Civil Service Career Avg Pension - contribs higher than accrual?

MJ17_2

Hi all

I have been trying to find an answer to this in the documentation for my pension, but there seems to be a remarkable lack of transparency so I hoped someone here might be able to help.

I am part of the civil service alpha pension - I contribute 5.45% of my pensionable income annually, and my employer contribute I believe 20.9%

According to the paperwork, my pension is accrued at a rate of 2.32% of my pensionable income every year, tied to Treasury Orders (for inflation).

I had always been of the impression that in a defined benefit scheme, it is not as simple as me being entitled to the sum of my contributions/the employers - rather, this is the cost of being in the scheme and goes to support those already retired.

But by my reading, if I am contributing 5.45% of my income every year, but my pension is growing at a rate of 2.43% of my income, I am essentially losing out.

This doesn't seem right - can anyone help?

Many thanks

M

EDIT: I have had a cup of coffee and looked at this with a pair of fresh eyes(!) By the amount of pension accrued, does that mean the amount that is added to the size of my annual benefit from the date of retirement?

Silvertabby

You're making the classic mistake of comparing one year of contributions with just one year of pension accrued.

You don't say what your salary is, but let's say £30K.

Your 5.45% = £1635.00

In return, you get 2.32% of £30K which equals £696

£696.00 x number of years in retirement - let's say average of 20 years - = £13920.00

Not a bad return !

MJ17_2

Thanks Silvertabby, this is much appreciated - I understand now (I feel that pension schemes should make this a bit clearer in their documentation as at first I was convinced I was being scammed!)

I think I have already answered my own question with this but for clarity - I am on a graduate programme and so my salary rises in a defined way after 4 years.

Is there any additional 'magic' involved in calculating payout in this sort of scheme which takes a true average of earnings, or is it just the 2.32% of each years earnings (which sounds more like a 'career tracker' almost?)

TIA,

M

marlot

Try page 13 of this http://www.civilservicepensionscheme.org.uk/media/95349/alpha_fullschemeguide_colour_v3.pdf

If you think you can write some words which better describe how the benefits accrue, then please do - I'd love to have a copy! I coach apprentices and graduates - and they often struggle to understand the alpha concepts. I've found it best to do a worked example.

hyubh

MJ17 wrote: »

Is there any additional 'magic' involved in calculating payout in this sort of scheme which takes a true average of earnings

How is doing things on a yearly basis not a 'true average of earnings'...? In simple terms, if I take a list of figures and sum 2.32% of each one, I come to the same answer as if I summed the figures first then multiplied by 2.32%.

Silvertabby

I believe that the Civil Service Alpha is similar to the LGPS CARE scheme.

At the end of each year, the pension accrued is 'banked'. ie, in this case, 2.32% of the year's pensionable pay plus cost of living revaluation. The LGPS revaluation is the same as CPI, but the Civil Service may be more or less than that.

In theory, if you added all of your years together then 2.32% of that total sum would be your pension without revaluation - but as the revaluation figure is likely to be different for each year then the only way to do it is on a yearly basis.

ADD
Just Googled it and Alpha also uses CPI as the revaluation rate.

System

Hi

It seems to accrue on 1/43.

So join at 23 and by retirement age, (67) you will have the technical amount of 43/43 (and then some more perhaps). Looks like a full pension.

Indeed if you stayed in the same post, with no promotion, and got CPI equivalent pay rises it may be that you would achieve a 100% pension.

Does not seem right, either Morally or Mathematically and certainly not sustainable for the taxpayer. Beats the old 80ths scheme capped at 40 years into a cocked hat.

So where is my logic flawed?

Thrugelmir

Scheme will be capped as % of pay.

Silvertabby

For the majority of people (ie, the one's who don't start as the office apprentice and finish as the CEO) the revalued CARE schemes now offered by the Public Sector will actually result in higher pensions than the old final salary schemes.

Before I retired, we started an office 'book' on how long it would take for the penny to drop and for the schemes to be reined back.

Dazed_and_confused

Silvertabby

I'm in a similar scheme and am quite surprised at just how generous it is.

Yes I'm paying more but i still get automatic tax relief on the contributions and there's nothing much you can really do about paying the extra unless you want to stop contributing but I'm not that mad

Im also going to get a massive increase in State Pension as I will be able to increase my starting amount up to the new maximum. Again am paying a bit of extra NI for a few years but I'll get the extra state pension, hopefully, for a long time.

Extra £37.25 per WEEK for me

No automatic lump sum with the new bit of my works pension but it will only take me around 12-13 years to accrue the same pension as it took 20 years to accrue in my old scheme.

Some are clearly going to be getting more pension than wages, good riddance to the old 40/80 or 40/60 in the bad old days.

hugheskevi

Indeed if you stayed in the same post, with no promotion, and got CPI equivalent pay rises it may be that you would achieve a 100% pension.

Does not seem right, either Morally or Mathematically and certainly not sustainable for the taxpayer. Beats the old 80ths scheme capped at 40 years into a cocked hat.

So where is my logic flawed?

Remember that Normal Pension age=State Pension age, compared to Normal Pension age=60 in old final salary schemes. An 8 year actuarial reduction would see the pension reduced by a bit over 33%.

Member contributions are higher - 5.45% or 7.35% for most, compared to 1.5% or 3.5% prior to 2012.

The change from RPI to CPI indexation and revaluation was the big saving, knocking off something like about 15% of the value of the pension over a full retirement, and more for those who also have lower revaluation (ie early leavers, or some of those with pay increases below RPI)

Also earnings in the long run are expected to be 4.5% per year, and CPI 2%. That makes a huge difference over a long period.