Private sector pension contribution rates

jem16

taktikback wrote: »

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...)?.

Yes - the figures were real. Even a £5k difference in salary can make a big difference if you include it as part of the overall package. You can't just discount it as FA tried to.

A typical public service contribution at 35k is 6.5-6.8%.

I'm in the public sector earning just under that. My pension contributions are 8.8% going up to 9.6% next April. NHS is 9%. LGPS in Scotland would see a contribution rate of 9.5% now. I know they have fairly recently increased their contribution rates.

http://www.lgps.org.uk/lge/core/page.do?pageId=144543

The 11% private sector contribution is way more generous than average.

I'm not disputing that. As always it depends on the job.

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...

Yes I agree it probably is at the moment coming on the back of a recession (or two). However with the private sector there is always the chance (or even likelihood) that it will get better again, at least as far as salary levels are concerned. Public sector tends not to change very much.

No wish to get involved in a slugging match, idealistic or otherwise, but I do get a bit fed up of continually reading about public sector pension bashing.

taktikback

The Wiltshire LGPS contribution for £35k is 6.5%...and won't be changing in 2014 - I'm surprised that the Scottish LGPS is so much more, but there you go..

It isn't easy to compare like with like public to private in terms of salary...that's why everyone focuses on the pensions, which are easily comparable...and look very generous in the public sector...or more to the point look very sick in the private sector. Problem is - private sector has no protection against market forces - public sector is buffered from all of that - which is why people rage..

jem16

taktikback wrote: »

The Wiltshire LGPS contribution for £35k is 6.5%...and won't be changing in 2014 - I'm surprised that the Scottish LGPS is so much more, but there you go..

Very surprising when all other public sector contributions are around the 9% mark in England & Wales.

It isn't easy to compare like with like public to private in terms of salary...that's why everyone focuses on the pensions, which are easily comparable...and look very generous in the public sector...or more to the point look very sick in the private sector.

I agree it's not easy to compare if you don't know the salary. However if you go for a job you should be armed with all the information you need.

Problem is - private sector has no protection against market forces - public sector is buffered from all of that - which is why people rage..

I agree. Personally I would rather have defined benefit pensions. However people need to look a bit deeper before simply raging. Public sector may have protection against the market but it has no protection against government changes in RPI to CPI and increased retirement ages due to be in line with state pension age.

Of course I really should have knocked off 15% from the public sector pension I worked out earlier as £21k, as retiring 3 years early at age 65 would see an actuarial reduction. So that £21k should really be £17,850.

Plus 22% contribution of £45k is £9900pa or £825pm. Taking FA's figures of 2.5% growth would see a pot of £574,937. An annuity at 2.8% would give a pension of £16,098.24 so suddenly we're not so far off.

Not sure where FA got 33% from. I make that 35.77%.

hyubh

jem16 wrote: »

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.

In the LGPS at least, the usual thing is for the new employer to enter the pension fund concerned as an admitted body solely to protect the pension rights for the staff who transferred (TUPE and 'fair deal' legislation cause this). The historical liabilities then tend to remain with the old employer via a 'pass through' arrangement, though that is between the old and new employer - things don't have to be like that, so long as one side takes the liabilities on. The employer rate for the company is then determined against an estimated future service cost for the staff involved, and a few other things - it may be high (depends on the nature of the transferred staff, and the riskiness of the company), but (I can say, from experience) likely to leave the company with no final bill from the fund when their contract with the old employer ends, and perhaps even a surplus to be repaid.

Things are rather different for older admitted bodies though (e.g. housing associations and CABs), since in their case, they will have entered the LGPS before historical liabilities were considered an issue, and as such, will have a big fat liability against their name waiting to be paid off when their their final contributing member leaves or retires. Cue tabloid headlines about councils forcing CABs and 'local community groups' into liquidation - if they don't start appearing within the next few years, I will be surprised...

richyggg

jem16 wrote: »

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.




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?



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



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.



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

Warmest regards,

This is wrong. At final salary , there is a 10K differential is salaries. This is not the case for the preceeding 40 years, especially for the starting years. (not that the public sector worker would work for 40 years)

So the 680K pension pot is a complete fallacy.

In the private sector, you would work for quite a number of companies, so, even if you had a final salary pension, your final salary would not be multiplied by 40, only the number of years in your final job. You have a series of final salaries, each probably substantially smaller.

Whereas in the public sector, your final salary counts for 40 years.

Public sector pensions are very, very generous. You cannot get near them in the private sector (even if you have a defined benefit scheme, which you won't.)

jem16

richyggg wrote: »

This is wrong. At final salary , there is a 10K differential is salaries. This is not the case for the preceeding 40 years, especially for the starting years.

If you read my post (and the previous posts by FA) properly, you will see that we are not talking final salaries. We are talking about the £10k difference in salary at age 29 with 36 years to go. It is quite likely that the differential will grow. FA insisted that we should ignore what's happened before so I did.

(not that the public sector worker would work for 40 years)

No you're correct as the public sector worker would have to work from age 29 (the comparative age) till age 68. However we took 36 years for comparison purposes. Unfortunately the public sector worker won't be able to retire at age 65 without suffering an actuarial reduction so my initial figures for the public server worker were too generous.

So the 680K pension pot is a complete fallacy.

No it isn't - it's actually quite generous.

In the private sector, you would work for quite a number of companies, so, even if you had a final salary pension, your final salary would not be multiplied by 40, only the number of years in your final job. You have a series of final salaries, each probably substantially smaller.

Whereas in the public sector, your final salary counts for 40 years.

