Private sector pension contribution rates

FatherAbraham

jem16 wrote: »

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

You're quite right, it should be 35.77%, rather than 33%.

I mistakenly used annual compounding at 2.5%p.a., rather than monthly compounding at that rate. Sorry for this blunder.

Furthermore, I was wrong to suggest that a private-sector worker making such contributions would then also have to pay for the public-sector workers' pensions: that was double-counting. Paying for the public-sector pensions falls upon all taxpayers, equally including those in receipt of the benefits.

I also said that the FCA has been replaced by the FSA: of course, it's the other way around.

Warmest regards,
FA

FatherAbraham

jem16 wrote: »

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.

These figures are pretty much useless for reasoning from. Firstly, we don't know whether the jobs he was actually offered were the best he could have done. There might've been a £50k private-sector job which he could've got, but wasn't aware of (this would strengthen your figures). There might've been a £40k public-sector job he could've got, but wasn't aware of (this would weaken your figures). His personal experience is too random to generalize in a statistically meaningful way.

Furthermore, it's unclear whether these two were "equivalent" jobs. Public-sector and private-sector jobs tend to be different in nature (of course they are: the two sectors are complementary, and we need both), so it's hard to make direct comparisons in any case.

Instructive is a post from the Touchstone blog (from the TUC), which was attempting to debunk questionable statistical claims that public-sector pay is higher than private-sector pay (see Nigel Stanley's http://touchstoneblog.org.uk/2009/12/more-about-public-versus-private-sector-pay).

The figures cited there attempt to deal with the difficulty of comparing public- and private-sector job content by using worker-educational level as a proxy (which the writer acknowledges is not perfect, but it gives some more insight than a flat overall average.)

Those figures show that graduate jobs pay 3.4% less in the public sector, higher-educated jobs pay 6.2% less, at A-level the different is zero, and at GCSE, public sectors pays 4.9% more than private sector.

We still don't know that these are equivalent jobs, of course. Terms and conditions will differ, the content and demands of the work will differ, and private sector jobs are almost always riskier than public-sector jobs.

With a shadow of a doubt, anyone trying argue that the public sector job you mention, paying 22% less than the private-sector job, shows us a generalizable different between pay rates in the two sectors is making a totally bogus argument.

The original poster also compared two specific jobs, but of course, we can't know without much more detail whether the private-sector job is a "bigger" (more responsibility, or more hours) job, or a riskier job (less job security) than the public-sector one, or indeed vice-versa.

What the OP did say was that the comparison was £45k to £40k, so the public-sector job is paying 11% less on salary. Given the pensions contribs figures the OP cited alone, the public-sector job is significantly better remunerated, if the two jobs are of equivalent utility-cost to him/her.

There were a couple of technical errors (but these are not as important as the inadmissibility, as a generalizable argument, of the specific job salary comparison you cited):

jem16 wrote: »

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.

This looks wrong. In the £35k job, he pays 9.6% pension contribs, leaving him £31640. In the £45k job, he pays 11% pension contribs, leaving him £40050. The difference between those two residual gross salaries is £8410, not £9370.

jem16 wrote: »

£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.

This is totally bogus. The difference you cite is between two gross salaries. There's no tax relief available -- it's gross pay, not net pay, so tax has never been paid on it in the first place. You're double-counting here.

Warmest regards,
FA

jem16

richyggg wrote: »

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+).

Yes you're quite correct. My mistake - sorry. Thanks for pointing it out.

Reworked figures based on £9370 would give a total pot of £544,155 which at 2.8% annuity rate would give a pension of £15,236. When added to the £14,850 would give £30,086.

Still pretty good.

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

Yes it's for the same job. I agree with the incentives to get you with private firms. One of the other firms that offered him a job were prepared to offer an extra £5k to get him. He decided against them as the total package was better elsewhere. Since joining his new firm he's already had an increase in salary, an annual bonus payment and a company car allowance.

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).

I'm with you now. This can be a benefit although its not always a good idea to combine them.

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.

Yes it would although it would need to include all the benefits and not just the headline rate of salary and pension.

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.

Did that include an automatic lump sum or not? I'm on the 1/2 scheme with an automatic lump sum. This is the same as the current 2/3 with no lump sum.

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).

How much is your employer paying?

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

With it changing to a career average and state retirement age scheme, he wasn't interested in working to at least age 68. With the DC pension he can choose to retire when he feels he has a big enough pot without suffering the actuarial reduction that a DB pension has to endure.

He's going down the route of using only half of his extra salary at the moment whilst he also saves for a larger house. Later on he can divert more into his retirement savings, be it for annuity purchase or more likely drawdown. I suspect he will also use S&S ISAs to give more flexibility.

jem16

FatherAbraham wrote: »

These figures are pretty much useless for reasoning from. Firstly, we don't know whether the jobs he was actually offered were the best he could have done. There might've been a £50k private-sector job which he could've got, but wasn't aware of (this would strengthen your figures). There might've been a £40k public-sector job he could've got, but wasn't aware of (this would weaken your figures). His personal experience is too random to generalize in a statistically meaningful way.

