Private sector pension contribution rates

BobQ

FatherAbraham wrote: »

Here's one example, relevant to several LGPS members I'm acquainted with, whose jobs were declared redundant last financial year: those over 55 were granted additional years of pension rights, in addition to the cash compensation for having lost their employment.
http://www.unison.org.uk/acrobat/18124_FightingRedun_Pack_LGpensionScheme.pdf)

............

The LGPS is based on a "real" pension fund and may well still do as you say.

I think the days of generous enhancements to most public sector pensions on redundancy are over. When I was in the civil service 30 years ago I recall examples of people in their early 50s getting very generous exit packages (up to 6 years as I recall) which enhanced their pensions to what they would have got on retirement at 60. ( I seem to recall some private sector DB schemes in those days offered some good inducements to retire early too).

I agree that there are still cases of medical retirement in the public sector that enhance pensions but the rules are much tighter I am told and are based on medical opinion that the person will never be able to work again. Redundancy payments are still reasonably generous but not on the scale of the past.

Others have suggested that the public sector employer contributions are nominal and can be ignored. This is not entirely fair.

First (as the example quoted by the OP shows) he is paid less than a comparable private sector job but about the same when you allow for the pension. Its always been the case that the public service have adopted this way of paying its staff. When I was in the civil service 30 years ago, the employer contribution was worth 7-8% and the salary differential was about the same. Now I agree the pension is worth a lot more.

Second, future public sector pensions will all be career average schemes with higher employee contributions which is only fair. The civil service introduced this for new staff in about 2006. But there is a provision in the schemes that means that if there is an actuarial assessment that the employer's contribution needs to rise above a stated cap in order to maintain benefits then either this will happen or benefits will be reduced. So the contribution is not nominal.

The fact is that public sector pensions will reduce in cost over the coming years and the increased contributions will make this happen even sooner. The continued criticism of public sector workers these days is quite disgraceful. The OP in the private sector is viewed by some as a burden on the nation. As soon as he moves to the private sector he is viewed by the same people as not being a burden. But he is doing much the same job.

FatherAbraham

jem16 wrote: »

Ill-health retirement is not as easy to get as you seem to be inferring. It's not simply a case of stopping work and saying you are too ill to work any more. Many have had to stop work and been refused access to their pensions as medical opinion states that whilst they may be unable to work at the moment, they cannot say for sure that they will never be able to work.

Easy to get or not -- it's still a possibility within the public-sector schemes, as is enhanced pension on redundancy, at all salary levels. These are not possibilities within private-sector defined-contribution schemes.

The original poster needs to price this benefit into his/her decision, somehow. The relevant question is the difference between a public-sector DB scheme and a private-sector DC scheme. If you're claiming that the OP should price the public-sector benefit as worthless, then I think you're giving very bad advice indeed.

jem16 wrote: »

Also in most cases, there are different tiers of ill-health retirement with the most common one offering no financial incentive never mind a "massive" one.

Enhanced early retirement is a massive benefit. See hugheskevi's post at 03-05-2013 8:55 PM for a calculation of the price of extra years of retirement benefit when older (38% of salary from the employer for a year just before 65 -- but that wasn't talking about early retirement, so it won't have included the employee contribs which are also granted on early retirement).

jem16 wrote: »

This seems to be the argument trotted out over and over again by those not in the public sector - ie we're paying for your pension.

What seems to be forgotten is that the same is true for every occupational pension scheme. They are all paid for by people buying/using the services of the firms.

What private-sector occupational schemes? There are hardly any left now.

In the private sector, the liability for the pension scheme falls upon the company, that is to say, the shareholders, or owners of the business.

In the public sector, the liability for the pension scheme falls upon the taxpayers.

Just as shareholders in private-sector schemes have closed or removed excessive pension benefits for employees, so taxpayers like me are demanding the closure of excessively-generous public-sector schemes, which we do not wish to fund any more. They are an expensive waste of money, since there's no competitive threat from private-sector employers who might lure public-sector employees away with better benefits.

jem16 wrote: »

So let's all unite and have a race to the bottom - see who gets there first!

People in private-sector DC schemes are already there, and we're sick of ripped off by public-sector workers being excessively remunerated. It's time we stopped paying for the excessive pensions of the public-sector elite.

