Public sector pensions - cpi instead of rpi

Old_Slaphead

paparossco wrote: »

Sad. It 'seems that two wrongs make a right' to some and they look forward with glee to an inevitable erosion of Public Sector pensions. I understand the gut reaction in the private sector to feel that they have had to suffer, so why not the Public Sector, but the Public Sector did not cause your schemes to go - you would need to ask your shareholders about that.

I joined the NHS over thirty three years ago as a vocation, to serve the public, not on the basis of what the salary was. Some of you may scoff but I believe that this is still common in our service. I would be grateful if you could stop 'venting your spleen' at us, if you want to target someone go for the people that caused this crisis. We know what is heading our way but you don't need to be so pleased about it.

People living longer is one of the problems - schemes were never designed to pay out for 25 years.
Also Labour created a business environment that inhibited healthy growth and relied too much on the financial sector and debt accumulation....it was complicit in asset price inflation as it generated large tax revenues. It taxed private schemes much too heavily creating an unfair playing field between public vs private schemes.
The illusiory wealth that Labour created resulted in a vast and unaffordable expansion of the state - that's why your jobs & pensions unfortunately have to now suffer cutbacks to a level commensurate with our reduced private sector.

I wish we were all rich and could afford good pay & pensions for all. As we can't then 'pain' should be shared out equally.

real1314

We can all take some solace in the news today that the government intends to:-

1. Hit banks with a windfall tax to the value of any bonuses paid out above 5% of salary.

2. Legislate to stop Banks from increasing staff wages for those who earn over £21k

3. Take action to withdraw bonuses, leaving packages and redundancy payments to bank employees that exceed the lower of 1 years pay or £50k.

Or was someone else responsible for the economic crisis?

real1314

Old_Slaphead wrote: »

FWIW my salary is around £27k and I've been saving for a pension for 22 years. I've been contributing between 15-25%pa of my salary (depending on other commitments) which at 60 might give a pension of £5000ish. That's less than a public sector worker gets for paying in at 5%pa

The £10,000 you quote me as saying is taken out of context as it refers to another poster's quote - the average, as I said earlier on in my posting, was alledged to be £4,000 (though that average includes part-timers and staff working somewhat less than a full 40 years)!!!!

Quoting £4000 average is misleading - it can relate to someone on a low salary working part time for 40 years OR someone on a very high salary working just just 2 years! You have to qualify the average by saying the FTE years earning it relates to to see how equitable it is.

Well, you seem to have suggested you're in your 50s now, did you not start a pension by the age of 20 which is the age your assumptions use for public sector pensions?

As for your £5k pa pension, if you've been paying in 15-25% (assume 20%) of £27k (assume an even £27k as the stuff you'd saved from the start should have gained due to appreciated interest) for 22 years, and assuming you've 8 years to go, you'd have a pot of around £162k by the time you hit 60.
Enough to pay out £5k pa for over 30 years. But you've also had (/taken) the flexibility to compete for the best paid work in the private sector and if you've done well for yourself, you should be on a better wage than the average worker for your type of job.

Others have foregone that flexibility for security of employment and pension. You could have taken that option too, but chose not to. Despite the so-called benefits.

markr007

Others have foregone that flexibility for security of employment and pension. You could have taken that option too, but chose not to. Despite the so-called benefits.

I didn't realise that public v private was the job decision I had to make. I think this is a rather silly statement really. Most people don't get offered lots of jobs to choose from and certainly don't get offered the job in the private and public sector doing the same thing.

I read page 1 and then skipped to page 5 so sorry if I'm covering old ground.

Firstly on CPI. It's worth noting that I believe the method of determining CPI is also planned for review to potentially include more in relation to housing costs so the difference might be minimal.

As has been mentioned already the average pension is a meaningless figure. People with low pensions in DB schemes (not just public sector ones) generally had low salaries. What matters when considering cost is the benefit design i.e. 60ths accrual or 80ths + 3/80ths cash, fully indexed and paid from 60 (65 for some and more commonly so for future benefits). These benefit designs are extremely good pension schemes but no more gold plated than the equivalent in the private sector - it just so happens that these have now closed.

Is the closure of private sector schemes a good thing? No.
However, are public sector schemes now too generous? Probably yes.

Ultimately every public sector job has a going rate that reflects the amount needed by workers to do the job and the amount the taxpayer/gov't is willing to pay for that service. Pension is just another part of it. You could double public sector pensions and I wouldn't care, as long as the overall cost of someone doing the job is unchanged i.e. their salary has dropped to compensate for it.

