Is the Teachers' Pension a good investment option?

hyubh

ValiantSon wrote: »

Irrelevant. That would advocate a rush to the bottom and purely be an argument based on vitriol and invective. "I can't get this, so nobody else should."

It's relevant in the context of suggesting that having to take FS and CARE benefits only at the same is not, in fact, 'outrageous', since there are far, far more negative things that could be done, looking at the private sector experience... Pumping up the rhetoric on trivial matters really doesn't help anyone.

Do you know for a fact that there are no savings?

Intuitively CARE in itself 'should' be a lot cheaper, however in practice the accrual rates of the public sector CARE schemes were all set higher than those of the FS schemes they replaced; moreover, transitional protections were (are) also excellent. On the flip side there is the higher NPA, and the mechanism for increasing the NPA retrospectively by linking it to the member's SPA. However, that's something that's only going to be of benefit longer term.

So you think that TPS members should pay more NI and have their TPS benefits reduced? Sorry, not following the logic.

Happy to explain: before the end of contracting-out, both TPS members and TPS employers paid a lower rate of NI because the only amount of State Second Pension (S2P) that TPS members could earn was the bit for the lowest earners (irrespective of contracting out) that Gordon Brown introduced.

When contracting out ceased, the full rate of NI now became applicable, with the flip side being that TPS members now earn the equivalent of S2P under the old system. However, all the public sector CARE schemes had been designed assuming contracting out was to continue, with the state pension being taken into account. As such, on the schemes' own terms, members are now over-pensioned, in effect: benefits should be slightly lower (since members' state pension entitlement will now be higher), with scheme contributions adjusted accordingly.

Why would this be unfair?

Basically, many members who will benefit from full increases on their GMP will get this at no cost to their state pension entitlement, whereas private sector schemes are providing full increases only at their discretion (and most will not). Since contracted-out deductions will no longer be applied to state pensions coming into payment, these transitional members will effectively get the same increase twice, if you look at matters from the point of view of when GMP was being accrued.

That said, there are technical reasons both why the government didn't have much choice here, and why many (though not all) private sector scheme members with GMP coming into payment under the new state pension are winners too. The main losers are amongst those who were contracted-in anyway.

Those [non-public sector] employers pay the employers' contributions and the members employed pay the members' contributions. So both are funding the scheme.

But only on a cash basis - there's no pensions liability that goes in their accounts, like would be so if they had their own DB scheme, or even if they just participated in the LGPS. The TPS from an employer's perspective is like a DC scheme, albeit a pretty generous one, despite in reality being an excellent DB scheme for the employee.

At the last valuation the scheme was self-funding, i.e. pensions in receipt were lower than contributions, so the exchequer was not paying anything out of general taxation.

Where did the vast majority of these contributions come from in the first place...? In principle the government could set the rate to zero for public sector employers, and instead deduct a figure from their budgets directly to cover pension payments going out.

Please explain. I'm unaware of anything untoward here.

Have a read through of this - a National Audit Office report from mid-2016 on the government's pension liabilities (it isn't a polemic):

https://www.nao.org.uk/wp-content/uploads/2016/06/Evaluating-the-government-balance-sheet-pensions.pdf

Beyond that, some hold the use of a CPI-based discount rate dubious (no private sector scheme could do the same), though the question of what is an appropriate basis for the discount rate of an unfunded public sector scheme has little consensus.

The requirement either requires that a member has to wait eight/three years longer for part of their pension from their NPA, or has to take actuarial reduction.

Remember that actuarial reductions for early payment, along with actuarial increases for late payments, are dealt with separately. So, if a member with final salary benefits takes their pension at their CARE benefits' NPA (which is higher), then their final salary benefits are actuarially increased. Conversely, if they take their pension at their final salary NPA, then only their CARE benefits are actuarially reduced.

This is unreasonable. There is no valid argument as to why members can't retire at NPA of 60/65 and take their final salary benefits and then at 68 take their career average benefits.

Why do the scheme's phased retirement options not suffice for the actual issue here?.

They would no longer be paying into the career average scheme, so they would not be accruing extra benefits. The whole decision is deliberately designed to either force teachers into working longer, or into taking actuarial reductions.

Again, that is missing the fact that phased retirement options exist - options that, I might add, did not exist when you first joined (the idea of taking one part of your pension while staying employed in the job that you earned it with is actually a relatively novel one).

No, it doesn't, because the final salary scheme is an entirely separate scheme, but that is also the point. As it is an entirely separate scheme [...]

This is patently false, given you maintain a final salary link for your pre-2015 service.

The benefits of the scheme were set out in the scheme rules, as were the contributions that members had to make to attain those benefits.

Yes: pension benefits were earned by virtue of being a member of the scheme, and one requirement of being a member was (and is) paying a contribution rate set by current scheme rules.

However, that doesn't mean contributions paid determined future benefits in any way. Moreover, it is not in your interests to claim otherwise, given even officially it is recognised that past contributions did not in fact represent the cost of benefits currently being paid out (the employer rate figure you've quoted yourself includes a percentage representing this, i.e. the 16.9% does not just represent the cost of pensions being earned now).

The government, therefore chose to end the scheme, rather than tinker with it.

Sorry, but this sort of rhetoric really doesn't help you. When a private sector DB scheme is said to 'end', it really does. Replacement of a generous final salary scheme with a generous CARE one is nowhere near a scenario of the same order.

The point you continue to miss (whether deliberately or not) is that at the last scheme valuation the TPS was cost neutral to the exchequer, with current contributions exceeding the liabilities of pensions in receipt.

