To think public sector pensions should be slashed?

And my issue with the new IHT provisions are that on death, if have been fortunate to build that 875-1.05m fund, it's now part of IHT estate. The DB is not part of the estate so the funding stream isn't reduced by 40%.

I guess I would loose some of the value of my pension- my pension fund has frequently been in the news because they are not paying people who have recently retired. There hasn’t been any government support for them at all!

www.bbc.com/news/articles/c74j2d8k3y4o.amp

So @envbeckyc out of curiosity, if your pension is public sector and is funded through investments and they fail are they underwritten by the Government or would you loose your pension funds? If you have ever read about the Royal Mail pension defecits and where the defecits landed and were absorbed, then you will understand the pension concern.

Teachers in the West Midlands in Local Authority managed schools are in the same funded pension scheme as me, however as most schools are now part of Academy groups they have pensions supplied by a trust not central government! Likewise higher and further education is not funded by central government pension schemes.

When I previously worked for a government agency that was also a funded scheme… as it was outside the Civil Service! The agency was focused on the Environment and lots of eyebrows were raised by staff as it held substantial shares in the fossil fuel industry as part of its portfolio and was run by Capita.

If you look at planning applications for regeneration schemes you often see Local Government Pensions (by region or city) as the applicant as it’s one way that they can secure a good return on the pension investment.

It’s important to remember that most people who work in the public sector are not civil servants and not benefiting from a ‘generous’ pension in retirement!

To be perfectly honest I don’t begrudge nurses, civil servants and the armed forces a pension that hopefully won’t see them retire in absolute poverty!

These are hard working professionals that we rely on, and the salaries are not as good as those in other countries like Australia and New Zealand, and there is a huge risk that we will loose highly competent and fully trained experienced staff!

If people feel that the public sector is rewarded better than the private sector, they could always start applying for those jobs!

To be honest, it came over to me (and I think many other posters) that the OP was suggesting that it would be OK to do this because all public servants get massive free pensions, and the reasons for this are no longer there because private sector has had little or no pay increases in recent years whereas public servants have had inflation busting increases thereby eroding the pay differential to nothing.

Whereas of course the vast majority of public servants have had zero or 1% pay rises only for the last decade and more. For the few occupations who have had a half decent rise this year, that still didn't make up for there being no rise at all for so long.

Whether that is sustainable or not, a number of subsequent posters (me included) have tried to show that from the employee point of view this would be extremely unfair as those who ARE on unfunded DB schemes have been promised these pensions in return for accepting a much lower salary. The problem then comes that to shift the current employees onto a funded pension means that the current contributions need to go into that, leaving a financial black hole to fund existing pensioners.

Indeed. That's the problem with ponzi schemes. And the longer they go on the higher the unfunded and unfundable liabilities become and the more awful the outcome when the chickens come home to roost, which is why our Governments ignoring the issue and allowing it to escalate knowing it will eventually collapse is scandalous and, as you say, extremely unfair on those making contributions to these schemes in good faith in the mistake. belief that there is a plan in place to pay them what they've been promised.

The argument proposed in the OP is nothing to do with whether they are sustainable, it's suggesting that all public servants on a DB scheme have their pensions cut significantly.

I thought that is why she was saying this? Nobody would be proposing this if it wasn't for the necessity to transition to a sustainable funding model.

The argument proposed in the OP is nothing to do with whether they are sustainable, it's suggesting that all public servants on a DB scheme have their pensions cut significantly.

This is based on the unfounded idea that all public service employees get massive pensions for no contributions. Whether that is sustainable or not, a number of subsequent posters (me included) have tried to show that from the employee point of view this would be extremely unfair as those who ARE on unfunded DB schemes have been promised these pensions in return for accepting a much lower salary. The problem then comes that to shift the current employees onto a funded pension means that the current contributions need to go into that, leaving a financial black hole to fund existing pensioners.

Regarding unfunded and funded schemes, the general rule is that if you are in a funded scheme you can transfer out of the scheme into a DC scheme with a notional amount (depending on various rules and regs about taxation, age etc) and that you can't transfer out of a government unfunded scheme except to an approved DB scheme. From memory, those that come under the "only to an approved DB scheme" include the central Civil Service, MoD/armed forces, NHS including doctors, I think teachers maybe.