The problem is that we have gone through a period of catch up in public sector pay and reduction in private sector pension benefits. The two are therefore now out of sync. Public sector pay is likely to take a hit over the next few years with the planned austerity measures. It remains to be seen what happens to private sector pay and there may well be a period of natural equalisation. However, I suspect that this won't be enough and something will still need to be done.

Fundamentally, there is only so much the taxpayer can afford to pay out in public sector pay and benefits and the workers, and indeed the nation as a whole, need to decide what the right balance between salary and pension benefits is.

What I don't like hearing is people whinging about having to delay their retirement til, god forbid, after 60!!! and no longer being able to afford all the holidays they had planned. A long healthy retirement is not a right for anyone. Pensions are there to provide for when you're no longer able to work, not to provide for a decade or more of doing all the things you want to do before you get to that point. We've had a golden generation that I suspect will never exist again.

I also don't like the I've paid my 6% for x years, I have a right to the pension I was promised line. You've paid 6% and the gov't/tax payer has paid a notional 14% but the real cost is arguably much higher. So if your benefits were halved you'd still have got good value for your 6%.

The nation needs to wake up and smell the coffee. We're all living longer and so should retire later.

Old_Slaphead

real1314 wrote: »

Others have foregone that flexibility for security of employment and pension. You could have taken that option too, but chose not to. Despite the so-called benefits.

There's virtually no flexibility of employment or security in the private sector once you get past 40 - I could argue that there's much more scope in the public sector given that's the only place where jobs have been 'created' in the past decade.

Your figures are not a million miles out but they overvalue my estimated fund by 20-30% due to the fact that the stockmarket has gone nowhere under Labour's reign meaning that most private pension funds have been stagnant over the last decade.

Given increased longevity & low interest rates the annuity rates, ie pension payouts, have plummeted (ie down 67% over last 15 years) - a problem that the public sector are shielded from with guarantees.

To get an equivalent pension to a comparable public sector employee I'd have to pay 25-30%pa into my pension (and then I also have to accept all of the risk and worry that a private pension causes, spend hours trying to understand the 'rules', deal with paperwork, monitor investments, worry about market crashes etc etc)- at best guess, I might get paid up to 10% more. The other T&Cs ie holidays, sick pay, flexitime, often subsidised canteen/gym, job security are far better in public jobs.

The real (only ?) upside of working in entrepreneurial SMEs is that real jobs are created and situations are constantly changing and adapting - altogether a much more dynamic & stimulating environment (even if, in many cases, there's not much money in it) rather than the stultifying, mindnumbing, unproductive petty bureacracy and red tape of large parts of the public service (admittedly not all jobs are like this but it would have been in my case). I say this from experience having spent a couple of years in CS and having most of my friends & family working in the public sector.

Old_Slaphead

joem1619 wrote: »

Consultancy firm Towers Watson estimates that, by 2016, a former public sector worker currently receiving a pension of £10,000 a year will be more than £800 a year worse off as a result of the change.

I also note that that Towers Watson say the public schemes have accrued liabilities of £1.18trillion (more than the national debt) against Govt estimates of £770bn - that the liabilities are rapidly escalating and that it's being operated as a Ponzi scheme, the cost of which will fall on your kids & grandchildren (what a legacy eh?).

Anyone any ideas as to what we should do to reduce this heavy burden ?

markr007

I also note that that Towers Watson say the public schemes have accrued liabilities of £1.18trillion (more than the national debt) against Govt estimates of £770bn - that the liabilities are rapidly escalating and that it's being operated as a Ponzi scheme, the cost of which will fall on your kids & grandchildren (what a legacy eh?).

This sort of emotive language and headline figures can all be found in the Public Sector Pensions Commission report: http://www.public-sector-pensions-commission.org.uk/wp-content/themes/pspc/images/Public-Sector-Pensions-Commission-Report.pdf published recently. It's not great language to cause an honest debate though, just gets the hackles up!

The truth is we could argue all day about what promised public sector pensions are worth. There is no 'fund' to provide them and there doesn't need to be one so in coming up with a value there are a range of arguments for different 'discount' rates. Discount rates reflect the 'time value' of money. For a simple example consider the amount of money you need in a bank account paying 5% interest today to pay £100 out in a year's time. You get this by 'discounting' the payment of £100 by the return expected on your money i.e. 5%. The answer is therefore 100/1.05 which is about £95. Arguably therefore the 'present value' of the £100 payment is £95.

If instead you just decide to pay that £100 out of your salary as when you need to then what is the present value now? Some would argue that it was still £95 as this is the amount you would need to put in the bank account. But what if by not putting the £95 in the bank account you could pay off some of a loan you had taken out on which you paid 7% interest. Arguably then being able to delay paying that £100 out for a year is worth 7% a year to you rather than 5% and the present value to you is £93.

