Dominic Lawson: Great pension divide: which side are you on?

Until recently many in the private sector felt relaxed about their retirement. Not now

When I was a feckless undergraduate my grandfather decided to drive down to Oxford in order to impart some advice so significant that he felt it required his (substantial) presence. "I don't know what career you are considering," he said "but I suggest you apply for the Civil Service".

I was astounded. This was a man whose whole career had been as a self-employed businessman. He regarded Government as at best a muddle-headed obstruction and at worst a larcenous conspiracy. So I asked why he thought I should join it. "You get an index-linked inflation-proof pension," was his abrupt response. This was in the late 1970s, when inflation was becoming rampant, and among pensioners-to-be only those from the public sector were immune to its destructive force. However, no normal 20-year old is going to decide his career on the basis of his prospects as a pensioner; I pretended to take his advice seriously, with no intention of doing so.

I doubt, however, whether my bleakly apprehensive paternal grandfather could have forecast the financial upheavals we are now enduring. Even before the firestorm that has ravaged the markets over the past months, the gulf between the prospects for pensioners in the private and public sectors had widened to an unbridgeable chasm.

By 2007 the completely unfunded index-linked final-salary based pensions of the public sector cost £20bn a year – approximately £3bn more than the amount paid by private-sector workers into their funded pension schemes. In other words, those in the private sector are already paying more into the pensions of retired public sector ex-employees than they are into their own. This is on the basis of the Government's own figures, which take no account of the fact that it has made not the slightest provision for future public-sector pension commitments: if a business was run in this way, its directors would end up in Ford Open Prison.

The Prime Minister, who constantly praises himself for taking "the difficult decisions", will never face up to this one, and not just because of the power of the public-sector unions – who, it must be said, have done a fantastic job for their members. As an ex-rugby player, Gordon Brown knows how to throw a hospital pass: this one is going to see a future Prime Minister flattened, while Lord Brown of Kirkcaldy is on the lecture tour, telling Harvard Business School how he saved the world.

Dr Ros Altmann, who used to advise Tony Blair on pensions, savings and retirement – and was therefore completely ignored by Gordon Brown – recently produced figures which showed that to get an annual pension of £10,000 a year, the average private-sector worker, paying into a so-called defined contribution scheme (far and away the most common) would have to work for 46 years; a public-sector employee of equivalent rank would need to work for just 23 years. Her real punchline is this, however: MPs, even if they fail to attain ministerial rank, can reach that level of pensionable benefit after seven years.

Those figures already look like an underestimation of the canyon that has opened up between the rulers and the ruled. As a result of the market crash of the past fortnight, it now seems plausible that a private pension fund which had been invested to the maximum 85 per cent in equities could well be worth no more now than it would have been if it had been left under the mattress for the past five years.

Since I became self-employed three and half years ago I have failed to invest in pension plans, just leaving any surplus cash in my bank account. This is the sort of laziness and improvidence which the money sections of our national newspapers have long inveighed against. Yet I have been rewarded for my eternal unwillingness to plan for retirement. That account has effectively been guaranteed by the state; had I invested the cash in a pension fund, I would probably have been worse off.

The Government's recent actions will do much to encourage the rest of the population to be equally irresponsible. It stated that it will reimburse in full any people who had accounts in the now insolvent Icelandic internet bank known as Icesave, even though from July it was publicly known that all the Icelandic banks had suffered a sharp drop in their credit ratings.

Yet had the same investors put the money into a private pension fund, they would have enjoyed no such instant post-dated protection. For Dr Altmann, whose PhD was based on a study of poverty and the incomes of the elderly, this is the biggest scandal of all. For five years she worked pro bono to rescue the pensioners of the collapsed Welsh steel firm, ASW. More than 100,000 retired workers saw their savings wiped out; Gordon Brown refused to put a penny of taxpayers' money to bail out those poor souls, despite the fact that they had been given the clearest impression that their money had been completely safe and protected by law.

As a result of subsequent action on their behalf by Dr Altmann, the Parliamentary Ombudsman ruled in the ASW pensioners' favour and accused the Government of maladministration. Mr Brown simply ignored this. Only after Dr Altmann, who has since resigned her Labour Party membership in despair, successfully took the case to a judicial review, did the Government agree to reimburse the ASW pensioners – to the extent of 90 per cent. I asked Dr Altmann yesterday if many of the ASW pensioners had died before they knew that their family savings had been restored: "Yes; I attended their funerals."

Until recently, many in the private sector felt relatively relaxed about their retirement, on the grounds that their home – dramatically enhanced in the house price boom – would be their pension. Even that now looks much less certain. According to the understandably disenchanted Dr Altmann, this too is one of the economic consequences of Gordon Brown: "He made it incredibly complicated to set up a pension scheme, but presided over an unregulated mortgage boom in which people could self-certificate their earnings. So pensions were depleted and borrowing soared. This was not an accident, but deliberate Government policy: to produce economic growth at all costs."

One of the objectives of that rapid economic growth was to generate the taxes to fund an unprecedented expansion in the public sector, whose employees' pensions would in turn continue to be financed by a boom which would never bust. Except that now, it has: and those of us in the private sector are about to pay the highest price of all.

Perhaps, after all, I should have paid attention to Grandpa.

d.lawson@independent.co.uk