Yes, sorry!

Tired today! 🥱 🤦🏻‍♀️

The £30k was her final salary, not her pension. If you read further down that post, you will see that I specified that the pension itself was around £15k,

Ok. Then she'd have to make pension contributions of roughly £20k per year over the 25 years she worked to have contributed the equivalent value of the annuity that she received at retirement. If she was earning £30k when she retired that doesn't sound likely.

That is the point being made: due to the structure of the schemes there is no compounding and given the generous risk-free and index-linked amounts promised there is no way these schemes can ever pay for themselves. Add in demographic changes and you have a time bomb of unfunded promises which taxpayers cannot afford to continue to pay to top up when current contributions increasingly do not cover withdrawals and this gap grows year on year. That is why the model is unsustainable.

For funded schemes where compounding happens it is possible for DB schemes to be sustained if they are well-managed. Clearly the tax changes made by Gordon Brown caused many to collapse and made this much harder, hence most private sector DB schemes being closed and the remaining public sector ones becoming less generous.

However, fundamentally the unfunded scheme model results in trillions of pounds of unfunded liabilities that are held off balance sheet to obscure the extent of the problem from the public because they aren't included in the national debt figure and successive Governments know that they have no plan in place that will enable these liabilities to be paid. It is an idiotic way to structure any pension scheme and eventually reality bites when the ponzi scheme can no longer be maintained, as it always does. The longer the issue is left unaddressed the worse it will be when it is no longer possible to kick the can down the road.

You do seem a little fixed on comparing things to the annuity rates. Comparatively few pensions are now used to purchase an annuity though it's an option that any IFA should consider (and usually rejects, depending on individual circumstances). It was a heinous rule that DC pensions needed to be used to purchase an annuity, and a major blessing when that was stopped.

Yes, that was one very positive change made. Ridiculous to force people to purchase annuities from private savings. But yes I have been referring to the equivalent value of DB scheme annuities in terms of what you'd have to pay to purchase one from a DC fund on the same terms because there is no other realistic manner in which their equivalent values can be compared, to highlight what a saver in a DC scheme would have to save in order to achieve the same pension outcome as somebody in a DB scheme. This is hardly contentious and is the standard method of comparison which presumably you're familiar with if you did indeed work as an administrator for an organisation facilitating scheme transfers.

Regarding the tax being deferred, which I agree applies to both pension types, if you can take 25% of your pension tax free as a lump sum surely that makes a difference to the overall tax paid? You haven't paid your 20% (or whatever rate) on the contributions, then you get 25% paid without having to pay tax on it.

Tax thresholds for higher rates are much lower than historically so this is meant to mitigate against the risk of ending up paying more tax on withdrawal than relief at the point of contribution. It is also a deliberate incentive to encourage pension saving because the Government desperately needs more people to be self-sufficient in retirement. Lump sums available from DB pension schemes are also tax free so again this is not relevant to a comparison between the two. DB schemes also received far more favourable tax treatment when the LTA was in place but fortunately at least that stupidity that actively discouraged saving/ working across both DB and DC schemes was abolished.

None of this has any relevance to the actual point of the thread as far as I can see.

That lack of compounding, alongside the vulnerability to changes in demographics that such a structure entails, is why they not unsustainable

Did you mean why they are not sustainable ?
@Marlhmarlol

Most people who have the option choose not to save it, so comparing what people have at the end isn’t really that fair.

That makes no sense. Everybody has the option to participate or not in the pension scheme their employer offers whether it's DB or DC. Nobody is forced to do so. You seem to be intent on making arguments about things that are totally irrelevant.

You’ve ignored the interest that saving that much money would generate. Assuming they retired immediately at the end of the 25 years and there was no time for the pot to grow between them finishing their CS job and retiring they would have needed to contribute ~27k a year. Not 40k. (I used the pension bee calculator to work this out).

The entire point is that there is no compounding because these unfunded schemes are structured as ponzi schemes. That lack of compounding, alongside the vulnerability to changes in demographics that such a structure entails, is why they are not unsustainable.