Looking at a DB scheme purely on a cashflow basis is fundamentally wrongheaded. You need to consider the pension payments that will be required in the future, per promises already made and being made.

The money is treated as general taxation. The value of contributions currently received exceeds the cost of pensions currently in receipt. As there is no investment of the residual sum, it is used by the exchequer to pay for current government spending. You're just wrong about this.

See my point earlier about the potential for an employer rate of 0%. This would come to the same thing!

Why would members (who have any financial nouse) want to reduce pension benefits for greater net pay?

Hmm, I thought you were dead against making assumptions about personal financial circumstances...?

How is it not a surplus? "Surplus (noun) An amount of something left over when requirements have been met" (OED). The scheme was (and as far as anybody knows, still is) in surplus. That surplus being used to subsidise current government expenditure. Perhaps you'd care to share your own unique definition of 'surplus'. (Don't worry too much about the English language not agreeing with you).

Google 'pensions surplus' and 'pensions deficit'... The assets of the TPS are zero, so the question of a 'surplus' in the pensions' sense doesn't arise.

In that case, I apologise. I misunderstood your comment.

No problem.

Oliver1191

It looks as though the CPI + 1.6% annual increase is only for active members. So, if you leave the scheme, you only get the CPI increase annually. It's something to bear in mind as this could have a big impact over the long term.

This would apply to faster accrual by default, but in terms of additional pension benefit, i'm not sure if the same deal applies (it probably would do, just can't find it written anywhere).

It's a hard call - teaching is a 'dicey' game at times (hence the rapid numbers leaving the profession). So, the risk is: is it worth buying more benefits in light of that? It's probably the case that hedging your bets is a good idea / not having all your eggs in one basket.

I'm conscious that my quality of life and access to future financial opportunities could well be greater if investing in a S&S ISA (and taking advantage of the LISA).

You can't compare public sector employment with private - it's way too generalised. Friends and family of mine who work in private companies have access to a large array of financial opportunities from lucrative share schemes, help to buy housing, etc. It depends on what job you have as to what opportunities are available. Equally skill level & supply and demand come into effect.

Thrugelmir

bostonerimus wrote: »

It's worrying just how far the DC bandwagon has gone to devalue DB pensions in the minds if many people. Given the mortality credit DB pensions should be able to pay more on average in annual benefits than a DC plan and you also get longevity insurance. An index linked DB plan along with state pension is the best foundation for retirement income. If you supplement it with a SIPP and ISA investments you will be in fantastic shape.

A decade of Central Bank intervention has created an air of complacency. Not to unsimiliar to the era of when using an endowment policy was the way to repay your mortgage (and provide a surplus on top). When market returns failed to materialise. Many people ultimately were left with a shortfall.

ValiantSon

Oliver1191 wrote: »

It looks as though the CPI + 1.6% annual increase is only for active members. So, if you leave the scheme, you only get the CPI increase annually. It's something to bear in mind as this could have a big impact over the long term.

How likely is it that you will leave the profession? If it is something that you are honestly contemplating (rather than the occasional bad day when you wonder about doing something else) then it might be worth looking at alternative investments for extra cash, rather than purchasing flexibilities (e.g. faster accrual or additional pension), but you should still carry on paying in to the scheme at your normal rate, and even in this situation, buying flexibilities will still accrue more pension. Even a CPI indexing is positive as you won't be losing any value.

As has been pointed out CPI is normally lower than RPI (although not necessarily always), but as you get closer to retirement the difference is likely to be less of an issue because you probably won't have any mortgage debt, which is one of the biggest factors in the difference between RPI and CPI calculation.

Oliver1191 wrote: »

It's a hard call - teaching is a 'dicey' game at times (hence the rapid numbers leaving the profession). So, the risk is: is it worth buying more benefits in light of that? It's probably the case that hedging your bets is a good idea / not having all your eggs in one basket.

See above, but at nine years in and recently having been promoted to leadership, the probability is that you will remain in the profession, but even if you don't, continuing to remain a scheme member while you are still teaching is a no-brainer. Paying for flexibilities will also return a better bet than investing in an S&S ISA, or a SIPP. If you do then leave the profession you will have a substantial DB benefit waiting for you and can then look at alternative investments as you move forward in your new career.

Oliver1191 wrote: »

I'm conscious that my quality of life and access to future financial opportunities could well be greater if investing in a S&S ISA (and taking advantage of the LISA).

How so? Investing in an S&S ISA and/or LISA at the expense of your pension scheme would almost certainly return a lower value to your net worth. The only advantage would be short term in having funds available now, and that wouldn't apply with the LISA because it is locked away until you are 60. If you are contemplating drawing money out of that ISA in the short to medium term then you shouldn't be investing it anyway!

To be honest on your salary, you should be able to pay for flexibilities and invest, so you have the best of both worlds.

You are a member of a generous DB pension scheme; taking the risk of withdrawing from that and chancing your arm with the markets is a foolish one. A number of teachers in the 1980s received extremely poor advice as part of the pension mis-selling scandal. They moved out of TPS and invested elsewhere and ended up with massively smaller sums than they would have if they had remained in the TPS. Don't follow their example.

Deneb

ValiantSon wrote: »

as part of the pension misspelling scandal.

Penshun?

Sorry, I'll get my coat...

ValiantSon

Deneb wrote: »

Penshun?

Sorry, I'll get my coat...

Ooops. Changed it now.