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

Gary1984

I doubt the government (especially a Tory one) particularly wants to get into the annuity market. They'd have a lot of angry insurers on their hands for a start. If insurer's annuity rates were undercut by the government then insurers, one of the biggest buyers of government bonds, would be buying significantly fewer government bonds which they need to buy to back the annuities. That wouldn't be ideal for a government that's currently having to borrow substantial amounts of money as lower demand would theoretically push borrowing prices up, not to mention lower company profits and corporation tax and so on. 

Interestingly (or not) it was government's who offered the first annuities, notably the Dutch and English. In around 1540 the English government would sell you an annuity at a rate of 14% at any age, which probably wasn't the best idea. By 1700 Halley, of the comet fame, had worked out mortality tables and pricing was on a more scientific footing. 

pafpcg

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?

I'm curious about how much thought you've given to this suggestion.  Defined Benefits schemes pay-out on the basis of the pensioner's employment record (eg length of service and final or average salary).  Calculating this for employees with direct access to the employer's personnel data-base is theoretically straightforward (though problems are not unknown!), but the administration of "defined benefits" for large numbers of non-employees would be burdensome - what's in it for the pension schemes?  [Unless, of course, one subscribes to the belief that the current government has an unacknowledged policy of maximising the transfer of public funds to the private sector - so many public sector pension schemes are now administered by private sector companies.]

However, the concept of the provision of a "public sector" annuity in competition with commercial providers would appear to be a viable option.  We already have that in the State Pension scheme.  The ability to pay Voluntary NICs (Class3 contributions etc) to top-up an individual's contribution record is an example of what's on offer now, but is of course subject to an overall limit. 

The government did indeed offer what in effect was an annuity for a lump sum a few years ago (2015-2017) with the "Class 3A State Pension Top Up" scheme.  But the scheme was limited to only those reaching retirement age before 1st April 2016 (ie excluding anyone retiring under the New State Pension) and the annuity available wasn't large (maximum of £1,300pa) but the CPI-linked annuity rate was much better than the rates available from insurance companies (even though it couldn't be bought directly from a DC pot but had to be paid for from taxed income).  So it's possible for the government to offer such a scheme - it's really a question of does it make financial political sense?

jimi_man

Well technically they do. You can transfer in DC pensions to most, if not all, public sector schemes. However I would dispute that the maths makes sense for public sector workers, since I'm not aware that it does. It's just a benefit offered as part of the job. 

GunJack

On deferment - Most (if not all) the public sector schemes don't have an actuarial increase for deferring taking benefits, basically it's use it or lose it from the date of scheme NRA.. (well, PCSPS Classic certainly is, hence why I'll be getting my paws on mine at 60, despite paying a fair whack of tax on the first year's-worth until I pack up the current job also ) 

edit - some of the newer iterations may do, taken my eye off the ball a bit since not directly involved any more..

hyubh

pafpcg said:

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?

I'm curious about how much thought you've given to this suggestion.  Defined Benefits schemes pay-out on the basis of the pensioner's employment record (eg length of service and final or average salary).

Various public sector scheme have had the concept of non-pay, non-service related DB benefits for many years, predating the end of final salary accrual - basically, if a member wishes to purchase additional pension, it's done directly (rather than indirectly via the concept of 'added years'), with the price relative to age and sex, not pay and service.

I would have thought more questionable is the idea that increasing unfunded government pension liabilities would 'reduce the deficit' rather than increase it in any material sense. Very 'George Osborne' thinking, though nice bung for relatively prosperous middle class people who could afford it (like me!).

hyubh

GunJack said:

On deferment - Most (if not all) the public sector schemes don't have an actuarial increase for deferring taking benefits, 

The opposite, it's only the archaic legacy sections that don't... 

GunJack

hyubh said:

GunJack said:

On deferment - Most (if not all) the public sector schemes don't have an actuarial increase for deferring taking benefits, 

The opposite, it's only the archaic legacy sections that don't... 

I did caveat that statement that the newer ones may do, gis a break!!

michaels

hyubh said:

pafpcg said:

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?

I'm curious about how much thought you've given to this suggestion.  Defined Benefits schemes pay-out on the basis of the pensioner's employment record (eg length of service and final or average salary).

Various public sector scheme have had the concept of non-pay, non-service related DB benefits for many years, predating the end of final salary accrual - basically, if a member wishes to purchase additional pension, it's done directly (rather than indirectly via the concept of 'added years'), with the price relative to age and sex, not pay and service.

I would have thought more questionable is the idea that increasing unfunded government pension liabilities would 'reduce the deficit' rather than increase it in any material sense. Very 'George Osborne' thinking, though nice bung for relatively prosperous middle class people who could afford it (like me!).

But with the average salary scheme it is much more like the benefit you get relates to what you pay now, yes early in your career you are probably earning less than your average so the contributions are worth more but then there is also more time for the money to grow if it were a funded scheme, the net effect is probably that on average your contibutions do actually pay for a certain proportion of your current salary so you can as a rule of thumb do the approximation I made that 12.5%* of your salary buys you 1/80th of your current salary per year in retirement and thus the 'salary' bit cancels out of both sides of the equation and you can work out how much pension a set sum of money should buy.

* This later amended to include employer contributions so it is actually more like 30% of salary to buy 1.25% of salary for life.

Nebulous2

Didn’t the government sort of do something like this with the post office final salary scheme? Take over the scheme, absorb the fund and agree to meet the pensions? 

Thrugelmir

Nebulous2 said:

Didn’t the government sort of do something like this with the post office final salary scheme? Take over the scheme, absorb the fund and agree to meet the pensions? 

Royal Mail technically was in the public sector prior to privatisation.