There are funded schemes and unfunded schemes. From what you've described yours is funded. Many public sector pension schemes are not and it is those that people are discussing in the context of taxpayers paying the shortfall between current contributions and payments. These include the pension schemes for the NHS, teachers, police, other emergency services and military.

Imagine someone being a lower rate taxpayer essentially deferring 20% tax until retirement. Income tax thresholds have been frozen for a few years and will continue to be frozen. The proportion of higher rate taxpayers has been increasing year on year.
More and more pensioners will not only be dragged into basic rate tax but also into higher rate tax so couldvessentially be worse off by paying into a pension if they only saved 20% when paying in.
The 25% tax free cash mitigates against ending up potentially paying more tax for saving over many years.
There is already a limit on how much tax free cash you can take and I do not trust any governments to not reduce it further.

I see all of the posts claiming that the public sector pensions are funded by central government taxation, but I don’t think that correct!

I am enrolled into the West Midlands Pension Fund - they invest my pension contributions into shares and projects which ensures that the fund is able to pay out pensions in the future. www.wmpfonline.com/sites/default/files/2023-04/ISS%202023.pdf

My previous public sector role also had a pension fund which invested in shares and projects in the same way!

There isn’t any central government underwriting of either of these funds so I struggle to understand why people are suggesting that tax payers will be left with the liability of me surviving until retirement?

Neither of my parents lived until state pension age, and I worry that all the contributions I have put into a pension pot will have been for absolutely nothing!

You’ve ignored the interest that saving that much money would generate. Assuming they retired immediately at the end of the 25 years and there was no time for the pot to grow between them finishing their CS job and retiring they would have needed to contribute ~27k a year. Not 40k. (I used the pension bee calculator to work this out).

Not saying it’s not a lot, but the general rule of thumb is that to get your career average salary you need to work 43 years. And during that time you are on a lower salary than you would get elsewhere so you are forced to save for retirement instead of having the option to spend that extra money on buying a house, holidays etc…

I worked in the private sector on less than 30k for 5 years before joining the public sector and ~10 years later with compound interest my private sector DC pension is actually average for my age. I was amazed that my colleagues were not saving the maximum amount our employer would match.

Most people who have the option choose not to save it, so comparing what people have at the end isn’t really that fair. Forgetting the extremely generous employer contributions for a moment…. My employee contributions* for my public sector pension right now are around £6k a year. If people saved 500 a month from age 21 to 67 they would have half a million in their pot with interest at retirement. The average pot at retirement is £228,200 for men and £152,600 for women.

edit:no idea what’s going on with the bolding here. Meant to bold employer and employee contributions 😆

The £30k was her final salary, not her pension. If you read further down that post, you will see that I specified that the pension itself was around £15k, THEN she had to share half of that with her ex leaving her with £7.5k.

Regarding the tax being deferred, which I agree applies to both pension types, if you can take 25% of your pension tax free as a lump sum surely that makes a difference to the overall tax paid? You haven't paid your 20% (or whatever rate) on the contributions, then you get 25% paid without having to pay tax on it.

My statement regarding compounding interest and growth related to DC pensions, to try and show a comparison with what the true cost of having a pension pot of that sort of size should be to the employee. So not this £40k pa saved you suggest, more like £7.5k pa. The OP states "public service pensions" and doesn't specify central government, unfunded pensions. In the case of central government DB pensions, it really isn't the employee's fault that the government runs pensions the way they do, yet here we have people suggesting that they get the pension cut. For the majority of public service DB pensions these days, they are funded the same as DC pensions.

The main take away from this thread is that the central government unfunded DB pensions, which are no more generous in terms of the salary (whether final or career average) multiplied by years of service than funded DB pensions, are a compensation for the significantly lower salaries the civil servants receive.

I do understand rather well the principles of the schemes, though not up to speed on very recent changes, but you seem to be trying to catch me out & picking & choosing statements and taking them out of context (and missing qualifiers too). Rather than going into full technical details here, I've tried to write things in a way that people not versed in pensions may understand.

You do seem a little fixed on comparing things to the annuity rates. Comparatively few pensions are now used to purchase an annuity though it's an option that any IFA should consider (and usually rejects, depending on individual circumstances). It was a heinous rule that DC pensions needed to be used to purchase an annuity, and a major blessing when that was stopped.

