Gold plated public sector pensions

Muscle750

Stubod wrote: »

"......average salary of £28k getting a £17k pension????..I think not.

MOH earns more than that and their pension will be less than half what they earn???

Yes but how long they been employed in that post etc?

Muscle750

What proves the injustice of the situation is how many in the public sector continue till they are at the normal state retiring age. Many go early suffering little or no loss to their pension by going early, Its not unheard of some been actually better off having more income from their pension than if they carried on working. Those in the public sector forget its us in the private sector paying to enable the inflated Employer contributions in the public sector where as we get no where near those contributions from our employer. Which is obviously why our pensions are so poor in relation.
Also those in the public sector that do go early because their pensions are far better than someone of same age etc in the private sector it will be a much better scenerio for them in relation to their pension income. I would even go as far as to say that just the employer contributions in the public sector exceed those of the combined employer and employee in the private sector.

JoeCrystal

How about reading the original study? Link here

There is the basis of calculations at the bottom of the study. How good they are? I don't know but it seems that it is assuming that the salary will increase by 4.5% every year and you are on average salary right from the start. I think there are too many factors to model private sector projection that well. It is assuming that the employee is saving into NEST pension for example.

I like the recommendations.:

"As defined benefit schemes are effectively unavailable in the private sector, all new public sector employees should join on the basis of a defined contribution pension."

More likely to have both options on the table like Civil Service one.

hugheskevi

How about reading the original study? Link here

Having read through, here are my comments/thoughts:

• The report assumes an individual aged 25, starting at national average salary of £28,600, receiving salary increases of 4.75% (inclusive of inflation) per year until they retire at age 68.

• The latest HM Treasury draft public service pension Directions assume public sector salary increases of 1.2% in 16/17, 2.2% in 17/18, 2.1% in 18/19, 2.3% in 19/20, 2.6% in 20/21, 2.8% in 21/22, 3.0% in 22/23 and 4.2% thereafter.

• The contribution rates members pay in the public sector schemes are based on starting salary, and it is assumed they never pay a higher contributon rate due to moving up a contribution tier despite their salary increasing.

• The assumption that workers work continuously between 25-68 significantly overstates public service pensions, as the largest public service pension schemes have higher in-service revaluation rates. This means that if a public sector worker leaves employment, the rate at which their pension increases is reduced from CPI+1.5% (approx, varies by scheme) to CPI. Due to the compounding effect, this makes a very significant difference over time.

• The rate of return on invested Defined Contribution pensions is 5% p/a, which includes inflation and is before charges. This quite a pessimistic rate of return, and well below long-term average returns.

• NEST level charges are assumed on private sector Defined Contribution pensoins. NEST is the default provider, and lower charges are available elsewhere for employers with larger workforces and which make more than statutory minimum contributions. This assumption makes the charges on pension contributions in the years approaching retirement prohibitive - in the final year, the member pays a charge of about 2% on their last-year contribution.

• It is assumed the Defined Contribution pension is used to purchase an index-linked annuity with survivor benefits (the report says they assume a CPI-linked annuity - I think they used escalation at 2% p/a as CPI-linked is not an option at the comparison service they cite). An index-linked annuity is the least-competitive type of annuity, with the lowest expected return - typical expected return is about 75-80% of initial capital value (source here).

• It is assumed the employer contribution into private sector Defined Contribution pensions is 4%. This is based on overall contribution averages, rather than seeking a comparison against a good quality Defined Contribution scheme, which would have contributions of about 10% employer, 5% employee.

• It is interesting to note the absence of any pension commencement lump sum. With the dire commutation rate of 12:1 in the public sector, this has little or no value. In the private sector you would always take the 25% tax free (except if valuable guarantees are in place, which are associated with legacy products rather than the pension schemes of today).

Every assumption made can be argued as being justifiable, when considered in isolation. The methodology, separated from the assumptions, is a reasonable approach to an individual case-study approach, but a more robust analysis would seek to use larger data-sets rather than an abstract individual case-study approach.

However, taken as a whole, the assumptions clearly are set to flatter public service pensions by assuming workers remain in service for their entire career and so benefit massively from higher in-service revalation whilst paying the lowest contribution rate possible despite regular above inflation pay increases.

At the same time, the assumptions understate private sector Defined Contribution pensions. The members are assumed to work all their career receiving a very low employer contribution, pay above average charges, receive below average investment returns and then use the whole pension pot to purchase a very expensive annuity, without even taking a 25% tax free lump sum.

It isn't surprising that if you compare a good quality public sector scheme using the best possible employment history against a low quality private sector scheme from an employer making low contributions and a member not taking a tax free lump sum and purchasing a very expensive annuity, the benefits from the good quality scheme will be significantly higher.

