Could index linking of existing public service pensions be removed?

Stargazer57

Debt_Free_Chick wrote: »

Switching the public sector to DC would increase costs though - as well as paying the pensions to those retired, contributions would also have to be paid to the DC pots for current employees. At present, the contribution paid to pensions for current employees is "nil".

DC schemes don't have to be funded. I believe Sweden operates a notionally funded DC arrangement.

Debt_Free_Chick wrote: »

Ignore all the press hype about £1 trillion deficits in public sector pensions. The pensions aren't funded so deficits are irrelevant.

How do you measure the extent of the promise from one generation to the next without estimating the deficit? If the deficit had been measured properly it is hard to imagine that it would have been allowed to quadruple as it did between 1997 and 2007.

Debt_Free_Chick wrote: »

If there are savings in expenditure in the public sector, they won't be found in pensions.

Ireland seems to have raised quite a bit by more or less doubling employee contributions to public sector schemes. Any reason why that wouldn't raise a few billion a year in the UK?

Stargazer57

hugheskevi wrote: »

Expenditure on public sector pensions is forecast to be stable at between 1.5%-2% of GDP over the next 50 years.

This projection assumed that the number of workers in the public sector was going to remain stable while the population increased by a sixth, as well as making a number of other questionable assumptions. The National Audit Office have promised a report investigating these assumptions later this year. I expect we will then learn that the Treasury was leant on by their then political masters in oder to put their name to this nonsense.

hugheskevi

Thanks Stargazer57 - all accurate and pertinent points.

Sweden does run a notional DC scheme. Notional DC is a possibility, although I always think that reducing pensions due to notional losses for workers with a high propensity to strike would be interesting. Personally I would think a considerably less generous DB scheme based on career average with longevity adjustment factors would be better, possibly supplemented by a pure DC scheme.

Raising employee contribution rates is the only way to get any serious money quickly. But that is precisely comparable to a pay cut given that pensions are part of remuneration. A risk is that there is an uncoordinated scattergun approach to cost saving, eg, raising pension contributions, cutting pension benefits, freezing pay, freezing tax thresholds, raising tax rates, etc, which each taken in isolation is fairly minor but when taken together have a disproportionate impact on some groups due to the lack of a structured approach.

I agree that the weakness of the forecasts is the static workforce assumption, as detailed in a recent NAO report.

Looking at stats over the last couple of decades, in 1991 there were 5,983,000 public sector workers, falling to 5,179,000 in 1997, before rising to 6,070,000 in 2009. So over 20 years there has been hardly any change in the number of the workforce, despite a large growth in population over that period (although within that definitions will have changed, and privatisation has an impact).

Given the expected cuts/recruitment freezes coming up in the public sector, a constant workforce assumption in the medium term is probably not far off the mark (although I suspect the assumption was more driven by convenience than analysis/expectations).

Personally I don't have a problem with the amount of pension public sector workers get. But it is rather inequitable that public sector workers are insulated from many or all of the risks that most private sector employees have no choice but to take on. Whilst I don't support a race to bottom in pension provision, I would support some rebalancing of risk.

roysterer

Private sector pension contributions (in my case) have doubled this year alone for reduced benefit from a final salary 1/60 scheme to career average. It is anticipated that this change will eventually be scrapped in one year or two to a DC scheme.
So you people in the public sector think I should pay increased income tax to fund your lucrative final salary schemes!!!!!!! with early retirement.

THERE IS A LOT OF ILL FEELING FROM PRIVATE SECTOR WORKERS FUNDING THE PUBLIC SECTOR. WE ARE NO LONGER GOING TO TOLERATE IT. AND THE TORIES KNOW IT. YOU SHOULD SPEAK TO PEOPLE WORKING IN INDUSTRY THERE IS A BAD FEELING REALLY BAD BAD BAD BAD FEELING TOWARDS PUBLIC PENSIONS.
LOBY YOUR NEW M.P. AND LET HIM / HER KNOW YOUR FEELINGS EVERYONE IN THE PRIVATE SECTOR.

Stargazer57

hugheskevi wrote: »

Given the expected cuts/recruitment freezes coming up in the public sector, a constant workforce assumption in the medium term is probably not far off the mark (although I suspect the assumption was more driven by convenience than analysis/expectations).

If you are going to allow policies that will be pursued over the next 5 or 10 years to influence the 50 year assumption for the size of the public sector, presumably you would expect the same treatment for the net immigration assumption. Right now the Treasury seem happy to rely on the experience over the last decade or so to influence the immigration assumption (which conveniently keeps the cost down) while ignoring what has happened to the size of the public sector workforce over the same period.

hugheskevi wrote: »

Personally I don't have a problem with the amount of pension public sector workers get.

I've got no problem with it, but I have a BIG problem with providing them with a pension worth over 30% of pay (if costed, as it should be, on a risk-free basis) and telling them, and everyone else, it is only worth about half that.

I have a feeling that if the true value of public sector pensions was quantified public sector pay rates would ease a little.

Debt_Free_Chick

Stargazer57 wrote: »

DC schemes don't have to be funded. I believe Sweden operates a notionally funded DC arrangement.

So, when pensions are paid out, who pays them and where does the cash come from? Is a lump sum paid out so the member can buy an annuity?

An unfunded DC scheme is no better and no worse than an unfunded DB scheme. I would guess that the pension is paid from income, when it falls due - and that's no different to what we have now. All that happens is the future pension entitlement is possibly lowered, being DC. But then, it could be higher as well.

