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What is the significance of “employer contribution” in the civil service pension?

IdéeFixe
Posts: 16 Forumite

I’m trying to understand what this number represents. For instance for salary between ___ and ___ thousand, the employee has to pay X% and the employer “contributes” Y%, eg. 27.3%. In the “Alpha” scheme.
Firstly, does it have any bearing on the lump sum you can claim? I know it doesn’t affect the recurring annual pension entitlement, which is basically a function of your salary each year that you were a member of the scheme.
Secondly, if it doesn’t link to your personal benefits, in what way does this number relate to the cost of running the scheme for the employer? Is it saying, to account for this scheme, this is the money we set aside in the budget? In which case, how exactly does that translate to the benefits they’re paying out? And if it’s not that, then what does it mean?
Firstly, does it have any bearing on the lump sum you can claim? I know it doesn’t affect the recurring annual pension entitlement, which is basically a function of your salary each year that you were a member of the scheme.
Secondly, if it doesn’t link to your personal benefits, in what way does this number relate to the cost of running the scheme for the employer? Is it saying, to account for this scheme, this is the money we set aside in the budget? In which case, how exactly does that translate to the benefits they’re paying out? And if it’s not that, then what does it mean?
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Wouldnt worry about it, it means nothing to you.
At all stages fo your DB pension there are certain guarantees. Guarantees to increase in deferment before you retire, guarantees to increase in payment once you retire, these are costly and the employer contributes a high amount to fund these guarantees.1 -
Remember that the employer's contributions are nominal and do not reflect the actual cost. I mean, 27.3% is purely there as a part of a funding valuation using different assumptions. If they did the current service cost, then it would be 64% of your pay instead. Contributions from employees and employers are barely increasing over the last few years, while pensioners' costs are rising much faster.
In other words, the amounts of employees' and employers' contributions are meaningless since the HM Treasury covers all the shortfall anyway.
There is nothing for you to worry about in this case.1 -
JoeCrystal said:Remember that the employer's contributions are nominal and do not reflect the actual cost. I mean, 27.3% is purely there as a part of a funding valuation using different assumptions. If they did the current service cost, then it would be 64% of your pay instead. Contributions from employees and employers are barely increasing over the last few years, while pensioners' costs are rising much faster.
In other words, the amounts of employees' and employers' contributions are meaningless since the HM Treasury covers all the shortfall anyway.
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Could you elaborate on what you mean by the “current cost basis” and 64%?The current service cost (expressed as a percentage of pensionable pay) in respect of accruing costs in the year ended 31 March 2021 was determined using the PUCM and the demographic and financial assumptions applicable at the start of the year; that is, those adopted as at 31 March 2020 in the 2019-20 account. 64% is the current service cost expressed as a % of pensionable pay.
So you got the employer's contribution already down as 27.3%, the employee contributions averaged out as 5.7%, which added up to a total contribution of 33%, which makes sense. But, since the combined employees and employers contributions is insufficient to cover pensions to the current pensioners, excess money to cover the cost got to come from somewhere else, aka HM Treasury so therefore 64% overall.,0 -
JoeCrystal said:Could you elaborate on what you mean by the “current cost basis” and 64%?The current service cost (expressed as a percentage of pensionable pay) in respect of accruing costs in the year ended 31 March 2021 was determined using the PUCM and the demographic and financial assumptions applicable at the start of the year; that is, those adopted as at 31 March 2020 in the 2019-20 account. 64% is the current service cost expressed as a % of pensionable pay.
So you got the employer's contribution already down as 27.3%, the employee contributions averaged out as 5.7%, which added up to a total contribution of 33%, which makes sense. But, since the combined employees and employers contributions is insufficient to cover pensions to the current pensioners, excess money to cover the cost got to come from somewhere else, aka HM Treasury so therefore 64% overall.,
Both the 33% and 64% figures are the estimated cost to fully fund the scheme, it isn't the case that 33% is underfunding the scheme.
The difference arises primarily because of the discount rate used to set the contribution rate (SCAPE rate, based on expected GDP growth) and the discount rate used in accounting calculations, which was much lower but due to recent interest and gilt yield increases is likely to be much higher when the figures are next updated.
Which is the most appropriate discount rate to use is the basis of a lot of discussion.
HMT pays the difference between the money paid out by the scheme to pensioner members, deaths in service, etc, and the amount received by the scheme from member and employer contributions. That is a different metric to the percentages above which seek to value the cost of the scheme.1 -
So… there is some notion that this employer contribution (plus the employee one) is on average enough to “fully fund” the benefits that will be later paid out? Because the sums allocated are expected to accrue interest in accordance with the discount rates?
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IdéeFixe said:So… there is some notion that this employer contribution (plus the employee one) is on average enough to “fully fund” the benefits that will be later paid out? Because the sums allocated are expected to accrue interest in accordance with the discount rates?
Of course, the allocation is notional as the scheme is run on a pay as you go basis and so no returns are ever actually earned. And in practice, HM Treasury allocates money to employers then takes that money back in employer contributions, so it is all very circular.
Also remember that is all at overall fund level, and the value for an individual is much different, with the pension costing much more for older members than younger members.2 -
IdéeFixe said:So… there is some notion that this employer contribution (plus the employee one) is on average enough to “fully fund” the benefits that will be later paid out? Because the sums allocated are expected to accrue interest in accordance with the discount rates?The only relevance of the employer contribution is to see how much the pension is worth, ie to be tempted to a job outside civil service with out a DB pension you would want about a 30% pay increase to be possibly equivalent to current salary including pension.0
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MX5huggy said:IdéeFixe said:So… there is some notion that this employer contribution (plus the employee one) is on average enough to “fully fund” the benefits that will be later paid out? Because the sums allocated are expected to accrue interest in accordance with the discount rates?The only relevance of the employer contribution is to see how much the pension is worth, ie to be tempted to a job outside civil service with out a DB pension you would want about a 30% pay increase to be possibly equivalent to current salary including pension.0
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Exactly the DB pension is very valuable. £50 k per year gets you £1160 of index linked pension for life from pension age, if you die you dependent pensions but then the money stops when they die.alternatively you could have £15k to invest in a DC pension. If you can invest beating inflation great but 4% drawdown is £600 per year. But it doesn’t die with you.It’s swings and round abouts and what you value.1
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