Rhetoric media on state gold plated pensions

SouthCoastBoy

CorseyEdge said:

Altior said:

That's the point isn't it, it would never happen in reality as public sector db pensions are effectual stealth salaries. It would however expose the monumental unfunded liability being built up on the heads of future taxpayers.

Where is this future liability being 'built up'? Do you have a figure for 'monumental'? 

Current liability is £49.7billion less £47.2 billion of contributions (net £2.5 bn or 0.1% of GDP) i.e. it pays for itself

Are those contributions employee contributions or employee plus employer?

zagfles

hyubh said:

zagfles said:

hyubh said:

It has been far too slow, but changes have been made to state pension ages and gender alignment, which of course will inevitably be pushed further out.

Public sector pension schemes, in general, didn't discriminate by sex in the first place - so Barber equalisation in the 90s wasn't a thing for them.

All contracted out pension schemes discriminated by gender pre 1997. It was the law, they had to! GMP is calculated differently for men and women due to the previous different state pension ages (60 for women and 65 for men), schemes had to use the calculation prescribed by law, and that calculation differed by gender!

The scheme total benefits may not have discriminated, most private sector scheme didn't, but as the GMP element was calculated differently this led to different outcomes for men and women depending on circumstances. In particular, with a deferred pension, the GMP revalues at a different rate, so a man and women with identical age, service etc who leave on the same date will initially have the same total pension, but the GMP element would be different, and due to the GMP having different revaluation rules the pension would revalue differently between leaving and the pension being taken. Also once in payment the indexation would be different.

It's a legacy of the numpty Labour govt of the 1970's. First they pass the sex discrimination law in 1975 telling employers "thou shalt not discriminate", but didn't apply it to themselves, ie to state benefits like the the state pension. They maintained unequal state pension ages with no plans to change them. On it's own this was hypocrisy, but didn't cause a problem for occupational pensions. Employers musn't discriminate, but the state can. Do as I say not as I do. Fine.

But in 1978 they introduced SERPS for the many people who didn't have an occupational pension. But as a lot of employers already had an occupation pension, they allowed these employers to "contract out" of SERPS, basically replicate as a minimum the benefits of SERPS in their scheme. As they were replicating a discriminatory state benefit, employers didn't see this as them discriminating, they were replicating a state benefit which discriminated! They HAD TO discriminate, they didn't have a choice.

So employers were caught between the legislation for calculating GMPs, which forced them to calculate it differently for men and women, and the sex discrimination act, which said all elements of pay should be equal! It was impossible for them to obey both laws! And now they (or their pension schemes) are stuck with the legacy of all this and making ridiculously complicated "GMP equalisation" calculations.

I stand by my original claim (small number of edge cases aside). In most (if not all) private sector schemes, the GMP/excess split is taken at exit, with the different elements revaluing separately to GPD. In public sector schemes, in contrast, the GMP/excess split is only taken at GPD - until then the whole basic pension increases as one. After that, a GMP component to the scheme pension only limits total increases when the member is receiving the 'missing' bit of PI through their state pension. If they are not (for whatever reason), then the scheme must pay full PI on the GMP (this rule was in place from the off in 1978). This works because, (a) public sector schemes must use S148 GMP revaluation (b) public sector increases on basic pension are the same (not contingently so, are explicitly the same) as increases on SERPS in payment.

S148 provides for increases in line with earnings in deferment, as SERPS, so does pre 97 excess also increases with earnings in deferment? You say above they're the same "as increases on SERPS in payment" which is totally different, SERPS in payment increases with CPI, SERPS in deferment increases with earnings.

And under the new state pension, which of course doesn't include indexation for GMP for pre-88 and excess above 3% for 88-97, the scheme pays full indexation?

OK, if they're both the case, then there's equality up to 60, but after that?....

So, say Mr M and Ms F were both born on 6/4/52, both joining the LGPS in 1978 and leaving it in 1997, on identical salaries and service histories. You're right, the GMP at exit will nevertheless be different. That said, thanks to the 85 year rule, both retire age 60 in 2012. As such, Ms F is retiring when her GMP is 'due'. But wait! She's not yet receiving her state pension. So, on retirement, both her and Mr M get an identical pension (viz., the increased total basic pension at leaving) that continues to increase the same way too. Of course, age 62-and-a-bit, Ms F does reach SPA, ahead of Mr M. She takes her state pension at that point; this then causes her LGPS pension to be increased adjusting for her GMP. However, the 'missing' increase is paid with her state pension - so she is not actually worse off.

