Pensions divide 'will hit millions'

PENSIONS are turning Britain into a divided nation, with public sector workers enjoying gold-plated retirements while many others struggle.

Within a generation only those in the public sector, such as civil servants, teachers, nurses and policemen, will benefit from traditional pensions linked to their final salaries.

Private sector employees will have to adjust to riskier stock market-linked schemes, raising the prospect of a 'two-tier' pensions system, financial experts warned.

Some 4m public sector workers have a pension. Widely regarded as the most generous in Britain, they typically offer a pension worth two-thirds of their income on retiring.

At the same time, millions of private sector workers have seen their final-salary schemes axed, the Association of Consulting Actuaries said.

It conducted research into 459 firms with fewer than 250 staff, a sector which employs more than 14m. The study found only one in three small companies still offers a final-salary pension scheme.

Of these, only a third are open to new staff because many have closed their doors in the last two years due to rising costs. The trend mirrors that in many bigger companies.

Experts predict the demise of final-salary schemes within 20 years. They are being replaced with more unpredictable packages which rely on the stock market, called defined contribution, group personal pensions or stakeholder pensions.

But these provide lower pensions. Typically, a stakeholder scheme would give just 10% of final salary, while a defined contribution scheme offers just 19%.

The biggest problem for employees with the new schemes is that their bosses usually contribute much less. The survey showed the average was up to six times less than into a final-salary pension.

The figures are most startling for the Government's flagship stakeholder pensions, designed to be a low-cost scheme to encourage people to save more.

On average, employers save only 2.4% of an employee's salary into these schemes compared with 15.8% into a final-salary scheme.

The study found that firms pay an average of nearly three times more into final-salary schemes than they do into defined contribution pensions.

It is usually left to the employee to fund the difference - and he or she may have to work longer to do so.

Gordon Pollock, chairman of the Association of Consulting Actuaries, said: 'My concern is that contributions into these schemes are worryingly low. The danger of a divided nation with public sector workers and a diminishing number of private sector workers enjoying good pensions, set against millions of people with poor pensions, is fast becoming a reality within a generation.

'I don't think the Government has yet grasped the enormity of the political issue or the imaginative responses needed to address what is a genuine pensions crisis.'

Workers who take out defined contribution, group personal pensions or stakeholder pensions will also receive State pension benefits which would boost savings.

A worker who takes out a stakeholder scheme at 25 and retires at 65 would then see their pension rise to a value of 42% of their final salary. But a final-salary scheme pension would be worth 85% when State pension benefits were added.

Final-salary schemes are being closed because the cost of running them is soaring, with people living longer than ever before. Government policy is also a major factor. Experts say a tax on pension funds imposed by Gordon Brown costs schemes £5bn a year.