Could the Govt allow DC pot holders to buy public sector pensions to reduce the deficit?

michaels

The govt currently 'charge' public sector workers a premium from their salaries and this then accrues them some DB pension.

Could the govt allow those with DC pots to purchase some govt DB pension on the same basis?  After all if the maths makes sense for public sector workers, why wouldn't it make sense for them to also take private contributions on the same basis?

This would give those with DC pots a better value way to get certainty than via an annuity.  
It would be extremely good for the current deficit
It might not cause long term damage to the govt accounts because of the inheritance tax saving would go

It could also be combined with 'solving' the care crisis if an optional care premium was built in as an automatic deduction form the pension payable - again the deduction starts now and the care expenditure is later.

Thrugelmir

Doubt employers are going to be willing to contribute at the required levels to fund such pensions. 

michaels

I was more suggesting that employer and more importantly existing DC pots could purchase DB pension on the same terms as current public sector workers.

princeofpounds

In theory yes. But it wouldn't be a good idea, because it cannot be afforded in the long term, even if it brings in money in the short term. 

In some countries, they actually nationalise private pension schemes, and force people to use their private pension savings to buy into state pensions. But not the state pensions that get offered to government workers - usually something much worse and easier to inflate away the value of.

Mistermeaner

I would love to be able to “buy” Years of NHS pension 

El_Torro

I had a similar thread to this which appears to have been deleted, hopefully this one won't go the same way.

It's a nice idea, but it increases the liability on the public purse. If the cost of purchasing such a pension were high enough to take the risks into account what would be the point in doing it? Private sector workers would just buy annuities with their DC pot instead. If the DB option were more favourable than annuities then we have to ask ourselves why the government can offer such favourable terms, or how they can afford it.

michaels

So suppose a govt employee on 50k pays 12.5% for 1/80th final salary pension available at 67.  Now assume they could buy as much pension as they want so 2% of salary would buy then 2/80ths etc - then 50k would buy then 8/80ths or 5k pa of pension (wow this is a good deal!)

The govt could offer a similar deal to all private pension holders, convert some or all of your DC pot to a govt db pension on the same basis, subject to the same indexation, actuarial reduction for taking it early etc, etc.  Sure there is a long term cost but perhaps offset to an extent by the govt keeping the money on death rather than it being inherited tax free as happens with a private pension pot.  Perhaps the any tax free DB pension lump sum could also be forfeited or again bring in more money in the short term.

The terms could obviously be varied to get a good deal for the taxpayer whilst making it attractive enough to attract enough funds to help with the covid deficit.
As an added benefit it could be linked to an insurance scheme to pay for long term care, protecting the house as an asset.

hugheskevi

michaels said:

The govt currently 'charge' public sector workers a premium from their salaries and this then accrues them some DB pension.

More commonly referred to as employee contributions.

michaels said:

Could the govt allow those with DC pots to purchase some govt DB pension on the same basis? 

Anyone joining a public service pension scheme can transfer-in DC pension, so it would just be opening that facility up to all.

 If the DB option were more favourable than annuities then we have to ask ourselves why the government can offer such favourable terms, or how they can afford it.

The Exchequer is far better placed to provide guaranteed income than the private sector, not having to put in place financial reserves with extremely low returns (as it can rely on future taxation) or deliver a profit.

So suppose a govt employee on 50k pays 12.5% for 1/80th final salary pension available at 67.  Now assume they could buy as much pension as they want so 2% of salary would buy then 2/80ths etc - then 50k would buy then 8/80ths or 5k pa of pension (wow this is a good deal!)

I'm not sure of the point of this fictional scheme or figures?

Any system of the form you propose would follow the rules around the existing transfer-in and/or Added Pension purchase arrangements. Most schemes publish Added Pension calculators online.

Perhaps the any tax free DB pension lump sum could also be forfeited or again bring in more money in the short term.

That would cost the Exchequer money - a long-term saving to the pension scheme is made from anyone choosing to commute income into a tax free lump sum at a 12:1 exchange rate.

Given the commutation rate (which is much lower than the actuarially neutral rate), Public Service Pension schemes don't have tax-free lump sums in anything but name, aside from the older versions which came with an automatic tax free lump sum. It is a bit like airport foreign currency exchanges advertising 'commission free' exchange whilst taking a huge slice from the uncompetitive rates on offer.

michaels

hugheskevi said:

michaels said:

The govt currently 'charge' public sector workers a premium from their salaries and this then accrues them some DB pension.

More commonly referred to as employee contributions.

michaels said:

Could the govt allow those with DC pots to purchase some govt DB pension on the same basis? 

Anyone joining a public service pension scheme can transfer-in DC pension, so it would just be opening that facility up to all.

 If the DB option were more favourable than annuities then we have to ask ourselves why the government can offer such favourable terms, or how they can afford it.

The Exchequer is far better placed to provide guaranteed income than the private sector, not having to put in place financial reserves with extremely low returns (as it can rely on future taxation) or deliver a profit.

So suppose a govt employee on 50k pays 12.5% for 1/80th final salary pension available at 67.  Now assume they could buy as much pension as they want so 2% of salary would buy then 2/80ths etc - then 50k would buy then 8/80ths or 5k pa of pension (wow this is a good deal!)

I'm not sure of the point of this fictional scheme or figures?

Any system of the form you propose would follow the rules around the existing transfer-in and/or Added Pension purchase arrangements. Most schemes publish Added Pension calculators online.

Perhaps the any tax free DB pension lump sum could also be forfeited or again bring in more money in the short term.

That would cost the Exchequer money - a long-term saving to the pension scheme is made from anyone choosing to commute income into a tax free lump sum at a 12:1 exchange rate.

Given the commutation rate (which is much lower than the actuarially neutral rate), Public Service Pension schemes don't have tax-free lump sums in anything but name, aside from the older versions which came with an automatic tax free lump sum. It is a bit like airport foreign currency exchanges advertising 'commission free' exchange whilst taking a huge slice from the uncompetitive rates on offer.

Thanks, lots of info there I didn't know.

So because there is no value in taking a state DB pension as a tax free lump sum this would again increase the tax take if DC pots were used to purchase state pensions.

There is also another way people can effectively purchase more state pension - by deferral.  Perhaps if public sector pension terms are too generous then the offer could be made at the same 'cost' as deferral which I think works out at a return of about 5.8% (is this based on average longevity?)  DC pension holders could be given the option to either 'defer forward' and/or purchase extra state pension on the same terms as deferral.

GunJack

michaels said:

Could the govt allow those with DC pots to purchase some govt DB pension on the same basis?  After all if the maths makes sense for public sector workers, why wouldn't it make sense for them to also take private contributions on the same basis?

Are you having a laugh?? So, are you willing to take a 20-odd% pay cut (and subsequent reduction in DB pension) and hand that over to the government AS WELL as your pension contributions?
The reason it makes sense for govt DB pensions is because salaries are much lower, especially in specialist areas. Why do you think private sector companies can run rings around government departments? Once they're armed with suitable experience to go with the qualifications, a high proportion of public sector leave for the private sector and the increased rewards on offer for similar (or lower) levels of responsibility.....after 20 years, that's what I  (and many others in my field) did...

michaels

Well your public sector pension was worth another 60% or more on top of your salary so you would have had to leave your 40k govt job and get more than 60k in the private sector (assuming 5% employer pension contribution) to actually be getting the same remuneration.