I thought service plus age had to add up to 85 (hence the 85-year rule?) 60 + 19 years service = 79

And what about Mr M who reached SPA in the new state pension (his SPA will be post 2016), where GMP increases are not paid in the state pension?  

I take the point that if pubic sector pension always use S148 and also increase the excess with earnings, there'll be less discrimination, but not sure if it eliminates it post 60.

Beside which, until very recently (maybe 3 or so years ago), the LGPS did directly discriminate by having different early retirement factors for men and women! This was unbeliveable, I presume someone took them to court over this or threatened to!

hyubh

CorseyEdge said:

zagfles said:

The cost to the taxpayer of the unfunded public service pensions is less than 0.2% of GDP... 0.2%. That seems relatively sustainable and far, far less significant than say losing 4% of GDP due to EU exit. 

Personally I think there are far more important things for the UK to gnash its teeth on than the inconsequential cost of post-retirement benefit to those that spent much of their life serving their country.

That seems to be based on the effect on the "current account", ie what's going in compared to what's going out. Which is useful for some purposes but not for understanding the cost of the liabilties being buit up. The £49.7 billion beig paid out is paying for historical liabilities (to existing public service pensioners) and the £47.2 billion being collected from existing public service employees and employers is creating future liabilities. The difference between the two is meaningless in terms of liabilities being created and settled, unless you treat it as a Ponzi scheme!

Is it 'meaningless'? That's the net cost of the scheme today (as well as the 4 year forecasts in the OBR brief)

Of course it's a Ponzi game, that's how the economics of these pensions work. It's exactly the same as the State pension. Should we treat that similarly?

A 'Ponzi' scheme is where there has to be more and more new participants to fulfil the promises made to old ones. Neither the state nor public sector pensions are supposed to be a 'Ponzi game' like that.

Conversely, the 'liabilities' of a pension scheme are not the cash cost of pension payments being made in the current financial year, but the pension payments promised for the future. Funded or unfunded, the liabilities of an occupational DB scheme are fundamentally of the same order (and quite different to those of the state pension, whose promises by contrast are non-contractual).

If the headcount of civil servants, and therefore number of active members in the Civil Service Pension Scheme, shoots up, this doesn't reduce the scheme's liabilities, even though contributions will increase while current pension payments going out stay the same. Instead, it increases liabilities, because more active members = more future pension payments being promised. 

Silvertabby

zagfles said:

hyubh said:

zagfles said:

hyubh said:

It has been far too slow, but changes have been made to state pension ages and gender alignment, which of course will inevitably be pushed further out.

Public sector pension schemes, in general, didn't discriminate by sex in the first place - so Barber equalisation in the 90s wasn't a thing for them.

All contracted out pension schemes discriminated by gender pre 1997. It was the law, they had to! GMP is calculated differently for men and women due to the previous different state pension ages (60 for women and 65 for men), schemes had to use the calculation prescribed by law, and that calculation differed by gender!

The scheme total benefits may not have discriminated, most private sector scheme didn't, but as the GMP element was calculated differently this led to different outcomes for men and women depending on circumstances. In particular, with a deferred pension, the GMP revalues at a different rate, so a man and women with identical age, service etc who leave on the same date will initially have the same total pension, but the GMP element would be different, and due to the GMP having different revaluation rules the pension would revalue differently between leaving and the pension being taken. Also once in payment the indexation would be different.

It's a legacy of the numpty Labour govt of the 1970's. First they pass the sex discrimination law in 1975 telling employers "thou shalt not discriminate", but didn't apply it to themselves, ie to state benefits like the the state pension. They maintained unequal state pension ages with no plans to change them. On it's own this was hypocrisy, but didn't cause a problem for occupational pensions. Employers musn't discriminate, but the state can. Do as I say not as I do. Fine.

But in 1978 they introduced SERPS for the many people who didn't have an occupational pension. But as a lot of employers already had an occupation pension, they allowed these employers to "contract out" of SERPS, basically replicate as a minimum the benefits of SERPS in their scheme. As they were replicating a discriminatory state benefit, employers didn't see this as them discriminating, they were replicating a state benefit which discriminated! They HAD TO discriminate, they didn't have a choice.

So employers were caught between the legislation for calculating GMPs, which forced them to calculate it differently for men and women, and the sex discrimination act, which said all elements of pay should be equal! It was impossible for them to obey both laws! And now they (or their pension schemes) are stuck with the legacy of all this and making ridiculously complicated "GMP equalisation" calculations.

