Council Tax

Andy_L

JayScottGreenspan wrote: »

According to my calculations a 2/3 final salary scheme is approximately equivalent to a defined contribution scheme of 34% of salary.

In the private sector a 10% defined contribution is considered generous (and is by no means universal).

My assumptions:
annual wage growth: 5% (RPI plus promotions)
defined contribution investment return: 6%
annuity rate: 4% (for index-linked payments)

The PPI produced this report on the subject (Oct08):
http://www.pensionspolicyinstitute.org.uk/news.asp?p=317&s=2&a=0

They estimated the cost of employers contributions at ~20% for the various 1/60ths schemes, so about ~26% all up. I suspect most/all of the difference is them allowing for early leavers/deaths and the fact that most people can't achieve continuous promotion but ultimately hit their personal ceiling

Old_Slaphead

Andy_L wrote: »

The PPI produced this report on the subject (Oct08):
http://www.pensionspolicyinstitute.org.uk/news.asp?p=317&s=2&a=0

They estimated the cost of employers contributions at ~20% for the various 1/60ths schemes, so about ~26% all up. I suspect most/all of the difference is them allowing for early leavers/deaths and the fact that most people can't achieve continuous promotion but ultimately hit their personal ceiling

Theres also a significant additional benefit as the pension is based on final salary whereas contributions are based on lower (ie pre inflated) salaries throughout the career. That probably accounts for some of the difference between 26% and 30%+

JayScottGreenspan

Andy_L wrote: »

The PPI produced this report on the subject (Oct08):
http://www.pensionspolicyinstitute.org.uk/news.asp?p=317&s=2&a=0

They estimated the cost of employers contributions at ~20% for the various 1/60ths schemes, so about ~26% all up. I suspect most/all of the difference is them allowing for early leavers/deaths and the fact that most people can't achieve continuous promotion but ultimately hit their personal ceiling

Interesting.

It makes a massive difference what investment/inflation rates you use. That ~20% is based on a real discount rate of 2.5%. But you can only get a return of 2.5% above inflation if you are willing to bear some risk, whlist public sector pensions are risk free. Using a 'risk free' discount rate of 0.8% above inflation, the final salary schemes are worth ~44% of salary.

Andy_L

JayScottGreenspan wrote: »

Interesting.

It makes a massive difference what investment/inflation rates you use. That ~20% is based on a real discount rate of 2.5%. But you can only get a return of 2.5% above inflation if you are willing to bear some risk, whlist public sector pensions are risk free. Using a 'risk free' discount rate of 0.8% above inflation, the final salary schemes are worth ~44% of salary.

I'll tell you what, offer me (and probably the rest of the public sector) a 20% employers contribution DC scheme and I'll bite your arm off. It'll be easy to sell to the private sector as the cost of public sector pensions as been more than halved. Looks like a win-win to me:rolleyes:.

Old_Slaphead

Andy_L wrote: »

I'll tell you what, offer me (and probably the rest of the public sector) a 20% employers contribution DC scheme and I'll bite your arm off.

You are (all) financially naive if that's the case. Shows you have little grasp of the benefits of your scheme.

Andy_L

Old_Slaphead wrote: »

You are (all) financially naive if that's the case. Shows you have little grasp of the benefits of your scheme.

I understand them perfectly, that's why I'd grab a 20% employers contribution.

Old_Slaphead

Andy_L wrote: »

I understand them perfectly, that's why I'd grab a 20% employers contribution.

How would you justify accepting such a low offer (assuming it was available) .

A 1/60 final salary scheme is equivalent to 30-34% of salary contribution. There's added benefits like ill health retirement, death benefit and no risk guarantee that isn't available with DC.

Andy_L

I take on investment/longevity risk but I gain investment/longevity rewards.

The Gov can't "do a Goodwin" and refuse to pay out in the future.

The 30-40% numbers are based on getting the full 40 years service ( which most people don't get) & continuous pay rises/promotion above inflation which, except for a few, can't happen because of the triangular hierarchy in the public sector (eg not every teacher can become a head teacher, nor every nurse a matron).

I don't get ripped off on lump sum commutation.

As a single chap I'm "forced" to pay for spouse/kids benefits rather than having the choice, If I die I can leave my DC pension fund (possibly subject to tax) to anyone rather than only my (non-existent) spouse getting 1/2 my pension.

It ends the Public Service bashing over gold plated pension

It can't be used as stick to beat us in pay rise negotiations.

It means an end to the ludicrous public sector bonus schemes as there's no need to avoid pensionable pay rises

Pay scales can finally be rationalised without the distorting effects of worrying about pension costs.

It makes public vs private pay comparisons far easier

I could put my personal contributions into an ISA instead of a pension, allowing more tax efficient retirement planning.

I could contract back into S2P if I think it's a good idea

and, perhaps most importantly, the short term doubling of the annual cost to the tax payer will really get up the nose of the Daily Mail et al :-)

Old_Slaphead

Andy_L wrote: »

I take on investment/longevity risk but I gain investment/longevity rewards.

The Gov can't "do a Goodwin" and refuse to pay out in the future.

The 30-40% numbers are based on getting the full 40 years service ( which most people don't get) & continuous pay rises/promotion above inflation which, except for a few, can't happen because of the triangular hierarchy in the public sector (eg not every teacher can become a head teacher, nor every nurse a matron).

I don't get ripped off on lump sum commutation.

As a single chap I'm "forced" to pay for spouse/kids benefits rather than having the choice, If I die I can leave my DC pension fund (possibly subject to tax) to anyone rather than only my (non-existent) spouse getting 1/2 my pension.

It ends the Public Service bashing over gold plated pension

It can't be used as stick to beat us in pay rise negotiations.

It means an end to the ludicrous public sector bonus schemes as there's no need to avoid pensionable pay rises

Pay scales can finally be rationalised without the distorting effects of worrying about pension costs.

It makes public vs private pay comparisons far easier

I could put my personal contributions into an ISA instead of a pension, allowing more tax efficient retirement planning.

I could contract back into S2P if I think it's a good idea

and, perhaps most importantly, the short term doubling of the annual cost to the tax payer will really get up the nose of the Daily Mail et al :-)

I think you've highlighted some very interesting issues.

The only further points I wish to raise......
(a)on purely financial terms a 20% would not fully compensate the of public sector workers fo their pension loss - your personal situation may mean that you don't get full advantage for all the benefits but that may not apply when you're 60.
(b)although you said 'probably' - I don't see how you could justify that the rest of the public sector would concur with your view esp petaining to the lack of security of a DC scheme.

It would be interesting to see, given an effective 20% pay rise, how public sector salaries stack up with private.

I also comment that at the 'bottom end' no public sector worker receives the minimum wage - whereas great swathes of the private sector do. The difference at the bottom of the payscale would be significantly more than 20%

beingjdc

Old_Slaphead wrote: »

I also comment that at the 'bottom end' no public sector worker receives the minimum wage - whereas great swathes of the private sector do.

Some do, although most are now contracted out so technically private sector - eg school cleaners, hence the point earlier this week about why comparing public and private pay averages is misleading.

Here's a couple that are minimum wage plus pennies.

http://www.lgjobs.com/jobs/playworker-914/
http://www.lgjobs.com/jobs/domestic-ref-13938/