Of course it is. That's why it's also meaningless to generalise that a public sector defined benefit pension is always miles better.

With a shadow of a doubt, anyone trying argue that the public sector job you mention, paying 22% less than the private-sector job, shows us a generalizable different between pay rates in the two sectors is making a totally bogus argument.

Now you've got it. The 2 jobs cannot simply be compared in an emotive statement of evil public sector pensions. We have to take many other things into account too.

What the OP did say was that the comparison was £45k to £40k, so the public-sector job is paying 11% less on salary. Given the pensions contribs figures the OP cited alone, the public-sector job is significantly better remunerated, if the two jobs are of equivalent utility-cost to him/her.

In the OP's case yes. In all such cases no as we have finally concluded.

This looks wrong. In the £35k job, he pays 9.6% pension contribs, leaving him £31640. In the £45k job, he pays 11% pension contribs, leaving him £40050. The difference between those two residual gross salaries is £8410, not £9370.

You're correct. I had worked out the difference in pension payments between 9.6% and 11.5% of £45k as opposed to the difference in salaries. My mistake.

This is totally bogus. The difference you cite is between two gross salaries. There's no tax relief available -- it's gross pay, not net pay, so tax has never been paid on it in the first place. You're double-counting here.

Yes you're correct. I have corrected that too. Thank you to richyggg for pointing it out.

So £8140 gives a total pot of £488,404 and a pension of £13,675. Added to the £14,850 gives £28,525.

richyggg

Did that include an automatic lump sum or not? I'm on the 1/2 scheme with an automatic lump sum. This is the same as the current 2/3 with no lump sum.

No lump sum with the 2/5ths DB pension. £4K/pa at 65. It is highly probable that the fund is exhausted before I retire.

How much is your employer paying?

Current employer is paying 10%.

With the DC pension he can choose to retire when he feels he has a big enough pot

Same here. 55 would be nice. You need £1 million in the pot for £24K at 65. How much at 55 ?

Good luck to your son.

jem16

richyggg wrote: »

No lump sum with the 2/5ths DB pension. £4K/pa at 65. It is highly probable that the fund is exhausted before I retire.

Hopefully the Pension Protection Fund would at least step in in such an eventuality.

Current employer is paying 10%.

That's not too bad.

Same here. 55 would be nice. You need £1 million in the pot for £24K at 65. How much at 55 ?

That would be an annuity rate of 2.4%. That seems rather low for age 65. Of course why use an annuity at all?

Good luck to your son.

Thanks. I hope your retirement plans work out too.

richyggg

I will be using drawdown, S&S ISAs and anything else I can think of to secure a decent retirement pension (£15K!) , at an age when I am not too decrepit hopefully. I am having to channel as much of my salary as I can to do this, and even then, no guarantee.

Meanwhile in a 2/3 DB index linked public sector scheme ... no retirement funding worries .. spend now, no need to squirrel away.

That is the main difference .. complete peace of mind.

hyubh

richyggg wrote: »

It is highly probable that the fund is exhausted before I retire.

Is that how it works? I don't know, genuine question - a non-public sector employer in the LGPS (be it a contractor, housing assocation, private school, whatever...) isn't able to just 'exhaust' its contributions for historical liabilities, and the funds at large have to have long-term recovery plans, if applicable.

richyggg

AFAIK -

If a DB pension fund is closed, there are no further contributions to it.
There should be some investment growth. As more beneficiaries retire, the fund will start to shrink.

The LGPS fund will be topped up/underwritten by taxpayers, so will always pay out. (Unless there is a taxpayers revolt!)

Who tops up the private scheme ? What if the company does not exist, has been taken over ... so no-one .. unfortunately it is not underwritten by the taxpayer.

jem16

richyggg wrote: »

I am having to channel as much of my salary as I can to do this, and even then, no guarantee.

So how much are you paying and what percentage does that equate to?

I'm currently paying £6,200pa into my public sector pension to hopefully get to £15kpa at age 60.

Meanwhile in a 2/3 DB index linked public sector scheme ... no retirement funding worries .. spend now, no need to squirrel away.

However my son can afford to squirrel away and still have as much as me to spend.

That is the main difference .. complete peace of mind.

The pension is at least guaranteed - for me this has always been the selling point of a public sector job but for me it has also been at a lesser pay than what I could have got teaching in an independent school.

However anyone joining today is being faced with a retirement age that is continually rising - how do you plan for that? What I thought would be an RPI index-linked pension has become a CPI index-linked pension and contributions rates have gone up by 50% in 3 years.

Out of interest - why did you choose to work in the private sector if the public sector seems to give you all that you desire? Genuine question - for me it was job security.