticised the UK government for some of its actions and warned about the impact these measures could have on the younger generation.

Torsten Bell of the Resolution Foundation said ministers should be prioritising the restoration of schools to make up for lost school time due to COVID-19 and create training and job opportunities for younger people who have suffered the most.

Separate data has also shown that the divide between state-backed schemes and private sector pensions have deepened.

Deepening pension divides between the public and private sector

Alarming figures out this week have revealed that public sector pensions schemes are backed three times as much as private sector schemes, with the NHS’s ranking the best-paid in Britain.

According to data from pensions consultancy Lane Clark and Peacock (LCP), for every GBP 1 saved, the NHS will contribute approximately GBP 10, compared to most private sector schemes, which pay as little as GBP 3 for every GBP 1 saved.

Public sector pay is even averaging better than private-sector pay, with figures from the Office for National Statistics (ONS) revealing that average public sector weekly earnings are GBP 580 a week, compared to GBP 530 for the private sector.

The private sector has also fared worse in the face of the coronavirus pandemic, with ONS figures showing steep redundancies in the hospitality and manufacturing sectors compared with the education and social services industries.

It comes amid news that the Treasury is planning a “pensions tax raid” to cover astronomical costs of COVID-19, tackle climate change and pay for a GBP 200M royal yacht, according to Whitehall sources.

Although nothing has been confirmed, UK Chancellor Rishi Sunak is reportedly considering cutting lifetime allowance from GBP 1,073,100 to GBP 800,000.

It comes amid news that more than 230,000 public sector workers have opted out of their pension scheme due to rising living costs.

The Treasury is believed to be “unconcerned” by the drop in enrolment despite a Commons public accounts committee warning that failure to take action could end up costing the next generation of taxpayers more in the long term.

Hargreaves Lansdown Personal Finance Analyst, Sarah Coles, said: “The future generation of retirees need to revisit their budgets and see whether they can contribute more to their pension pots if they want to live like the current generation of retirees.”

How much do you need for a comfortable retirement?

It’s hard to know exactly how much you will need to save to have a comfortable retirement due to differences in earnings, circumstances and expectations.

However, you can reduce any anxiety by planning ahead and determining the type of lifestyle you want to live when you retire.

Many of us tend to overlook our pension statements or file them away without thoroughly reading the contents.

Given that your pension will more than likely be your biggest asset after your property, reading the paperwork and regularly monitoring your savings will be essential to ensure you’re on track to achieving your retirement goal.

When it comes to reviewing pensions, you should check to see how well any investments and personal funds are performing, even if you have only invested into your provider’s default fund.

It’s also wise to cross-reference your savings against the provider’s benchmark and any other competitors to see whether you can boost your cash.

If your funds are underperforming versus market peers, this could significantly impact your future retirement. First, figure out whether this is down to the asset class or the fund itself, then take appropriate action, which may be to switch to a better-performing pension provider.

As many people have multiple jobs over their lifetime, keeping track of your pensions can be challenging. If you’ve found yourself in that situation, seek free advice via the Government’s Pension Tracing Service.