Public v Private Sector Pensions

BobQ

BillJones wrote: »

Public sector workers get something of the order 20% more in salary and benefits than the equivalent level of role in the private sector. If you are in a role with an equivalent public sector job available, then it makes sennse to consider this, and look at a public sector job.

On the flip side, public sector jobs tend to be more heavily clustered at the lower end of the scale, so it's close to impossible to find an "equivalent" job if you are a high-flying professional. A friend has just moved from barristing to public prosecuting, and sespite an appparent large pay cut, will be far better off when the overall package is lokoed at. His wife is staying in private practice in a similar job, so that they staill have the possibility of one of them earning very serious money, while the other is guaranteed a pretty decent level and security of job.

My perception from civil servants I know is that those doing very basic clerical work are paid less than the private sector (but the pension does make up for this). Those in the junior management roles (eg Executive Officer) are fairly well paid allowing for the pension but that those in professional and higher management/ professional jobs are poorly paid compared with equivalent private sector jobs.

There is always a legitimate argument to be had about which jobs ought to be public sector and which private. However, in my lifetime it has usually been the case that in a depressed market public sector salaries seem relatively high and in times of growth they seem low.

I agree the pension reforms are necessary, but it will have some interesting consequences in the future. The senior civil service will no longer be comprised of career civil servants who accept low salaries for the responsibilities carried because of a very general FS pension, so they will increasingly join the civil service for the contacts and knowledge of how Government works and then leave much as people swop jobs in the private sector. The only way of stopping this will be to pay higher salaries. The other impact will be that senior civil servants will lose the concept of loyalty and be more self serving. This does have pros and cons but the interchange of jobs may not be in the public interest.

BobQ

Drp8713 wrote: »

I agree that inflation will have an effect on the spending power of the pension.

Its that everyone was questioning how somebody on 23k could end up with a 22k pension, but with the CARE schemes linked to CPI and probably with a salary increase assumption in the estimate, it is possible if you are young enough

Whole point of CARE is that the pension earned each year buys the same at retirement as it did when it was earned.

BobQ

Thrugelmir wrote: »

At 4% drawdown rate that's a final pension pot of £550k. How many individuals build a pot that size? Let alone have it index linked with no risk,

Just had my NUVOS statement for last year and accrued pensions have been uprated by 2.7%! A nice bonus in this low interest rate environment.

No complaints about my employers contribution of 26%.

Realise that it's not going to last so have been buying additional contributions while maintaining investment in my SIPP.

Well if your employer is paying 26% you must be paid over £75K so you can probably afford to dump it in a SIPP!:)

Sadly the OP's friend benefits from a more modest employees contribution. around 18%, which is I agree still very generous.

BeansOnToast_2

I'm in a private sector final salary scheme, with a projected pension based on current salary of about £27k. That assumes I stay there and the scheme stays open for another 11 years.

If it were to close now and I don't take my pension until I'm 65, I'd get £20k, not counting any inflation uprating.

So I'm quite fortunate.

Thrugelmir

BobQ wrote: »

Well if your employer is paying 26% you must be paid over £75K so you can probably afford to dump it in a SIPP!:)

Just a very generous part of the Civil Service.

Contribution levels are the same for all grades. Even those on £14k a year.

kidmugsy

spock007 wrote: »

... I just don't see how we can afford public sector pensions. The whole thing seems unaffordable and to be honest, pretty unfair!

Nothing unfair about it: it's contractual - the only unfairness would be if the accrued benefits were not honoured.

A better question is whether it is wise. Of course it isn't. Move 'em all onto DC for the future. And if that doesn't prove good enough to attract and retain staff, then pay 'em more. My guess is that across most of the country there wouldn't be the least need to pay the generality of employees more, but there are bound to be pockets of expertise where you'd need to, and particular places. No government would have the spine to do it of course.

Thrugelmir

hugheskevi wrote: »

With following assumptions:

3% salary growth p/a
2% CPI
5% nominal return
£20,000 starting salary at age 21

Then to get £550,000 in today's CPI terms a contribution rate of 25% (employer, employee and tax relief combined) is needed.

Those assumptions are quite pessimistic - £20,000 starting salary is fairly low for someone starting out at 21, 5% nominal return is historically low, and a lifetime of salary growth only 1% above CPI (so pretty much flat relative to RPI) is unlikely.

For the majority these are optimistic assumptions. I would say not the norm in the roller coaster of life. Jobs for life ceased some years ago.

Thrugelmir

kidmugsy wrote: »

Nothing unfair about it: it's contractual - the only unfairness would be if the accrued benefits were not honoured.

A better question is whether it is wise. Of course it isn't. Move 'em all onto DC for the future. And if that doesn't prove good enough to attract and retain staff, then pay 'em more. My guess is that across most of the country there wouldn't be the least need to pay the generality of employees more, but there are bound to be pockets of expertise where you'd need to, and particular places. No government would have the spine to do it of course.

The squeeze is being applied have no concern about that. Making the Civil Service "Fit For Purpose" is the current agenda. Tomorrows strike action is in a sense a response to the pain being inflicted.

Your_Hero

hugheskevi wrote: »

With following assumptions:

3% salary growth p/a
2% CPI
5% nominal return
£20,000 starting salary at age 21

Then to get £550,000 in today's CPI terms a contribution rate of 25% (employer, employee and tax relief combined) is needed.

Those assumptions are quite pessimistic - £20,000 starting salary is fairly low for someone starting out at 21, 5% nominal return is historically low, and a lifetime of salary growth only 1% above CPI (so pretty much flat relative to RPI) is unlikely. If salary sacrifice is available it gets even easier.

Despite the extremely cautious assumptions, the contribution rate needed is only 25% of salary. If the employer sorts out 10% of that, then an employee contribution of 12% is needed, plus basic rate relief. That is very achievable.

Kept its value relative to CPI, eroded in value relative to RPI, enhanced its value relative to earnings.

But far, far behind the returns from vast majority of DC pensions in recent years - presumably your SIPP returns are much better.

That rate is for Prison Officers with reserved rights (pre-Fresh Start), but I didn't think any of them were in nuvos?

Whilst I appreciate the optimism in your post, it is fair to say that your assumptions are extremely unrealistic. There aren't many people who can afford to pay 25% (employer and employee combined) into their pension pot. A 3% salary increase every year is probably unrealistic too - many people do not even have wage rises that keep up with inflation. Also, the inflation rate is normally assumed at 2.5%.

All these factors would mean that saving £550,000 pension is unrealistic dream for most individuals. It is possible, but only for a very very small minority. The average pension pot in the UK is £30,000. I think that says a lot.

Auto-enrolment ought to help, but even when AE is at full steam in 2018, employer only have to contribute 3%, with a total contribution rate (employer, employee and tax relief combined) is only 8%.

Backbiter

Your_Hero wrote: »

The average pension pot in the UK is £30,000. I think that says a lot.

What is says is that most people have simply neglected to make adequate provision for their retirement.
It also says that averages are fairly meaningless, when they will include the pension pots of those who are in the early stages of their working lives and will not yet have built up a decent pension pot, which takes decades.
If the £30k figure were the average of those close to retirement, it would mean they could look forward to an annual pension of around £2000 a year, or £40 a week. If they have been making pension contributions for 40 years to build up that fund, they must have been minuscule.