Warmest regards,
FA

jem16

FatherAbraham wrote: »

These are not possibilities within private-sector defined-contribution schemes.

As I said, the redundancy payout of private sector workers is often higher.

If you're claiming that the OP should price the public-sector benefit as worthless, then I think you're giving very bad advice indeed.

Not completely worthless but not one I'd make a decision on as it's becoming more and more difficult to obtain ill-health retirement.

Enhanced early retirement is a massive benefit.

Which very few actually get.

What private-sector occupational schemes? There are hardly any left now.

You seem to be under the misapprehension that an occupational scheme is a defined benefit scheme. An occupational pension is a pension where the company contributes - it can be defined benefit or defined contribution. With the introduction of NEST all employers must soon offer a pension.

http://www.pensionsorter.co.uk/occupational_pensions.cfm

In the private sector, the liability for the pension scheme falls upon the company, that is to say, the shareholders, or owners of the business.

Of course. Where will the shareholders or owners get the money? From the profits built up by people buying/using their service of course.

In the public sector, the liability for the pension scheme falls upon the taxpayers.

Naturally as the shareholders are the taxpayers.

The only difference between the two is that private sector is run to make a profit and the public sector isn't. I'm sure you are not advocating that public sector services are run to make a profit?

They are an expensive waste of money, since there's no competitive threat from private-sector employers who might lure public-sector employees away with better benefits.

In some cases there are. Most of the higher qualified public servants would make more money in the private sector. As a teacher I can get more money in an independent school and still have access to the same Teachers' Pension Scheme.

People in private-sector DC schemes are already there, and we're sick of ripped off by public-sector workers being excessively remunerated. It's time we stopped paying for the excessive pensions of the public-sector elite.

Warmest regards,
FA

Not all private sector schemes are there.

Some do still pay good employer contributions. My 29 year old son earns £10k more than me now and his pension scheme pays 11% if he pays 11%.

He recently moved jobs due to redundancy and the previous pension scheme was non-contributory with an employer contribution of 6%. If he paid 5% then they matched that 5% so a total employer contribution of 11%. The closer he got to retirement the more the employer paid. He also got private health care and access to numerous other benefits for a very much reduced premium, none of which a public sector worker gets.

As to redundancy pay he walked away with 6 months pay instead of the normal 6 weeks pay. I would have got less than him even with 32 years service and being much older.

It's not all doom and gloom in the private sector.

JoeCrystal

jem16 wrote: »

It's not all doom and gloom in the private sector.

Ha, your son's old company must be one of the very rare good employer. I doubt it will apply to most companies in the country though.

Cheers,
Joe

jem16

JoeCrystal wrote: »

Ha, your son's old company must be one of the very rare good employer. I doubt it will apply to most companies in the country though.

Cheers,
Joe

No idea but that's his previous company and present company both with good pension packages, albeit defined contribution. 2 other companies he had interviews with - one was 5% employer contributions and one was final salary.

He must be lucky.

JoeCrystal

jem16 wrote: »

He must be lucky.

Very. To be frank, if I was looking for another job, I would most certainly take pension scheme into account. My own employer fares... Poorly in comparison to most companies.

Cheers,
Joe.

FatherAbraham

jem16 wrote: »

Not all private sector schemes are there.

Some do still pay good employer contributions. My 29 year old son earns £10k more than me now and his pension scheme pays 11% if he pays 11%.

I agree with you, that an 11% employer contribution is very good for a private-sector DC scheme.

Now let's compare it with a 29-year-old who's in a public-sector defined-benefit scheme (we can assume 0% income growth in real terms for the sake of discussion). I'll try to show the working, without getting too boring, to ensure that everyone can review what I've calculated. We need not really consider what the 29-year-old has done beforehand, the past is unchangeable.

At 29, there are still 36 years to go, in order to reach typical scheme retirement age of 65, when an index-linked pension with 50% survivor benefits will be granted..

During those 36 years, the member will accumulate 36/60 of scheme salary, or 60%.

Now consider a DC member who would like to achieve that same 60%, index-linked, 50%-survivor-benefits pension at 65.

