Confronting Inequality in the UK Pension System

In his third pension article, Anthony Royd identified a critical disparity in the UK’s pension system: public sector employees benefit from far more generous pensions compared to the basic state pension, which many private sector retirees must rely on.

This discrepancy raises serious questions about equity and fairness, as public sector pensions are primarily funded by government contributions, while private sector workers often face less favourable alternatives. Addressing this imbalance is essential for creating a fairer, more sustainable system.

The UK’s basic state pension system pales in comparison to other G7 countries. With the full state pension currently set at £11,500 annually—and even less for retirees over 75—it leaves millions of pensioners far below the relative poverty threshold of £20,400.

Germany replaces approximately 50% of pre-retirement income.

France achieves around 75%.

Canada provides about 60%.

By contrast, the UK’s replacement rate has been failed by the Triple Lock, generating a paltry 28.4%, well below the OECD average of 58.6% and the EU average of 63.5%. This systemic inadequacy forces millions of retirees into financial hardship, while public sector workers enjoy pensions that often replace 50%–75% of pre-retirement income in addition to the state pension.

The advantages afforded to public sector employees underscore the inequities in the UK pension system. Below are examples of public sector schemes:

Teachers’ Pensions

Scheme: Defined benefit, calculated based on career average salary and years of service.

Payout: Teachers retiring after 30 years receive approximately 60% of their final salary.

Civil Service Pensions

Scheme: Defined benefit, typically with accrual rates of 1/40th or 1/50th of final salary per year of service.

Payout: Full-career civil servants receive pensions equivalent to 50%–70% of their pre-retirement income.

NHS Workers’ Pensions

Scheme: Defined benefit, often accruing at 1/80th or 1/60th per year of service.

Payout: After 30 years, NHS staff receive 60%–75% of pre-retirement income.

Reforming public sector pensions is key to achieving equity. Proposed measures may include:

Increasing employee contributions to reduce the burden on taxpayers while maintaining retirement security.

Aligning public sector pensions with private sector standards by capping payouts at ratios proportional to state pension replacement rates.

Replace public sector pension schemes with an enhanced state pension system, supplemented by a hybrid approach that combines defined benefit (providing predictable retirement income) and defined contribution (based on investment performance) elements.

This would ensure a balanced approach to equity and sustainability.

Transforming the state pension system is equally critical. Key actions include:

Raising the basic state pension to between 60% and 70% of pre-retirement income, aligning it with international benchmarks and ensuring fairness across all demographics.

Addressing the injustice faced by individuals over 75, who receive lower pensions despite contributing to National Insurance for 50 years, requires a universal pension system based solely on contribution years rather than date of birth.

The Women Against State Pension Inequality (WASPI) campaign highlights another pressing issue of pension disparity. It was established to address grievances stemming from changes to the state pension age for women born in the 1950s.

Their complaint focuses on the abrupt transition of the pension age from 60 to 65, and subsequently to 66, as initiated by the 1995 Pensions Act and accelerated by subsequent legislation. Inadequate communication of these changes left many women unprepared, leading to significant financial hardship. Investigations have identified maladministration in how these reforms were handled, further fuelling WASPI’s demands for government compensation—demands that remain unmet despite widespread public and parliamentary support.

Transitioning the state pension to a Defined Benefit Scheme funded by National Insurance contributions, with funds ring-fenced exclusively for pension payments. This approach would reduce reliance on general taxation and ease intergenerational fiscal pressures.

Raising the state pension replacement rate would eliminate the need for disproportionate public sector schemes, ensuring fairness for both public and private sector retirees.

Ring-fenced National Insurance contributions would create a more stable and transparent funding system, safeguarding pensions for future generations.

A fairer pension system would boost consumer spending, reduce poverty, and create long-term economic growth.

Rebalancing pensions would reduce the financial strain on younger taxpayers, fostering a more equitable society.

The UK’s pension system is in dire need of reform to address glaring disparities between public sector pensions and the state pension. By aligning state pension levels with international standards and reforming public sector schemes to reflect the realities faced by private sector workers, policymakers can create a fairer, more sustainable system.

Increasing the state pension replacement rate to 60%–70% of pre-retirement income would ensure retirees receive adequate support while alleviating the financial burden on taxpayers.

A comprehensive overhaul is essential to delivering equity, sustainability, and security for all UK citizens.

The UK’s pension system disproportionately favours public sector employees, leaving private sector workers and state pension recipients at a significant disadvantage.

Reforming both public sector pensions and the basic state pension is essential to achieve equity.

A key solution lies in transitioning to a Hybrid Model that replaces bloated public sector pension schemes with a fairer system. By introducing a combination of defined benefit (predictable retirement income) and defined contribution (investment performance-based) systems, underpinned by an increased state pension, the UK can balance affordability and equity.

Additionally, raising the state pension to align with international benchmarks, capping excessive public sector pensions, and funding pensions through ring-fenced contributions will create a more just, sustainable, and economically beneficial framework.

The time to act is now, to secure a fairer future for all retirees, or Is It Me!

Join Anthony Royd as his final article presents a comprehensive solution—a Hybrid Pension Model that merges fairness and affordability by replacing bloated public sector pensions with a balanced system. Coupled with a Universal Pension Credit, with a Double Lock for vulnerable groups.