How do you measure the extent of the promise from one generation to the next without estimating the deficit? If the deficit had been measured properly it is hard to imagine that it would have been allowed to quadruple as it did between 1997 and 2007.

I think you're making a comparison with funded schemes. The point of a funded scheme is to accumulate sufficient assets to enable that fund to pay out the pensions promised. This is not the case with unfunded public sector schemes. They are not aiming to accumulate any assets for the future, so there can't be "a deficit". What you read in the press is a purely hypothetical figure which estimates what the deficit would be, if the schemes were funded.

Ireland seems to have raised quite a bit by more or less doubling employee contributions to public sector schemes. Any reason why that wouldn't raise a few billion a year in the UK?

No reason at all - but it would be a realignment of total remuneration and, I presume, would require agreement and negotiation with the Unions.

hugheskevi

So, when pensions are paid out, who pays them and where does the cash come from? Is a lump sum paid out so the member can buy an annuity?

A lump sum could be paid out to an insurer to provide an annuity, but much more likely is that the final pot of cash is internally annuitised by the Government, with reference to market rates.

An unfunded DC scheme is no better and no worse than an unfunded DB scheme.

Agreed - a notional DC arrangement is very similar to an unfunded career average DB with longevity adjustment factor.

All that happens is the future pension entitlement is possibly lowered, being DC. But then, it could be higher as well.

Whilst the notional DC pot could theoretically change in line with anything, eg FTSE, Dow, etc, in practice it is normally uprated in line with national average earnings or something similar in schemes where it is in place around the world. So pretty much everything hinges on the the notional contribution rate, which as you say could be lower, higher, or the same.

For those unfamiliar with notional defined contribution schemes, a generic description of how they work is that a notional contribution is made each year. This can consist of employer and employee contributions of any percentage - let's say they total 20% of salary however they are divided. That contribution is increased in future in line with national average earnings (or whatever index the rules state). Each year a contribution of 20% is made, and uprated by earnings. At retirement that generates a notional pot of money. Looking at market annuity rates, an annual income can be calculated from the notional pot, and that is what is paid out each year, drawn from Government revenue (ie tax).

Debt_Free_Chick

hugheskevi wrote: »

A lump sum could be paid out to an insurer to provide an annuity, but much more likely is that the final pot of cash is internally annuitised by the Government, with reference to market rates.

If we have a notional unfunded DC scheme, there are no assets to fund the lump sum, so any payment would require "hard cash".

An internal annuity is what we have in the present unfunded DB schemes.

For those unfamiliar with notional defined contribution schemes, a generic description of how they work is that a notional contribution is made each year. This can consist of employer and employee contributions of any percentage - let's say they total 20% of salary however they are divided. That contribution is increased in future in line with national average earnings (or whatever index the rules state). Each year a contribution of 20% is made, and uprated by earnings. At retirement that generates a notional pot of money. Looking at market annuity rates, an annual income can be calculated from the notional pot, and that is what is paid out each year, drawn from Government revenue (ie tax).

Yes, an unfunded DC scheme is simply a bookeeping exercise, with no funds ringfenced. The final benefits are still paid by the Government, in the same way as they are now for the existing schemes. With no real assets backing the pension promises, we would have "deficits" in the DC schemes as well as the DB schemes.

None of this raises income for the Exchequer; and it doesn't cut current expenditure on pensions either.

Any cut in pensions will take generations to have any effect - it will do nothing for the current budget deficit.

Personally, I don't see cutting public sector pensions as a matter of urgency for the current Government. A lot of time and no doubt money would be spent to arrive at the answer "well, it won't cut current expenditure on pensions and it won't generate any new taxes".

The media don't understand and are being fed a line by unknown sources with some kind of axe to grind (probably actuaries in the private sector who no longer have a DB pension )

Incidentally, I do not and have never worked in the public sector, so I have no gold-plated DB pension of my own to protect

downshifter98

I think that the media 'scare' stories about how much a fully funded public sector scheme would be are a real red herring; in truth these future payments will just be added to the balance sheet as they actually arise - if this means taxes have to go up they will go up for all, including (or possibly especially) for retired public workers; remember these pension payments are taxed like all earnings (20 - 50% possibly more) and that the spending these (massive?) pensions generate will incur VAT of at least 20% - crikey the way its going the government will be making a profit.

With regard cutting the deficit now (or pretty soon) it's the state pension that will be an easy target - just adding a year or 2 on everyone's retirement age will save bundles and no unions to fight with..

dzug1

roysterer wrote: »

Private sector pension contributions (in my case) have doubled this year alone for reduced benefit from a final salary 1/60 scheme to career average. It is anticipated that this change will eventually be scrapped in one year or two to a DC scheme.
So you people in the public sector think I should pay increased income tax to fund your lucrative final salary schemes!!!!!!! with early retirement.

THERE IS A LOT OF ILL FEELING FROM PRIVATE SECTOR WORKERS FUNDING THE PUBLIC SECTOR. WE ARE NO LONGER GOING TO TOLERATE IT. AND THE TORIES KNOW IT. YOU SHOULD SPEAK TO PEOPLE WORKING IN INDUSTRY THERE IS A BAD FEELING REALLY BAD BAD BAD BAD FEELING TOWARDS PUBLIC PENSIONS.
LOBY YOUR NEW M.P. AND LET HIM / HER KNOW YOUR FEELINGS EVERYONE IN THE PRIVATE SECTOR.

There may be a lot of ill feeling but some of it is based on ignorance.

Most of the public sector no longer has 'final salary' schemes - moves to end that started 10 years ago and more.

And where's 'early retirement' come into it? It was never that easy and rules have been tightened up.