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How Mr Average earned much more than his neighbour

Steve Bee recounts a story that is happening up and down the country, one that should bring cheer to embattled pension savers.

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by Steve Bee on Sep 19, 2010 at 00:01

How Mr Average earned much more than his neighbour

A lot of negative things are being written about pensions these days, so here's something positive for a change; sort of to try and redress the balance a bit; that kind of thing.

It's a story, a short story that is being told up and down the country in every town and city; it's told not in words, but in the way people live their lives. It goes something like this:

There are two families living next door to each other, always have and probably always will, but even if they don't they'll still keep in touch.

They are both called Mr and Mrs Average and both have two children; the children have grown up as neighbours and friends. They live in what may be called average houses, three-bedroomed semis. The houses are worth just under £200,000 in today's money; about the national average price for a house. They are both paying a mortgage off on their properties and have plans to pay them off by the time they reach retirement age. Paying the mortgage and household bills is sometimes a bit of a struggle, but they manage.

Both Mrs Averages worked before their children were born and now work part-time to help with the household finances while both Mr Averages work in similar jobs and both earn the national average wage of about £26,000.

Both households have similar cars, practically the same household appliances and computers, TVs, mobile phones and stuff. They have similar holidays, in fact they sometimes go on holiday together as one big group; the are good friends as well as being good neighbours. The children go to the same school they buy their weekly shopping from the same supermarket, they get their weekly take-aways from the same chinese and indian restaurants and, when they can afford a night out they even go to the same local pubs and restaurants; again sometimes together as they are friends.

Their lives, in fact, are almost identical with just one tiny difference; one Mr Average is in a company pension scheme at work and the other is not.

The Mr Average who's in a company pension scheme doesn't know that his friend, Mr Average, isn't. Similarly the Mr Average who's not in a company pension scheme at work doesn't know that his friend, Mr Average, is.

Pensions, quite frankly, isn't a topic that comes up down the pub or when they have a barbecue in the garden or when they're away on holiday together.

Even if the subject did come up the Mr Average who's in the company pension scheme at work knows so little about it that the conversation wouldn't get far anyway. Pensions are not only not interesting, they're not relevant to the everyday lives of everyday average people. Are they?

Well, not until they reach retirement age they're not I suppose. But when they do retire, having finally paid off their mortgages and helped their children onto the lowest rung of the housing ladder and out of any debts they've incurred if they managed to get themselves into and through university and maybe helped a bit with supporting their grandchildren and all that kind of stuff, they then, after all that time of being in the same boat in life, reach the point where their lives start to diverge.

The Mr Average in this story who was in a company pension scheme at work was in a final-salary pension scheme and he's retired with a pension of two-thirds of his average salary; say £16,000 a year in today's money. His good friend and neighbour, the Mr Average who wasn't ever in a company pension scheme at work would need about £400,000 hanging around in his bank account to buy himself a similar annual lifetime annuity; or to put that another way about twice as much as his house is worth. The chances are he hasn't got that much stashed away; or anything like it.

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11 comments so far. Why not have your say?

What I don't get is that pensions are legally seen as part of pay (I believe there was a major case in European law), but two people can do the same work for the same employer and - due to their date of joining, one is in a DB scheme with a contribution rate of about 25% whilst the other is in a DC scheme with a contribution rate of perhaps 10%. Why is this difference in pay allowed under equal pay law?

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What about the Mr Slightly Above Average who lives in the same street? You don't mention him do you!

He earns £30,000 to £35,000 per year and is not in a pension scheme. He and his wife live a prudent lifestyle, saving as much as they possibly can so that they can look after themselves in retirement. They take few holidays and do not have flash cars etc.

Hampered by taxation, constant changes to regulations and interest rates, unethical behaviour at retail banks, and misselling and high charges across the financial services industry, he retires with somewhat less in the way of a pension income than Mr Average who has a company pension.

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In answer to milestogo, the answer is that equal pay law only precludes differences in pay between men and women doing the same job. So unless all the men are in one scheme and all the women are in the other, which is most unlikely, the equal pay laws are not infringed. In short if both men and women are in both schemes then the difference in pay is not due to sex.

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It says more about ridiculously uncompetitive annuity rates than anything else. When you could buy a 20 year government bond paying 5% (which no doubt will go up soon with interest rate rises). To get an annuity that pays less than this and where they keep your capital when you die is ridiculous.

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If unfunded direct benefit schemes are part of the pay package, then why all the squeaking about being poorly paid, in the public sector, for example. Calculations could be made to be able to compare actual salaries, after the effects of pension (and maybe even hours worked). Then we would be able to see quite clearly where the cuts should be made. Simple!

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Thanks to K Dean, and I'm sure the comments are correct but, as the underlying principle was 'equal pay for equal work', then the present gender-focused law is missing a very common source of pay difference, effectively that between generations.

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The problem is that very few people in public sector schemes appreciate how much their pension is worth either. They don't want to lose it, because their union has told them they are going to be cheated, but they don't begin to understand it. A lot of people don't join, even though they are advised strongly that they should, because they don't want to pay the 6% contribution.

Even with employer contributions in local authority schemes in the region of 20%, if you approached people and said rather than charging you 6% we will give you that 6% back, and another 6% on top - then I reckon close to 90% of people would take it. The problem would be that not nearly enough of that would find its way into a pension scheme / savings for retirement.

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Trouble with 'average' is that it is distorted by ultra high figures. So it is better to look at medians. If you put Bill Gates in a room with nine people earning 20,000 the median is 20,000 but the average is zillions.

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moral of the story: someone with a final salary pension scheme is much richer than someone without. you may as well have said mr. average found some buried treasure since that's about as likely (and valuable) as getting a final salary pension.

i'm glad you're not my pensions adviser.

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Luck is involved, to some degree.

Even if you accept a job with a final salary pension scheme, you are likely to lose it when the company is taken over and the scheme is closed. There is a big divide emerging between the withs and the withouts .... It will become even more visible as the baby boomers approach retirement. The withs can retire. The withouts are either working or studying or looking for work or setting up their own business or doing the last three all at the same time. Need to get back to my homework now.

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Sep 20, 2010 at 13:53

Id like to see a story more focused on the starting age of saving into a DC pension, and the difference between Mr Average's annuity when they reach 65 if one started contirbuting at 25 and one at 35. If this financial planning was taught in schools I believe that the importance of saving early would really help the industry.

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