I stand by my original claim (small number of edge cases aside). In most (if not all) private sector schemes, the GMP/excess split is taken at exit, with the different elements revaluing separately to GPD. In public sector schemes, in contrast, the GMP/excess split is only taken at GPD - until then the whole basic pension increases as one. After that, a GMP component to the scheme pension only limits total increases when the member is receiving the 'missing' bit of PI through their state pension. If they are not (for whatever reason), then the scheme must pay full PI on the GMP (this rule was in place from the off in 1978). This works because, (a) public sector schemes must use S148 GMP revaluation (b) public sector increases on basic pension are the same (not contingently so, are explicitly the same) as increases on SERPS in payment.

S148 provides for increases in line with earnings in deferment, as SERPS, so does pre 97 excess also increases with earnings in deferment? You say above they're the same "as increases on SERPS in payment" which is totally different, SERPS in payment increases with CPI, SERPS in deferment increases with earnings.

And under the new state pension, which of course doesn't include indexation for GMP for pre-88 and excess above 3% for 88-97, the scheme pays full indexation?

OK, if they're both the case, then there's equality up to 60, but after that?....

So, say Mr M and Ms F were both born on 6/4/52, both joining the LGPS in 1978 and leaving it in 1997, on identical salaries and service histories. You're right, the GMP at exit will nevertheless be different. That said, thanks to the 85 year rule, both retire age 60 in 2012. As such, Ms F is retiring when her GMP is 'due'. But wait! She's not yet receiving her state pension. So, on retirement, both her and Mr M get an identical pension (viz., the increased total basic pension at leaving) that continues to increase the same way too. Of course, age 62-and-a-bit, Ms F does reach SPA, ahead of Mr M. She takes her state pension at that point; this then causes her LGPS pension to be increased adjusting for her GMP. However, the 'missing' increase is paid with her state pension - so she is not actually worse off.

I thought service plus age had to add up to 85 (hence the 85-year rule?) 60 + 19 years service = 79

19 years service plus 15 years deferred membership plus 60 = 94.

However, had there been a gap between two periods of active service aggregated into one record, then that time wouldn't count towards R85.

hyubh

zagfles said:

S148 provides for increases in line with earnings in deferment, as SERPS, so does pre 97 excess also increases with earnings in deferment?

No, the whole deferred pension increases on leaving, per the same Pensions Increase applied to pensions in payment (so uncapped CPI at present). But as I said, you take the GMP/excess split at GPD in a public sector scheme, not at exit. So as at GPD, GMP will only have an impact where the S148 revalued figure is more than the total increased basic pension.

One consequence of this is that for someone who retired before GPD, there will never be an adjustment at GPD which reduces their total pension. In contrast, depending on how it treats GMP between DOR and GPD, this could happen in a private sector scheme.

You say above they're the same "as increases on SERPS in payment" which is totally different, SERPS in payment increases with CPI, SERPS in deferment increases with earnings.

Agreed, SERPS in payment increases according to the same rate as public sector schemes do. And yes, SERPS before it comes into payment revalues the same way as GMP in a public sector scheme does. These two points do not contradict what I said about the GMP/excess split not being taken at GPD however.

And under the new state pension, which of course doesn't include indexation for GMP for pre-88 and excess above 3% for 88-97, the scheme pays full indexation?

Correct. A bit unpalatable at first, not taking this course would have caused a GMP equalisation problem that didn't exist under the previous system. Initially the government decreed giving full PI the 'temporary' solution to members now reaching SPA, but after going round the houses with a few consultations this was formalised as the permanent solution. So for any member who reaches SPA on or after 6/4/16, their GMP gets full PI, not 0% or full PI capped to 3% as applicable.

(PS: originally the rule that a public sector scheme must pay full PI on GMP where the member wasn't getting the difference through their state pension covered situations like retiring abroad to a place where the UK government doesn't increase your state pension. Once women's SPAs started to be equalised with men's however, it applied to GPD < SPD scenarios too; then finally nSP came in and got rid of the old assumptions completely as you say.)

I thought service plus age had to add up to 85 (hence the 85-year rule?) 60 + 19 years service = 79

For deferred members you count the years between leaving and 60 (or 60-something) as well. (If there was a gap in service however, that doesn't count. Which back in the day could be significant for a rejoiner who blindly chose to aggregate their old and new service!)

And what about Mr M who reached SPA in the new state pension (his SPA will be post 2016), where GMP increases are not paid in the state pension? 

Full PI on their GMP permanently. And yes, that does cause a difference to Ms F, still under the old system. However this is a difference concerning state pension entitlements, not scheme pension entitlements.

zagfles

hyubh said:

zagfles said:

S148 provides for increases in line with earnings in deferment, as SERPS, so does pre 97 excess also increases with earnings in deferment?