Public sector pensions are very, very generous. You cannot get near them in the private sector (even if you have a defined benefit scheme, which you won't.)

We weren't comparing private sector defined benefit pensions with public sector defined benefit pensions.

Once again though, you cannot look at pensions in isolation. You have to compare total remuneration - ie at least salary plus pension.

richyggg

jem16 wrote: »

If you read my post (and the previous posts by FA) properly, you will see that we are not talking final salaries. We are talking about the £10k difference in salary at age 29 with 36 years to go. It is quite likely that the differential will grow. FA insisted that we should ignore what's happened before so I did.



No you're correct as the public sector worker would have to work from age 29 (the comparative age) till age 68. However we took 36 years for comparison purposes. Unfortunately the public sector worker won't be able to retire at age 65 without suffering an actuarial reduction so my initial figures for the public server worker were too generous.




No it isn't - it's actually quite generous.



We weren't comparing private sector defined benefit pensions with public sector defined benefit pensions.

Once again though, you cannot look at pensions in isolation. You have to compare total remuneration - ie at least salary plus pension.

Ok, I didn't take into account your starting age.

However, why are you adding tax relief to the - the £9370 is not net of tax.

The differential of 10K at 29 is nowhere near realistic, so the extra 680K pot is still unachieveable.

My final point was to give a further reason , never usually mentioned - that public service years are deemed continuous, giving a maxed final salary pension.

I suspect that if the salary difference is fully 'invested' in a DC pension, then the pension may equal that of a public sector DB scheme, however the full risk of growth of the pension pot and future annuity rates is borne by the worker - the private sector worker.

jem16

richyggg wrote: »

However, why are you adding tax relief to the - the £9370 is not net of tax.

£10k is the difference in gross salaries. I adjusted it down to £9370 to take into account the extra contribution being made to the DC pension. If that was paid into a personal pension it would be a net payment and basic rate tax relief would be added.

The differential of 10K at 29 is nowhere near realistic, so the extra 680K pot is still unachieveable.

It was based on the real job offers that my son had. Whether or not that differential grows throughout his 36 years I can only guess but based on my own experience over the last 36 years, I would take a bet on it doing so.

The £680k figure was also based on 2.5% growth which I think might be a tad conservative (but we were trying to keep the comparisons equal) so no I don't think it's unachievable.

My final point was to give a further reason , never usually mentioned - that public service years are deemed continuous, giving a maxed final salary pension.

Not quite sure what point you're trying to make here?

I suspect that if the salary difference is fully 'invested' in a DC pension, then the pension may equal that of a public sector DB scheme, however the full risk of growth of the pension pot and future annuity rates is borne by the worker - the private sector worker.

How does £33,895 equal £21k?

I've shown the figures that would be achieved if the difference is fully invested - it's far greater.

I've also acknowledged the risk is borne by the worker - is it worth it for an extra £12k?

hugheskevi

There have been a lot of robust studies in public-private sector remuneration comparisons, such as this one by the IFS.

Whilst such studies inevitably contain many assumptions which may be disputed (and some will argue that there are few highly skilled public sector workers who could command a similar or higher remuneration in the private sector, else why wouldn't they have left) several common themes are usually present, and have been for several years (eg review senior salary review board reports):

• Lower skilled workers in the public sector have higher remuneration than comparably skilled individuals in the private sector
• Higher skilled public sector workers have lower remuneration than similar skilled workers in the private sector
• Due to (largely) national pay negotiation, the differences are exaggerated by regional wage differentials. Where pay is lowest, eg, parts of the north east, lower skilled public sector workers are remunerated significantly above comparable private sector workers. Whilst in London and the south east, higher skilled public sector workers have significantly lower remuneration than comparable private sector workers
• Recent pay freezes along with tiered pension contribution increases have tended to make the gap between highly skilled public sector and private sector workers larger.

richyggg

jem16 wrote: »

£10k is the difference in gross salaries. I adjusted it down to £9370 to take into account the extra contribution being made to the DC pension. If that was paid into a personal pension it would be a net payment and basic rate tax relief would be added.



It was based on the real job offers that my son had. Whether or not that differential grows throughout his 36 years I can only guess but based on my own experience over the last 36 years, I would take a bet on it doing so.

The £680k figure was also based on 2.5% growth which I think might be a tad conservative so no I don't think it's unachievable.



Not quite sure what point you're trying to make here?



How does £33,895 equal £21k?

I've shown the figures that would be achieved if the difference is fully invested - it's far greater.

I've also acknowledged the risk is borne by the worker - is it worth it for an extra £12k?

The difference is £9370 gross - so net of tax is what you have to pay into the pension - the tax is then rebated - back to £9370 going into the pot (not £11K+).

Is the 10K difference for the same job ? Private firms will often pay to get you in , and then suppress increases.

The point on public sector DB is that if you work in numerous local authorities for 40 years, and your final salary is x, then your pension could be 2/3 x. This is not the case if you work for numerous private companies (all with DB schemes).

It would be interesting to have a realistic figure for how much more you would have to earn to put in a DC scheme , to match a 2/3rds DB scheme.

As for me, my company DB scheme ended a couple of years ago. It was a meagre 2/5ths scheme, 7.5% contribution, and over 11 years I have accrued a 4K pension (it is based on my salary 2 years ago (not my eventual final salary), which increases with CPI capped at 5%). Assuming there is money left in the fund when I retire.

Now on a DC scheme, I am putting in 33% of my salary and maxing isas in order to try to have a decent pension (I am aiming for a modest 12K + state pension).

If I were your son, I would stick with the £35K + guaranteed 2/3rds DB pension.