Public Sector Pensions - Are they really so bad?

Turnbull2000

Rumours of a u-turn on the cards, but the Telegraph is reporting that tax relief for all pensions may be abolished next year. Can see a huge surge towards BTL if that happens.

ViolaLass

cootambear wrote: »

You have to admire how the government has made low paid workers and the vulnerable in need of social care and benefits the scapegoat for the banking crisis.

The richest 1,000 people in the UK saw their wealth increase by 18% last year, however they are tightening their belts like the rest of us, as they expected a greater inflation of their wealth.

That new super yacht may have to wait a bit.

You're determined that it's all to do with the banking problems while ignoring the fact that increased life expectancy means that we were always going to have to change our pension arrangements.

Maybe. In a private sector situation the maximum employer match is likely to be up to 4% or 6% of salary, with few going higher than that. So a good private sector case would be 6.4% from you plus 6% from the employer, paid via salary sacrifice to save a bit of NI.

Very good point, jamesd, I hadn't noticed that. So the main benefit is the significantly higher employer contribution? Plugging your figures into the calculator gives me a pension of about £10k.

vivatifosi

Taking politics out of the situation for a moment, the cost of providing a DB scheme has increased massively over the years. Back in the 90s it was not uncommon for companies to be able to put the same amount into a DB scheme as they do into a DC scheme now (6-7%), they could even take pensions holidays. By the early 2000s the cost of employer contribution in DB schemes had practically doubled and they've gone up since then. For the schemes that I know well, the cost to the employer has gone up from 7%, to 12% to 18%.

The reasons for this are complex. First it is fair to say that investment returns have not performed as we would have liked. Second, people are living longer and pension trustees have to by law be conservative in their view on mortality: in effect this means anticipating paying their scheme members over a long period of time, thus increasing the deficit. Then we have the fact that the way schemes are calculated as being "in deficit" have become stricter. This is by and large a good thing, but it means that schemes that may not have appeared to have a deficit under the previous methodology now have one which they have to reduce. Also, when a government performs a raid on pensions, such as the removal of tax relief on dividend income, this also has an impact on the amount you can expect in. Finally, when you have a time of low investment returns and high inflation, it costs more to provide pensions as you have factored in an increase of say 2.00% for your pensioners and then a figure of double that rocks up and throws out all of your calculations. These are the facts that private schemes have to deal with.

I'd also say that moving to a career average scheme is not necessarily a bad thing. It increases flexibility. In final salary schemes people who suddenly in their late 50s or early 60s find themselves with caring responsibilities cannot easily reduce their hours without impacting their pension at retirement. With a career average scheme the impact is less marked.

As a trustee, I believe strongly that accrued benefits are sacrosanct and should not be played with. I don't like the shift to CPI where RPI has been promised on accrued amounts as I think that crosses that line, however I do accept - as both a trustee of a private scheme and a public sector worker - that the current system is not economically viable and does need to be changed. I have no problem with a) higher contributions going forward, b) average salary schemes or c) CPI being used as an inflation measure going forward providing the benefits accrued to this point remain unchanged.

Gorgeous_George

The bottom line is that we need to provide for own retirement - preferably in something the government cannot steal.

GG

vivatifosi

Gorgeous_George wrote: »

The bottom line is that we need to provide for own retirement - preferably in something the government cannot steal.

GG

I agree George. The problem before now is that governments from both sides of the divide have got involved in raiding pensions. Accrued benefits should be sacrosanct, end of.

jamesd

ViolaLass wrote: »

So the main benefit is the significantly higher employer contribution? Plugging your figures into the calculator gives me a pension of about £10k.

That's a prominent difference but it's really a bit more complicated because an employer has effectively a fixed pot of money and there's the question of how the employer should allocate it.

In the private sector with current plans it's generally done so you get that percentage match on your current income and that rises or falls as your income rises or falls. No past years calculation, you get pension contributions based just on current earnings. So everyone is getting the same split, regardless of their income level. There can be different match levels based on age or individual contract negotiations, though the matches are always based on only current salary.

In defined benefit schemes things are different, particularly in a final salary scheme. In the final salary case the people who get higher pay later get higher pension contributions for the year they are working in but also get higher pension value paid in to their transfer/benefit value for all of their past years worked. The result is that they get a larger share of the total pension money pot than the more average employees get. It's even worse for those who leave for a different job and leave the scheme completely.

I don't personally think that it is good to pay people extra money into their pension pot/benefits for all their past years of service based on a pay rise today because I don't think that's a very fair system. Career average systems are a bit more generous to the more normal employees than the high flyers because they reduce the amount added by later pay rises. They also reduce the penalty for changing job.

But I'd still rather see everyone on defined contribution schemes, so it's easier to move around between jobs in public and private sector. If desired, the public sector could keep the higher level of employee payments into the scheme, though in the private sector the companies reduced theirs when they switched.

To me, a final salary scheme looks like one worked out by a boss to make them better off than the employees, since they are likely to be making more money and getting the extra benefits for all of their past years.

