Fairness pension

TH1878

i_was_taught_2b_cautious wrote: »

How were RPI to CPI increases allowed to happen?

Because RPI used the flawed arithmetic mean rather than the internationally recognised geometric mean.

Dird

hugheskevi wrote: »

Assume you are aged 25 and inflation is 2% each year...

Are you saying DC is better than DB (LGPS)? Staying on my current salary for 30 years at the same contribution% I'd contribute £76k towards the pension and receive £23k/year (I assume this rises with inflation?). After 3 years of retirement I'd have reclaimed my contributions (I guess more like 4/5 years assuming I have to pay tax on the 23k?) then essentially be making a "profit" on my contribution...given my chocolate biscuit obsession I might not reach pension age though
40 years = £101k contributed, £30k taken per year

hugheskevi

Are you saying DC is better than DB (LGPS)?

It is not as simple as as one being better than the other. In some circumstances a good DC scheme would be better than a particular DB scheme and vice-versa. The LGPS does not offer a DC alternative so it is a moot point, the question there is whether opting-out is better than the DB scheme and the answer to that will be that the LGPS pension is best in almost all cases.

The point of my comment was in response to the point that public service pensions are still generous to younger workers. The new variety of DB pensions, and particularly the Civil Service and LGPS pensions, are not particularly good for young members, and in many cases a high quality DC pension of the sort which may be typical from larger private sector employers would be expected to generate a better result.

Staying on my current salary for 30 years at the same contribution% I'd contribute £76k towards the pension and receive £23k/year (I assume this rises with inflation?).

This type of approach averages out the value over a working lifetime. The value of the LGPS pension is higher for older workers so to look at whether the scheme is good value for young members or not the value of an individual year of accrual needs to be examined. As the revaluation rate is the same whether a member is in employment or not (in most cases) it is quite straightforward to calculate how valuable the pension benefits accrued in an individual year are. The results of that calculation show that the pension is nothing special for young members, but very valuable for older members.

Andy_L

TH1878 wrote: »

Because RPI used the flawed arithmetic mean rather than the internationally recognised geometric mean.

In what way is the arithmetic mean flawed for inflation calculations?

TH1878

Andy_L wrote: »

In what way is the arithmetic mean flawed for inflation calculations?

Arithmetic mean overstates inflation and geometric mean is a better measure of inflation over multiple holding periods, i.e. Multiple years

Dird

hugheskevi wrote: »

This type of approach averages out the value over a working lifetime. The value of the LGPS pension is higher for older workers so to look at whether the scheme is good value for young members or not the value of an individual year of accrual needs to be examined.

Don't understand your meaning. When you say "young" do you mean someone simply with a few years of contributions (e.g. could be a 50 year old with a recent job change)? If so 3 years leads to £7.6k and £2.3k/year pension + inflation. So still about 4 years breakeven

BobQ

TH1878 wrote: »

Because RPI used the flawed arithmetic mean rather than the internationally recognised geometric mean.

In other words it was based on actual prices including housing costs, whereas the CPI ignored housing costs (not relevant to people's living standards) and a piece of trickery that enables them to take into account the fact that if you cannot afford to buy a branded item you will buy an own brand.

I grant you that CPI is used widely in the OECD nations but there is no mathematical justification for the change. It is just that mathematics has been used to sh@ft people.

BobQ

Dird wrote: »

Don't understand your meaning. When you say "young" do you mean someone simply with a few years of contributions (e.g. could be a 50 year old with a recent job change)? If so 3 years leads to £7.6k and £2.3k/year pension + inflation. So still about 4 years breakeven

Those over 50 in 2012 remain on the old schemes not the career average one.

One other factor is employer interference. When I was 20, most professional jobs (public or private) had a DB scheme, those that did not had a DC scheme with a large employers contribution. At the time I could not have foreseen the fact that when I came to retire many DB schemes would have been phased out. At that time I was a civil servant, but could not have foreseen that contribution rates would be 10% and the FS schemes being phased out. When I was 20 the investment risks faced by those with DC schemes seemed significant and created uncertainty as people approached retirement. Yet those retiring from the public sector today have also been hit by uncertainty as years of pay restraint have reduced the value of their FS.

My point is that younger employees today may find the attractiveness of an employers scheme to be very different by the time they retire so having a pension pot of their own might offer a better prospect.

hugheskevi

Don't understand your meaning. When you say "young" do you mean someone simply with a few years of contributions (e.g. could be a 50 year old with a recent job change)? If so 3 years leads to £7.6k and £2.3k/year pension + inflation. So still about 4 years breakeven

No, when I say young I mean someone who is not very old, ie those in their 20s. Length of service, date of joining, etc, is irrelevant to the value of CARE schemes where revaluation is the same for active and deferred members. Each year of accrual can be treated in isolation, as whether they choose to remain with the employer or go elsewhere does not lead to any difference in value of the accrued pension.

The young person in their 20s faces about 40 years of their pension increasing by CPI (expected 2%) which is significantly lower than expected investment returns in a DC scheme. The difference doesn't matter for someone in their 60s, but is of huge importance to someone with so many years to retirement.

Dird

OK so it's kind of like playing the stock market rather than settling for Santender's 3% AER. As my former colleague went off sick for 12-18 months with stress after his pension scheme collapsed I guess I'll be happy with "slow & steady"