And of course I never advised anyone directly regarding their pension, I am not qualified to give advice.

God that's amazing. I think you'd earn in 5 years roughly the same payout annually that I've built up over the last 25 BC mine is DC.

For most DB schemes (NHS being our biggest employer) career average was only introduced in 2015. Then the government managed to cock that up as well by discriminating against old/young people by allowing those that were a few years away from retirement to stay in the old scheme and moving everyone else into career average by 2022.
After the government lost the court case at the highest court, effectively everyone was given a choice to stay in the final salary scheme until 2022.
So your less generous career average pensions are not going to filter through for many many years.

If you object to tax relief on DC schemes then it'll have to be removed from DB schemes, too. So add up the % contribution from your employer (often 20-30% for public sector schemes) plus your own (10% maybe). So let's say 35%. Now multiply that by your salary, and your highest % tax rate, and you'll be getting that deducted from your net pay every month if you want to remove tax relief on pension contributions. It will apply to both DB and DC schemes because contributions into BOTH receive full tax relief. Nobody is taxed on contributions because the tax is paid when you retire and receive the income.

How can somebody say they worked in the pension industry in any capacity and not understand even this basic principle of the income tax being deferred and that it applies to all types of pension schemes? It is literally the entire point of the system, the fundamental principle upon which all types of pension schemes were designed. It isn't a "Government contribution". 🤦🏻‍♀️🙄😆😆

That would be the case only if they had spent the entirety of those 35 years on £43k or the equivalent - remember it's career average. Much more likely that they had spent the majority of the time in lower grades, say 10-15 years in the equivalent at today's rate of £25k so accruing around £500 a year, and another 10-15 years at a today's rate of £30-35k so around £700-750 a year. Also bear in mind that the recipient is paying at least half of the contributions.

Then factor in that to get a pot of £750k you don't have to put £750k in due to typical growth and compound interest (as I noted above) - I've run the pension shortfall calculators and you're talking about an equivalent yearly contribution to your DC pot, employers and employees contributions combined, of nearer £7500pa.

So all in all, the actual salary differential is £4k a year or less.

I should note that I worked for some years as a pensions administrator often working with DB pension transfers into DC pensions.

Good for you. I am an economist and chartered accountant and have worked in the private sector and in the public sector on financial regulation and law including with the organisations determining actuarial regulation, so I think I understand tax law and pensions regulation thank you. I don't think I need the system explaining to me by someone who was an "administrator" transferring people between schemes and seems to think this makes them an actuarial expert.

What you've written is completely nonsensical I'm afraid. I very much hope you weren't providing any financial advice to anybody.

Yes, schemes are career average now. So given that people spend some time in lower grades the amount should be lower. My calculations were based on them earning the amount stated throughout their entire career, no part time work, no time building up to that salary, earning it from day 1, to make the example simple: taking the most generous analysis and it STILL comes out showing that contributions nowhere near cover the pension payments. The point you have made about it being career average just reinforces what I've said because the person would have paid in LESS than that on average making the discrepancy between what they pay over their working life and what they receive jn retirement even larger.

This discussion was about unfunded DB schemes. There is no compounding because there is no fund and current contributions are paying current recipients so there is nothing to compound. That's the entire problem with the ponzi scheme.

You don't seem to understand even the most basic concepts of either system.

No. Not taxing someone until later is not the same as giving them money. It is their money, that they have earned. Nobody is giving them anything. And it isn't tax free: it is deferred tax. With pensions the entire point of the system is that everyone contributes tax free, and the tax is deferred so everyone is instead taxed when they take the pension income. This is exactly the same for DB and DC schemes, so is totally irrelevant to the comparison between the public sector and private sector schemes anyway because NOBODY is taxed on pension contributions. That is literally the whole fundamental principle of both systems. It is taxed at a later date, not tax free.

It is just the opposite system of ISAs. With ISAs you take the income as pay when earned and are taxed at that point and then can invest it tax free and withdraw it tax free. With pensions the tax is applied when you withdraw it not when you save it.

How can there be so many people who don't even understand these basics and think that the Government is "giving" people money on pension contributions?!