No, the whole deferred pension increases on leaving, per the same Pensions Increase applied to pensions in payment (so uncapped CPI at present). But as I said, you take the GMP/excess split at GPD in a public sector scheme, not at exit. So as at GPD, GMP will only have an impact where the S148 revalued figure is more than the total increased basic pension.

OK I'm confused now, I thought this was prohibited under the anti-franking rules, where the GMP and excess have to revalued separately from the exit date? That's how private sector schemes I'm aware of do it, not through choice, but because of anti franking rules. Do these not apply to pubic sector schemes?

Also what would happen if both Ms F and Mr M decided to defer their pension till 65, would Ms F get the statutory uplift on the GMP (IIRC something like 7% plus CPI) for taking it late, or would that be franked into the total pension as well? Would they have the same pension at 65 in this case?

Andy_L

Altior said:

From April next year, stop all public sector pension accrual dead, and make it the auto enrolment rate going forward. The difference in implied benefit gets added to gross salary (they keep any accrued DB entitlement). Employees can then make their own arrangements, in addition to the 3% as they see fit. Let's see what their salaries would be then. 

About 20% higher

hyubh

zagfles said:

hyubh said:

zagfles said:

S148 provides for increases in line with earnings in deferment, as SERPS, so does pre 97 excess also increases with earnings in deferment?

No, the whole deferred pension increases on leaving, per the same Pensions Increase applied to pensions in payment (so uncapped CPI at present). But as I said, you take the GMP/excess split at GPD in a public sector scheme, not at exit. So as at GPD, GMP will only have an impact where the S148 revalued figure is more than the total increased basic pension.

OK I'm confused now, I thought this was prohibited under the anti-franking rules, where the GMP and excess have to revalued separately from the exit date?

No. I can't remember the exact wording off hand, but there is an exception if the whole basic pension is increased from exit in the public sector scheme style.

That's how private sector schemes I'm aware of do it, not through choice, but because of anti franking rules.

Generally speaking private sector schemes that take a public sector-style approach have a public sector or quasi-public sector heritage, e.g. the Railways Pension Scheme and the USS. However, while rare, there are others too, e.g. the old L&G staff scheme.

Also what would happen if both Ms F and Mr M decided to defer their pension till 65, would Ms F get the statutory uplift on the GMP (IIRC something like 7% plus CPI) for taking it late, or would that be franked into the total pension as well?

Well, both. The GMP is still GMP, so gets the statutory LRF. However the principle I gave before still applies, the revalued/increased/late incremented GMP only acts as an underpin to the total basic pension. Given scheme revaluation will be more generous than statutory excess revaluation, this underpin is unlikely (if not impossible) to hit.

AlanP_2

zagfles said:

CorseyEdge said:

Altior said:

That's the point isn't it, it would never happen in reality as public sector db pensions are effectual stealth salaries. It would however expose the monumental unfunded liability being built up on the heads of future taxpayers.

Where is this future liability being 'built up'? Do you have a figure for 'monumental'? 

Current liability is £49.7billion less £47.2 billion of contributions (net £2.5 bn or 0.1% of GDP) i.e. it pays for itself

Don't understand the relevance of a GDP %, it's about 5% of the cost of these unfunded schemes being directly paid by taxpayers. Plus the indirect costs (basically all public sector costs are ultimately paid by the taxpayer)

From the standpoint that the public sector work for the taxpayer then 5% employer contribution seems broadly on a par with private sector to me.

NedS

AlanP_2 said:

zagfles said:

CorseyEdge said:

Altior said:

That's the point isn't it, it would never happen in reality as public sector db pensions are effectual stealth salaries. It would however expose the monumental unfunded liability being built up on the heads of future taxpayers.

Where is this future liability being 'built up'? Do you have a figure for 'monumental'? 

Current liability is £49.7billion less £47.2 billion of contributions (net £2.5 bn or 0.1% of GDP) i.e. it pays for itself

Don't understand the relevance of a GDP %, it's about 5% of the cost of these unfunded schemes being directly paid by taxpayers. Plus the indirect costs (basically all public sector costs are ultimately paid by the taxpayer)

From the standpoint that the public sector work for the taxpayer then 5% employer contribution seems broadly on a par with private sector to me.

The other 95% is also paid for by tax payers, by way of employer and employee contributions whereby the employer is the state and the employee is employed by the state (tax payer). 5% is the percentage of the current liability that is currently unfunded (unmatched by current contributions).