30 June 2011

Public Sector Pensions - My Key Points

Here are some of the most important points for me in the public sector pensions debate.

As ever, these comments are in no way a reflection on individual public sector workers who, like anyone else, should always take advantage of any financial benefits on offer by their employer.
  • The country has not been able to afford many of the pensions that are on offer for some years. Increasing longevity is significant... a baby born one year later than a sibling has a life expectancy 2-4 months longer (depending on whose figures you use). That year on year increase has to be paid for by an increase in contributions (taxpayers) or a reduction in benefits.
  • Private sector pensions (which have a government-imposed duty to be able to pay their pensioners) have been subject to big changes for a number of years, with final salary schemes closing and higher contributions being needed to maintain the expected benefits in retirement. Those public sector pension schemes which are unfunded (not all are) have no such duty - simply expecting (presumably) to increase taxes in future generations to pay the higher costs. So all that is happening now is that public sector schemes are beginning to catch up with the real costs of providing the pension benefits.
  • According to Lord Hutton, a teacher's pension pot is 14% down to the taxpayer, and 5% down to the individual employee.
  • Private sector workers should not have to forgo their own pension savings in order to fund other peoples'.
  • Changing from final salary to career average will most significantly affect high fliers who have come up through the ranks, but lower paid workers may be better off.
  • A public sector worker who starts on a salary of £20,000, sees their pay rise by 4.5% a year and works for 40 years will, according to Hargreaves Lansdown, have an annual pension of £19,920 based on a career average scheme. This compares to £7,960 a year that a private sector worker will get from a defined contribution scheme based on 10% contributions. A worker who joins the new scheme, the National Employment Savings Trust (NEST), can expect a yearly pension of £5,000.
  • To look at it another way, a teacher receving a salary of £32,000 will get a pension that is the same as a private sector worker who has built up a pension pot of £500,000. To build up such a pot would require contributions of 20% to 30% of salary over 40 years (depending on your assumptions but that's based on a starting salary of £25,000). The teachers' pension scheme requires contributions of 6.4%.
  • It is not the case that public sector workers get a good pension to make up for lower salaries  (although admittedly it is difficult to compare apples with apples). Average total pay (including bonuses) in the private sector was £455 per week according to recent labour statistics. Meanwhile, equivalent pay in the public sector was £473 per week. And in the three months to April 2011 total pay in the private sector rose by 1.6% on a year earlier but total pay in the public sector rose by 2.2%.
  • It is not fair to move the goalposts by changing someone's pension entitlement (including retirement age) without reasonable notice - and here I have in mind both the accelerated increase in womens' state pension age and the delay in retirement for all public sector workers. Ideally, changes should not be made once you are in an employment. But to be realistic, just as no one can expect an employer to tell them in advance what pay rises they will get over their whole career, neither can they expect the accrual of pension benefits to remain static. It would certainly not be fair to change some pension entitlement which had already been accrued (and that is not proposed), but to change what will be accrued seems to me to be acceptable if necessary, providing sufficient notice is given. And therein lies a current debate - is 10 years long enough to revise your plans, for instance? I'm inclined to say it is, especially given the magnitude of the financial crisis we continue to be in and which private sector workers are already having to accommodate.

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