Millions of public sector workers could be offered higher salaries in exchange for smaller pension pots, reports suggest.
The proposal would reduce the future pension benefits of these workers in return for increased pay now, in a bid to address ongoing staffing shortages while keeping public spending in check.
Unions remain divided on the plan, with some calling it “dangerous” and warning that it could undermine workers’ financial security in the long term.
Others, however, see merit in the idea, acknowledging that some public sector pensions – including those for teachers, nurses and civil servants – are overly generous and may not be needed by all employees.
Here, experts weigh in on whether this trade-off is worth considering.
After a campaign of strikes over public sector pay in recent years, ministers in 2024 resolved industrial disputes with pay rises ranging from 5.5 per cent for teachers to a 22 per cent two-year rise for junior doctors.
But the Government is facing the threat of more strikes in 2025 after the Treasury warned that it will only fund further pay rises of 2.8 per cent.
Speaking at the Institute for Government in early December, the civil service’s chief operating officer floated the idea of changing the way officials are paid, possibly including an increase in salary with less generous pensions to compensate.
Cat Little said: “The questions that we need to look at are, you know, what’s the balance between pay and pensions? How do we really focus and segment our pay on the skills that we most need to recruit and retain within the civil service?”
But multiple Government sources insisted that the suggestion was not being actively worked on and had not been presented to ministers.
It is understood that one obstacle to the change would be that it would require a fresh influx of cash from the Treasury to pay larger salaries upfront, with the savings from smaller pensions coming decades in the future.
A Government spokesperson said: “We are focused on supporting the civil service with the necessary tools it needs to deliver change for working people.”
Employees however, particularly younger ones, may see the immediate financial boost to their salary as an attractive option.
With the rising cost of living, student loan repayments, and the challenges of buying a home, many are feeling the strain.
While the extra pay would be tempting, there are serious long-term considerations to weigh, experts told The i Paper.
‘The long-term loss could dwarf the immediate gain‘
On the surface, a pay bump may feel like a win but trading long-term financial security for short-term relief could leave many in a precarious position later on, Fiona Peake, personal finance expert at brokerage Ocean Finance, said.
She told us: “For public sector workers, many of whom rely on defined benefit schemes, pensions are often more generous and predictable than private sector equivalents.
“Lowering the value of these benefits – whether through reduced contributions or changes to how payouts are calculated – could have a huge impact on retirement income.”
If you’re earning £30,000 a year and expect a pay rise of 5 per cent – that’s an extra £1,500 annually before tax, which can be a real help with everyday expenses.
But if the trade-off involves a reduction in your pension accrual rate, the long-term loss could “dwarf the immediate gain”, Ms Peake said.
She added: “Over a 20-or-30-year retirement, even a small reduction in pension benefits can add up to tens of thousands of pounds.
“A higher salary now means more take-home pay, but it could also push you into a higher tax bracket or increase your student loan repayments.
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Read More“On the other hand, maintaining a strong pension allows for a reliable income later in life, when you may no longer have the capacity to earn.”
Pensions remain far better for public sector workers than those in the private sector, with Andrew King, retirement planning specialist at Evelyn Partners saying they are “well worth retaining”.
Employer contributions are 28.97 per cent of salary in the civil service, 28.68 per cent for teachers and 23.7 per cent in the NHS.
Some mid-ranking staff find they are able to retire on a pension at almost the same level as their salary.
A typical 52-year-old senior civil servant in the “SCS1” pay band on a salary of £78,500 has an annual pension contribution “worth” £18,300 of additional salary compared to the equivalent private-sector worker, The i Paper previously reported.
This means that, when taking pensions into account, a worker in the private sector would need to earn £96,800 to match the overall financial value of the official’s £78,500 salary plus pension.
But to a 25-year-old splurging half their salary in rent, or others struggling with the cost of living crisis, this lure of a comfortable retirement will likely come as little solace.
‘It could be beneficial for the Treasury to consider this‘
Although such a change would require a fresh influx of cash from the Treasury to pay larger salaries upfront, Mr King suggested that there could be longer term benefits.
“It could be beneficial for the Treasury… as this will reduce their liability to pay the pensions of the teachers in the future, again a rising cost as we all live longer,” he said.
Anne Fairweather, head of government relations and public policy at Hargreaves Lansdown (HL), agreed.
She said: “When the government is taking a thorough look at pensions in the private sector, reviewing public sector schemes makes sense.
“Reform will be complex as there is no underlying fund outside of local government schemes. But the government is right to think about where the burden should lie.
“With defined benefit pension liabilities being paid by taxpayers into the future, the cost of the schemes needs to be assessed.”
How could this work and could this lead to higher taxes?
Most public-sector staff build up their pensions each year based on a portion of their income.
As an example, with the Teachers’ Pension Scheme (TPS), you get 1/57th of your annual salary each year in retirement, for every year you work.
If you’re a teacher on £35,000, you’ll get £614 a year – adjusted to increase by inflation plus 1.6 per cent – in retirement, for every year you’ve worked.
Sir Steve Webb, former pensions minister and now consultant at LCP, previously said: “One way to change things is to say your total package is X, the split will be more towards pay and less towards pension.”
As a teacher, you could accrue a lower amount in your pension – say 1/60th instead of 1/57th – and instead get a higher salary. You could also say that staff have to pay less in to the scheme instead, so perhaps 7.6 per cent, instead of 8.6 per cent of their salary.
But the way that public-sector pensions are funded means that a change to the system isn’t necessarily simple, and indeed over the short-term may not be cost neutral.
When you pay into a pension in the public sector, your money, along with your employer’s contributions, is not going into a pot for you in retirement, as they are in the private sector. They are used to pay the pensions of people claiming today.
If we lowered contribution rates, it could create a problem funding today’s pensions, which may have to be recouped in other ways, like higher taxes.
Sir Steve added: “Are the public going to be happy with a tax rise, because we have a bill for retired people and no money to pay for it?”
Pros and cons of taking a higher salary in return for a lower pension
According to Myron Jobson, senior personal finance analyst, at interactive investor:
Pros
A pay rise provides an immediate increase in your take-home salary, which can help meet short-term financial goals, such as paying off debt and saving for a house With a higher salary, you might have more flexibility to invest or save in other ways – e.g. investing in stocks or propertyCons
With the loss of employer contribution, you could miss out on the valuable benefit, which might have been a better deal in the long run A reduction in the potential value of your retirement nest egg because of the reduced contributions It could lead to tax complications – the increased salary could push you into a higher tax bracket, reducing the actual benefit of the pay rise compared to the pension contributions you would have received For parents, a higher salary could push them into the high income child benefit charge threshold. A higher salary could result in parents becoming ineligible for valuable childcare initiative such as 15- and 30-hour free childcare and the tax-free childcare Read More Details
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