RichandJ

vivatifosi wrote: »

Taking politics out of the situation for a moment, the cost of providing a DB scheme has increased massively over the years. Back in the 90s it was not uncommon for companies to be able to put the same amount into a DB scheme as they do into a DC scheme now (6-7%), they could even take pensions holidays. By the early 2000s the cost of employer contribution in DB schemes had practically doubled and they've gone up since then. For the schemes that I know well, the cost to the employer has gone up from 7%, to 12% to 18%.

The reasons for this are complex. First it is fair to say that investment returns have not performed as we would have liked. Second, people are living longer and pension trustees have to by law be conservative in their view on mortality: in effect this means anticipating paying their scheme members over a long period of time, thus increasing the deficit. Then we have the fact that the way schemes are calculated as being "in deficit" have become stricter. This is by and large a good thing, but it means that schemes that may not have appeared to have a deficit under the previous methodology now have one which they have to reduce. Also, when a government performs a raid on pensions, such as the removal of tax relief on dividend income, this also has an impact on the amount you can expect in. Finally, when you have a time of low investment returns and high inflation, it costs more to provide pensions as you have factored in an increase of say 2.00% for your pensioners and then a figure of double that rocks up and throws out all of your calculations. These are the facts that private schemes have to deal with.

I'd also say that moving to a career average scheme is not necessarily a bad thing. It increases flexibility. In final salary schemes people who suddenly in their late 50s or early 60s find themselves with caring responsibilities cannot easily reduce their hours without impacting their pension at retirement. With a career average scheme the impact is less marked.

As a trustee, I believe strongly that accrued benefits are sacrosanct and should not be played with. I don't like the shift to CPI where RPI has been promised on accrued amounts as I think that crosses that line, however I do accept - as both a trustee of a private scheme and a public sector worker - that the current system is not economically viable and does need to be changed. I have no problem with a) higher contributions going forward, b) average salary schemes or c) CPI being used as an inflation measure going forward providing the benefits accrued to this point remain unchanged.

Some of mine pay 30%+, on top of employee conts and deficit reduction conts.

DB schemes are expensive, a lot of people don't realise quite how expensive.

vivatifosi

RichandJ wrote: »

Some of mine pay 30%+, on top of employee conts and deficit reduction conts.

DB schemes are expensive, a lot of people don't realise quite how expensive.

Wow that's scary. The 18% was exclusive of deficit reduction conts as they aren't as easy to calc per member due to defereds etc. I think there is a very real disconnect between people's perception of pension entitlement and their understanding of how much the organisation is putting in on their behalf. Oh to go back to the good old days...

LydiaJ

Graham_Devon wrote: »

As has already been stated, you don't get police, teachers, MPs etc in the private sector.

Yes, you do get teachers in the private sector, and they get pretty much the same salaries as state school teachers. Some independent schools pay less than the state sector, quite a lot of them pay slightly more - perhaps 5% more, or absolute max 10% more, and that's mostly the boarding schools with lots of evening duties, Saturday teaching etc.

At the moment, teachers in almost all kinds of schools (state and independent) are eligible to join the same public Teachers' Pension Scheme. Hutton doesn't want independent school teachers to be in the TPS any more. It's not yet clear whether he wants to kick out the ones who are already in, or just not let new ones enter. If this goes ahead, there will be much less movement of staff between sectors, and the private schools will have to put salaries up to remain competitive on recruitment. Then the fees will go up.

Putting increased fees together with the squeeze on disposable incomes that we are already seeing will result in children (possibly a lot of children) ending up in state schools who wouldn't otherwise have been. Expect more headlines about inadequate numbers of school places (especially in London), kids having to be bussed to schools miles away, overcrowding in state schools, squeeze on public money to open up places for these extra children, etc.

grizzly1911 wrote: »

So if that is average there will some with none, don't forget there are also a lot of part timers across council roles too so they will be pro rata.

<snip>

Pretty certain that contribution doesn't count, it is years service in final salary. If you work partime in the interim then that will factor it down, as will taking a lower paid job towards the end of your career, perhaps taking a lower stress job.

Yes. For those who don't know how this is calculated....
Working part time counts as accruing part of a year's service at the whole salary of which you are being paid pro-rata. So, if the salary for your grade is £25k and you get paid £15k for doing a 0.6FTE job, you are considered to have worked 0.6 of a year at £25k, not a whole year at £15k.

grizzly1911 wrote: »

Thatcher planned the second miners attack with military precision, ensuring coal was stock piled in advance to "starve" them out.

I wonder if Camerons henchmen have the same level of fore site?

It's a bit difficult to stockpile midwifery services. The same goes for many other public sector jobs.

[In case anyone feels it's relevant to their interpretation of my post to know what my own pension arrangements are, here are the details:
I am currently drawing widow's pensions from two pension schemes, one public and one private sector.
I also have two pensions of my own, again one public and one private sector, which will pay out when I retire, which I expect to do at the state pension age, currently predicted to be 67 for my age group.]

jamesd

LydiaJ wrote: »

Hutton doesn't want independent school teachers to be in the TPS any more. ... If this goes ahead, there will be much less movement of staff between sectors, and the private schools will have to put salaries up to remain competitive on recruitment. Then the fees will go up.

No need for the fees to go up. At the moment the schools are paying more money into TPS in the form of higher employer contributions. They could just switch from paying that into the TPS to paying it as salary and add 15-25% to salaries with no extra cost. Or they could pay less and cut the fees.