The annuity rate for such a pension is currently about 2.8% (source: http://www.pensionchoices.com/annuity-rates/index-linked-annuity-rates/), so to get to 60% of salary, a pot size of 21.43 times the current salary will be needed (since 2.8% of 21.43 is 0.6, or 60%).

There are 36 years to accumulate this pot size. Latest FCA (now replaced by FSA) advice for pensions illustrations is to use a mid-range real return rate of 2.5% (that's 5% nominal, less 2.5% inflation).

Using the regular-contributions compound-interest formula found at http://plus.maths.org/content/have-we-caught-your-interest (but there are many compound-interest calculators available on the internet for those who don't need to see the underlying maths), we can see that we must make a pension-fund contribution of 36% of salary each year to reach 21.43 times salary after 36 years at 2.5% return (since the total return is 58.73 times whatever the contribution is)..

In other words, even though we agree that your son's employer contribution of 11% is good, and his total contribution of 22% places him in a tiny minority of DC members who're contributing that much, his pension fund is going to be woefully in deficit with respect to achieving the kind of pension which public-sector, defined-benefit members think of as "normal".

His "high" level of contributions at 22% will actually give him a pension at 33% of "scheme salary", just over half of what the public-sector defined-benefit member will accrue.

You may wish to warn him that he's going to do very, very badly in comparison to public sector workers. Even worse, he'll be expected to be part of the taxpayer base which will be called upon to fill the public-sector pensions deficit (I appreciate that public-sector workers are also taxpayers, and will have to contribute, but they will be net winners). Your son loses twice -- and that's in a scheme which you thought of as good.

Really, is there any point in continuing this discussion? I've now shown you the black-and-white figures. If you still think that public-sector defined-benefit pensions are "fair", then there's no hope for you. I'm just very surprised that you would want to do hard-working people like your son down so badly, by supporting the continuation of these evil public-sector pension schemes.

jem16 wrote: »

It's not all doom and gloom in the private sector.

It's totally gloom and doom in the private sector. I don't think you have any idea what you're talking about.

Warmest regards,
FA

jem16

FatherAbraham wrote: »

You may wish to warn him that he's going to do very, very badly in comparison to public sector workers.

Fortunately my son is very into figures and spreadsheets. Even his friends make fun of him because he always has a spreadsheet for everything. He's quite capable of working out figures for himself.

So this is what went through his head when deciding amongst several jobs. What does my total remuneration package consist of? I have to include salary, pension plus benefits.

I'll not bore you with all the comparisons but stick to 2, one public sector and one private sector.

Public sector;

£35k salary with final salary (at the moment but due to change to career average) pension and no other benefits. Pension contribution currently 8.8% but due to rise next year to 9.6%.

Private sector;

£45k with 11% employer contribution provided 11% paid by employee. No other benefits but private health insurance soon to follow.

Taking your figures, which I'm sure are correct, this would mean a pension of £21,000 for public sector and £14,850 for private sector. Hey that's not fair comes the emotive statement!

But wait a minute, I need to think about the extra £10k salary that I'm getting. To be absolutely fair I'll call it an extra £9370 as an 11% contribution is higher than a 9.6% contribution.

Now I've got 3 options.

1. Pay the whole £9370 into a pension
2. Pay part of it into a pension and spend the rest
3. Spend all of it on wine, women and song

Lets' explore the whole lot into the pension just to be the same as the public sector.

£9370 becomes £11,712.50 after basic rate tax relief. I'll ignore higher rate tax relief as it's used on the 11% contribution. That makes a £976.04pm contribution which, if following your figures again of 2.%5 growth, gives a pot of £680,196 after 36 years.

£680,196 at 2.8% annuity rate gives £19,045.49.

So the private sector, comparing like for like, now has a pension of £33,895.49 and the public sector worker still has £21,000. Is that fairer?

Or how about half of that extra payment. Total pot would be £340,098 giving pension of £9522.74 so total of £24,372.74 and £4685 extra to spend every year for 36 years.

Really, is there any point in continuing this discussion?

No I don't think there is as you seem to be so wrapped up in the nasty, horrible public sector pension emotion that you are not thinking straight. Why else would you completely have ignored the extra £10k salary?

I've now shown you the black-and-white figures.

And I've shown you the "real" black-and-white comparison where total remuneration must be taken into account.