What if we take a step away from finance and instead you could invest the money now in some drugs that would mean your terminally ill parent would live 2 years longer. How much is it now worth to you that you can delay that £100 payment you owe for 1 year? What is the 'time value' of that money now and the appropriate discount rate?

This is exactly the position the government has. By not setting the money aside now to pay the pensions it can use it to build roads, schools, hospitals etc. what rate of return do you get on this investment? Nobody knows but governments use a specific discount rate when deciding on what things to invest in known as a 'Social Time Preference Rate'.

The £770bn figure is probably based on the this rate of discount. The £1.18trillion figure is based on low return government bonds and is akin to the 5% in the example above. Which one is right?

The truth is neither are 'right' as there is no right answer. All that matters about unfunded liabilities is that we know what cash flows we are expecting to pay out and can plan for this in future budgeting. So lets stop worrying about these meaningless large numbers and get back to what is important and that is what is a fair amount of pension to promise for future service that is not going to lead to those future cash flows causing problems in the future.

As much as I dislike the language and a lot of the figures in the report I linked to, I would advocate the first 4 changes for future provision:

1. Increase the retirement age - we are living longer
2. Reduce the accrual - if 2/3rds salary is the right target for a pension then we should aim to accrue it over our working life. If we retire later our working life is extended so the rate at which we accrue pension should be reduced.
3. Introduce career average to spread the pension cost more equitably among the workforce (rather than concentrating on those who retire on high salaries) (the saving from this can be used to improve accrual rates potentially offsetting 2)
4. Introduce a salary cap (and for me this should be an actual cap rather than just be for pension purposes) such that nobody in the public sector can earn more than the prime minister.

marklv

real1314 wrote: »

Well, you seem to have suggested you're in your 50s now, did you not start a pension by the age of 20 which is the age your assumptions use for public sector pensions?

As for your £5k pa pension, if you've been paying in 15-25% (assume 20%) of £27k (assume an even £27k as the stuff you'd saved from the start should have gained due to appreciated interest) for 22 years, and assuming you've 8 years to go, you'd have a pot of around £162k by the time you hit 60.
Enough to pay out £5k pa for over 30 years. But you've also had (/taken) the flexibility to compete for the best paid work in the private sector and if you've done well for yourself, you should be on a better wage than the average worker for your type of job.

Others have foregone that flexibility for security of employment and pension. You could have taken that option too, but chose not to. Despite the so-called benefits.

A pot of 162k would pay more than 5k a year, more like 8k.

marklv

cvd wrote: »

The problem with the debate is that people see the issue as black and white. It is not.

It is, in my opinion, wrong that a manager in a local authority or a top civil servant or a head-master retires on a pension of £50,000 per year inflation linked for life.
However, I also regard it as wrong that some low paid worker in a local council who perhaps raises a family and only works for 15-20 years and retires on a pension of say £4000 per annum gradually sees the value of her pension fade away and ends up depending on state handouts because the pension is not uprated with RPI.

There is a middle way.

I think you've hit the nail on the head here. The problem with public sector pensions is not the system per se, but the way that it distorts entitlements hugely in favour of the highest paid. The civil service move to a career average scheme (Nuvos) has gone some way to removing the distortion, but it still remains.

I believe that the notional salary, for pension purposes, should be capped at, say, £60k a year. Any salary above that should not count towards pension calculations. In addition, there should also be a lower limit, say £30k a year, so that anyone earning below this (e.g. £18k) will receive an automatic uplift in pension entitlements based on a higher notional salary.

Having said all this, changing the index to CPI was wrong and harmful. It would have been better to have imposed a rule setting the indexing to RPIX to a maximum of 5% a year. This way the annuity costs would have been slashed substantially, while keeping that more comprehensive inflation index. It would also have had a lower impact, given the scant likelihood of inflation exceeding anything much above 5% in the future. CPI excludes council tax and house insurance, both of which still have to be paid by pensioners. Now, if a law would peg these costs to CPI then it would change things, but is it likely? Nope.

StevieJ

Dunstonh raised this on the savings thread, anyone think it is part of some grand plan to do away with RPI? or am I seeing Bogeymen when there are non?

NS&I is withdrawing its fixed interest and index-linked savings certificates and cutting rates on its direct saver and income bonds by 0.25 per cent with immediate effect

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http://www.moneymarketing.co.uk/investments/nsi-slashes-rates-and-pulls-products/1015348.article