NHS Pension Employer Contributions - What is the point?

harryj95

Hello all,

I've recently started my first new job in NHS I am a member of the 2015 CARE Scheme NHS Pension.
I understand that I contribute 7.1% of my salary to get 1/54th (1.85%) of my salary back every year during retirement + CPI and 1.5% etc etc.

I've read there is also an employer contribution of 14.38% (rising to 20% from April 1st).

However, I am confused as to how I will actually receive any benefit from the employer contributions, due to the calculation only taking into account my 'pensionable pay' (i.e. my salary) and not my employer contributions.

Therefore, upon retirement I would only receive 1/54th of my salary, as my employer contributions won't be included as part of this calculation and subsequently I won't actually receive any of my employers contributions upon retirement.

I'm fairly certain the pensionable pay only includes my salary and not my salary plus employer contributions.

What am I missing here? Can anyone help shed some light on this?

hugheskevi

However, I am confused as to how I will actually receive any benefit from the employer contributions, due to the calculation only taking into account my 'pensionable pay' (i.e. my salary) and not my employer contributions.

The employer contribution rate is irrelevant from your perspective. You will receive the pension accrued under the scheme rules, how it is funded does not matter, that is the Exchequer's problem.

Therefore, upon retirement I would only receive 1/54th of my salary, as my employer contributions won't be included as part of this calculation and subsequently I won't actually receive any of my employers contributions upon retirement.

The employer contribution is just the way the Government chooses to manage funding the scheme. The Government could, for example, choose to have a zero employer contribution and you would still receive the pension promised, paid for from the Exchequer.

In an unfunded pension scheme, the employer contribution is just an accounting mechanism, ensuring employers take account of the pension costs of employing staff, showing the overall value of the scheme and so forth. The contributions from members and employers are used to pay out pensions to pensioner members today, with the Exchequer paying any shortfall or keeping any surplus.

A good example is the forthcoming increase to the employer contribution rate - it makes no difference to you whether the employer contributes 14.38% or 20% or something else, you still get the pension promised regardless of the employer contribution rate.

I'm fairly certain the pensionable pay only includes my salary and not my salary plus employer contributions.

Correct.

Flugelhorn

it is only a way of collecting money for the pension - you say you are paying in 7.1%, if you were earning more then you would pay a higher percentage of your pay ( I think the last one I paid was 14.5%) however you still only get the same benefits calculation applied at retirement ie higher payers pay proportionately more for the same benefits
Ultimately what you and your employer pay in bears little relation to what comes out at the end

HappyHarry

You don't receive 1/54 of your salary in retirement.

You receive 1/54 of your salary for each year of service before retirement.

E.g. if you work for 30 years, you get 30/54 of your average salary (give or take), for each year of retirement. If you live 25 years in retirement, that's a lot of money back.

harryj95

Yes thats why I said you get 1/54th of your salary back each year
Exactly thats why its still a pretty good pension

louloubelle79

Sorry to ask on this thread but I have a few Qs
I’m also in 2005 nhs pension, contribute 9.3% myself and started to pay max allowed NHS AVC with Pru. Reading above sorry if I sound daft, I’m doing this to hopefully receive more in retirement..do my AVC payments count as my contributions on top of the 9.3 and should receive more in retirement than if I didn’t pay the AVC?

harryj95

Ah ok I see now how that makes so much more sense now thanks.

I think I was just getting confused as with most other pensions aren't defined benefit you just build up a 'pot' thats both employee and employer contributions and that grows depending on what investment vehicle you use.

So i just thought i might be getting shortchanged if my employer contributions weren't being calculated but I see now thats just the % of how the pension is funded.

Thank you!

Marcon

louloubelle79 wrote: »

do my AVC payments count as my contributions on top of the 9.3 and should receive more in retirement than if I didn’t pay the AVC?

Yes and yes!

crv1963

harryj95 wrote: »

Ah ok I see now how that makes so much more sense now thanks.

I think I was just getting confused as with most other pensions aren't defined benefit you just build up a 'pot' thats both employee and employer contributions and that grows depending on what investment vehicle you use.

So i just thought i might be getting shortchanged if my employer contributions weren't being calculated but I see now thats just the % of how the pension is funded.

Thank you!

You definitely are not being shortchanged. You have to remember that in comparing DC with DB pension you are comparing apples with oranges.

DC builds a pension pot, managed to retirement by the scheme provider at retirement that has to sustain the retirement income under the control of the retiree. Risk and possible risk of insufficient funds to do this borne by the saver.

DB accrues an entitlement to a sustained retirement income given to the retiree by the scheme provider. Risk completely borne by the scheme provider.

Under NHS scheme as a none funded scheme- there is no fund for your contributions to go into, your contributions go towards current pensioners, as your pension will be from the then pension scheme members. All underwritten by the Govt., so in effect you are buying a "promise to be paid". Your rate is 1/54 salary per year worked promise at point of your retirement.

Employer % contribution bears no real effect for you, as they don't go into your pot as you don't have one.

The real way to value your pension would be to calculate your eventual expected pension (or check prediction on ESR)- current salary divided by 54 multiplied by number of years total expected time to retirement= expected pension in todays values, then multiply by 20 gives what size pot will be your use of LTA at point of retirement (rough and ready figures only, the actual will be higher). The size will surprise you and make you realise what a bargain you are getting. The size of pot would not sustain the size of pension for a lifetime!

Plus there are the other not often discussed benefits- long term sick pay, ill health retirement benefit, survivor(s) pension.

Hence the continual debate/ angst about public sector pensions vs private sector pensions in some quarters.

crv1963

OP- yes go for AVC or SIPP or LISA to build additional income/ sums to fund retirement/ life goals/ earlier retirement. Even quite small percentage of salary saved can make a big difference over time.

I saved 2% or around £50 pm into Equitable Life AVC for a couple of years until it went south. That was only for I think 3 years so 1800, now worth 6k plus whatever uplift will come my way when it finally closes later this year or next year. Not an enormous amount but a bit better than a kick in the teeth.

Look at pensions in the whole if you have a partner/ spouse. We're currently saving into SIPP for Mrs CRV to try to maximise pension return while minimising tax paid in retirement.

Flugelhorn

crv1963 wrote: »

The real way to value your pension would be to calculate your eventual expected pension (or check prediction on ESR)- current salary divided by 54 multiplied by number of years total expected time to retirement= expected pension in todays values, then multiply by 20 gives what size pot will be your use of LTA at point of retirement (rough and ready figures only, the actual will be higher). The size will surprise you and make you realise what a bargain you are getting. The size of pot would not sustain the size of pension for a lifetime!

Plus there are the other not often discussed benefits- long term sick pay, ill health retirement benefit, survivor(s) pension.

Hence the continual debate/ angst about public sector pensions vs private sector pensions in some quarters.

At one point (they seem to have stopped now) the pension estimates paperwork from the NHS used to include the estimated cost of an annuity to pay the pension (if you were in a DC scheme instead of a DB scheme) - definitely made it clear that it was a bargain.