If you still think that public-sector defined-benefit pensions are "fair", then there's no hope for you. I'm just very surprised that you would want to do hard-working people like your son down so badly, by supporting the continuation of these evil public-sector pension schemes.

The problem is that it isn't so black-and-white as you make it out to be. Most higher qualified (and by that I mean higher education at either college level of university level) people can earn more in the private sector than in the public sector. The total remuneration package must be considered and not just the headline pension.

Fortunately my son and his spreadsheet looked at facts. Not unsurprisingly he chose the private sector.

Granted there are many of the lower paid public sector jobs where they cannot get a better remuneration package in the private sector - in fact many of those low paid jobs are actually farmed out to private sector companies so it's not altogether clear where the total liability lies.

It's totally gloom and doom in the private sector. I don't think you have any idea what you're talking about.

Warmest regards,
FA

I think I have but then I have looked at hard facts rather than raw emotion.

Warmest regards,

sharnad

FatherAbraham wrote: »

I agree with you, that an 11% employer contribution is very good for a private-sector DC scheme.

Now let's compare it with a 29-year-old who's in a public-sector defined-benefit scheme (we can assume 0% income growth in real terms for the sake of discussion). I'll try to show the working, without getting too boring, to ensure that everyone can review what I've calculated. We need not really consider what the 29-year-old has done beforehand, the past is unchangeable.

At 29, there are still 36 years to go, in order to reach typical scheme retirement age of 65, when an index-linked pension with 50% survivor benefits will be granted..

During those 36 years, the member will accumulate 36/60 of scheme salary, or 60%.

Now consider a DC member who would like to achieve that same 60%, index-linked, 50%-survivor-benefits pension at 65.

The annuity rate for such a pension is currently about 2.8% (source: http://www.pensionchoices.com/annuity-rates/index-linked-annuity-rates/), so to get to 60% of salary, a pot size of 21.43 times the current salary will be needed (since 2.8% of 21.43 is 0.6, or 60%).

There are 36 years to accumulate this pot size. Latest FCA (now replaced by FSA) advice for pensions illustrations is to use a mid-range real return rate of 2.5% (that's 5% nominal, less 2.5% inflation).

Using the regular-contributions compound-interest formula found at http://plus.maths.org/content/have-we-caught-your-interest (but there are many compound-interest calculators available on the internet for those who don't need to see the underlying maths), we can see that we must make a pension-fund contribution of 36% of salary each year to reach 21.43 times salary after 36 years at 2.5% return (since the total return is 58.73 times whatever the contribution is)..

In other words, even though we agree that your son's employer contribution of 11% is good, and his total contribution of 22% places him in a tiny minority of DC members who're contributing that much, his pension fund is going to be woefully in deficit with respect to achieving the kind of pension which public-sector, defined-benefit members think of as "normal".

His "high" level of contributions at 22% will actually give him a pension at 33% of "scheme salary", just over half of what the public-sector defined-benefit member will accrue.

You may wish to warn him that he's going to do very, very badly in comparison to public sector workers. Even worse, he'll be expected to be part of the taxpayer base which will be called upon to fill the public-sector pensions deficit (I appreciate that public-sector workers are also taxpayers, and will have to contribute, but they will be net winners). Your son loses twice -- and that's in a scheme which you thought of as good.

Really, is there any point in continuing this discussion? I've now shown you the black-and-white figures. If you still think that public-sector defined-benefit pensions are "fair", then there's no hope for you. I'm just very surprised that you would want to do hard-working people like your son down so badly, by supporting the continuation of these evil public-sector pension schemes.



It's totally gloom and doom in the private sector. I don't think you have any idea what you're talking about.

Warmest regards,
FA

your figures are incorrect

taktikback

well -the OP had a salary differential of £5k and 4 days less holiday - can a direct comparison between a job in the private sector and public sector really be £10k (or a 30% increase...)?. I can't help feeling that this has become an idealistic slugging match, where the data has got submerged. A typical public service contribution at 35k is 6.5-6.8%. The 11% private sector contribution is way more generous than average.

Whilst I don't necessarily subscribe to FA's comments that you don't know what you are talking about, I have to say it's way tougher in the private sector right now than you make out...