Public Sector Pension 'Value'

PorkBlonde

I'm currently working in the public sector and have an interview coming up for a similar job in the private sector.

I currently earn £28,350 - the job is advertised between £27K to £33K. At the maximum of this I think would earn approximately £250 to £300 per month net more than at present.

There are pros and cons to both sectors but obviously a big benefit in the public sector is the pension.

I'm interested if anyone has an opinion how much in salary terms the Local Government pension scheme is worth as a premium? How much extra salary would it take to make you move? For the sake of argument this is assuming everything else is equal.

exil

The current employer contribution rate is 13.6% for the LPGS. So this is worth about £400 a month on a 30k salary.

However - does the new employer have no pension scheme at all? If it has one, how much does the employer chip in? Remember that alll employers will have to offer the new personal accounts in 2012 if they have no scheme already, and this involves them putting in 3%.

PorkBlonde

Hi, the employer contribution would be 4% for the first two years rising to 8% thereafter.

exil

OK the difference is then 5.6% or about £150 a month.

markr007

Although this contribution rate sounds about right please note that the 13.6% is cost to the employer for providing the pension. This is a completely different number from the cost of you providing a similar level of pension for yourself. There is also the substantially less risky nature of a gov't backed final salary pension compared with a defined contribution scheme (although it is difficult to put a "value" on this).

The cost of replicating the benefits in a DC scheme is dependent on a number of parameters, not least your age. It wouldn't surprise me if the cost was substantially more than 13.6% of salary though.

The only way of really establishing value though is based on your own attitude to pensions versus cash and attitude to risk.

All I'm really saying is don't take it as read that the benefit you are getting is worth 13.6% of salary, it could be worth a lot more.

Old_Slaphead

exil wrote: »

The current employer contribution rate is 13.6% for the LPGS. So this is worth about £400 a month on a 30k salary.

However - does the new employer have no pension scheme at all? If it has one, how much does the employer chip in? Remember that alll employers will have to offer the new personal accounts in 2012 if they have no scheme already, and this involves them putting in 3%.

My LG pays between 17-19% and the scheme is underfunded. I think there will be big changes to the schemes in the next few years that will make them much less generous.

bristol_pilot

Don't get your hopes up on the starting salary. The public sector often has a policy of putting new starters on the bottom of the salary scale and there is no flexibility. Unlike the private sector where they will pay you what they need to, within reason, to get you to leave your current employer.

PorkBlonde

Thanks for the replies. One way of looking at it I guess is that for each year I pay into the LGPS my pension rises by approx £300 per year, how much would I have to pay into the other scheme to achieve the same level. I suspect the amount is prohibitively large! I'm allowed to top up my contributions but only a maximum of 3% would be matched by the employer.

I agree, markr007 - essentially it it's a question of how much I value the pension over other factors.

bristol_pilot - I'd be moving to the private sector. Part of asking the question here is me thinking about what would it take to get me to leave, I think it would have to be pretty close to the top of the scale.

Jazzyjeff_2

In Hampshire the LGPS Employer contribution rate is 19.1% so very surprised by some of the %'s quoted here. Cannot see how 13.6% would ever be enough.

dunstonh

Jazzyjeff wrote: »

In Hampshire the LGPS Employer contribution rate is 19.1% so very surprised by some of the %'s quoted here. Cannot see how 13.6% would ever be enough.

The employer contribution on a final salary scheme is irrelevant to the end benefit for the individual. The employer has to factor in a number of things when working out their contribution which can lead to significant amounts being paid in during some periods and a payment holiday in others.

A decent final salary scheme and associated benefits can cost the equivalent of 15-25% if you wanted to match them privately depending on the level of risk you are willing to go by.

markr007

LGPS is also one of the few "funded" public sector schemes meaning it has deficits to deal with like the private sector. The contributions payable vary substantially across local authorities as each one has their own fund and the differing sizes of deficit. You can't therefore compare the employer contribution rates across local authorities or use them as guide as the cost of benefits accruing (for this reason and others that I and others have highlighted above).

I've just run some figures and can't stress enough that this is not advice and shouldn't be relied upon (particularly as it's late and I could have got something wrong) but using FSA standard Statutory Money Purchase Illustration Assumptions, assuming you buy an inflation linked pension with a 50% spouse's pension on death, salary increases at inflation and you are in a life styling type fund the following results come out:

Age | % Final Salary Bought by 1% Cont | Contribution Rate Required for 2/3rds | Contribution Rate For 60ths Going Forward
20 4.20% 15.9% 17.9%
21 4.00% 16.7% 18.3%
22 3.81% 17.5% 18.8%
23 3.63% 18.4% 19.3%
24 3.45% 19.3% 19.8%
25 3.29% 20.3% 20.3%
26 3.13% 21.3% 20.8%
27 2.97% 22.5% 21.3%
28 2.82% 23.7% 21.9%
29 2.68% 24.9% 22.4%
30 2.54% 26.3% 23.0%
31 2.41% 27.7% 23.5%
32 2.28% 29.3% 24.1%
33 2.16% 30.9% 24.7%
34 2.05% 32.5% 25.2%
35 1.93% 34.6% 25.9%
36 1.83% 36.4% 26.4%
37 1.72% 38.8% 27.1%
38 1.62% 41.2% 27.8%
39 1.53% 43.6% 28.3%
40 1.44% 46.3% 28.9%
41 1.35% 49.4% 29.6%
42 1.27% 52.5% 30.2%
43 1.18% 56.5% 31.1%
44 1.11% 60.1% 31.5%
45 1.03% 64.8% 32.4%
46 0.96% 69.5% 33.0%
47 0.89% 74.9% 33.7%
48 0.83% 80.8% 34.4%
49 0.76% 87.6% 35.1%
50 0.70% 95.3% 35.7%
51 0.64% 104.1% 36.4%
52 0.58% 114.2% 37.1%
53 0.53% 126.1% 37.8%
54 0.48% 139.8% 38.5%
55 0.43% 156.2% 39.1%
56 0.38% 176.5% 39.7%
57 0.33% 201.5% 40.3%
58 0.29% 233.2% 40.8%
59 0.24% 275.6% 41.3%
60 0.20% 335.2% 41.9%
61 0.16% 422.2% 42.2%
62 0.12% 570.1% 42.8%
63 0.08% 864.0% 43.2%
64 0.04% 1741.5% 43.5%

So if you are 20 1% of salary as a contribution will be enough to get you 4.2% of your final salary as a pension at retirement age of 65. To get two thirds you need to pay in 15.9% of salary for life.

The numbers get scary very quickly. If you are 40 and have not yet started a pension then you need to pay in almost half your salary for the next 25 years to retire on 2/3rds salary at retirement (with pension increases and a spouse's pension - removing these, particularly increases, would have a big impact)!

You can justify the figures being about right with 46.3% * salary * 25 years * 1.06^12.5 (investment growth for on average 12.5 years) * 1.025^12.5 (salary/cont rises for on average 12.5 years) / 26 (=annuity rate) / (salary * 1.025^25 (i.e. your salary at retirement)) = 68% of final salary

Get rid of the pension increases and things look much better by about 50% i.e. 46.3% would get you 100% of final salary so you only (!!!!) need 31% of pay as a contribution from age 40 onwards. Come 47 you are back up to 50% again.

Even as a pensions actuary I find these numbers shocking. I think they highlight well both the cost increase of providing DB pensions and the need to start saving when you are young - I mean what's 17% of salary to someone starting their career and wanting to get on the housing ladder....

p.s. Note also that this would suggest the 15-25% should be 18-44%!

p.p.s if salary growth outstrips inflation then the figures look worse still.