Thrugelmir

hugheskevi wrote: »

• The report assumes an individual aged 25, starting at national average salary of £28,600, receiving salary increases of 4.75% (inclusive of inflation) per year until they retire at age 68.

Highly unlikely. As after 10 years will hit the top of their grade. Only so many can move to a higher grade position.

DairyQueen

Perhaps the relative generosity of public sector pensions is less of an issue than the overall cost to the public purse. With an ageing population, will (non-public sector) taxpayers be willing to continue underwriting PAYG pension benefits for a rapidly increasing number of unfunded public sector retirees, whilst receiving far less generous (funded) pensions themselves?

This is primarily the result of the differential between employer contributions (or taxpayer liability incurred by employers in the case of the public sector), and it is a large differential.

I understand that 15% of public sector schemes are funded but they are in deficit. However, I can't find the source where I read that so don't quote me.

The numbers already look scary. The same source (I'll look for it) suggested the current public sector pension liability stands at close to 1.5 trillion. That's a clearly unsustainable 75% of GDP. Something will have to give and I suspect that the government will renege on its promises. Plenty of precedent for that. The latest being the withdrawal of inflationary increases on GMP in payment from 2016, except (ahem) for those in the public sector who, I understand, will continue to receive this increase until 2020.

I can't see any government (other than led by Corbyn) being prepared to bankrupt the country in order to pay disproportionately higher pensions to one sector of the population. Nor can I imagine a situation where huge cuts in essential services will be tolerated in order to foot that particular bill.

Would be interested if anyone can offer official sources to either refute, or support, the above stats. If they are true then I don't hold out much hope of those retiring from the public sector a generation or so from now receiving the pension they anticipated when they began their working lives.

Welcome to the club guys. Most of the private sector joined a couple of decades ago but new members are always welcome .

bostonerimus

Saving enough for a reasonable retirement isn't cheap. Well funded private and public pensions were once part of the employment deal, but employers have looked to shift cost and risk onto the employees and government is now doing the same and/or underfunding pensions. This has ended up as a massive money grab out or worker's pockets and anyone that still has a decent employer pension is now a target.

Triumph13

bostonerimus wrote: »

Saving enough for a reasonable retirement isn't cheap. Well funded private and public pensions were once part of the employment deal, but employers have looked to shift cost and risk onto the employees and government is now doing the same and/or underfunding pensions. This has ended up as a massive money grab out or worker's pockets and anyone that still has a decent employer pension is now a target.

The whole issue here is that the cost of providing pensions has multiplied massively simply because people are living so much longer. When people could be largely relied on to fall off their perch within a few years of retirement this was a relatively easy liability to fund. Once you start having to pay out for 20+ years it quickly spirals to a size that can easily bankrupt the sponsoring employer, be that a private company or the state. This is not about employers ripping off workers, it's about everyone having to come together to deal with a massive and relatively new issue.

Johnnyboy11

The Government has deliberately sanctioned significant detriment to Public Sector pensions in recent years:

A near pay freeze over the past 8 years, resulting in salary and pension lagging RPI by about 15%, ouch!
RPI -> CPI indexation in retirement
Final Salary -> Career Average
Employee contributions 5% -> 7%+
NRA 65 -> 67
LGPS Rule of 85 gone

There's a clear and determined direction of travel here...

DairyQueen

Triumph13 wrote: »

The whole issue here is that the cost of providing pensions has multiplied massively simply because people are living so much longer. When people could be largely relied on to fall off their perch within a few years of retirement this was a relatively easy liability to fund. Once you start having to pay out for 20+ years it quickly spirals to a size that can easily bankrupt the sponsoring employer, be that a private company or the state. This is not about employers ripping off workers, it's about everyone having to come together to deal with a massive and relatively new issue.

Very well put. Ignoring the consequences of demographic change will simply compound the problem to the detriment of future generations.

I'm not sure how a 1.5 trillion taxpayer liability that benefits only one sector of the population equates to Boston's 'money grab on worker's pockets' but then he is in the USA so it isn't his pocket that's being grabbed.

Companies decided decades ago that they couldn't afford to remain solvent and pay pensions for 20+ years at levels previously enjoyed by workers who were kicking up daisies after around 10 retirement years. The problem (for them) was made worse when low paid and part-time workers, many of whom were female and therefore inconveniently lived even longer, began qualifying for pension benefits that were previously denied them.

Either taxpayers are willing to continue funding current levels of public sector pension, and at the cost of fewer public sector jobs, and reduced services/benefits to the entire population, or they aren't. Unless GDP rises dramatically (anyone betting on that?) my guess is that this issue will eventually cause a Brexit-level of tension.

Just what we need.