Public Sector Pensions

[Chil1234]

Lord Hutton (former Labour cabinet minister) has produced his report this morning on the state of public sector pensions suggesting, amongst many other things, that increasing contrbutions may be necessary to make up some of the shortfall and that final salary schemes should make way for average salary schemes. Union representatives interviewed on the Today prog this morning ranged from 'we'll look at the recommendations' to 'no way Pedro'. Who's right?

BeenBeta: but you would have to apply that to the whole population and all pensions: when I started work, it was the norm for private companies to have final salary scheme pensions - many of those have closed to new members, but many of those aged 50+ are still in such schemes.

As noted above: the collapse of private sector pensions, and the move from final salary schemes, only began after the Labour govt's tax raid (by contrast in 80s companies were taking "contributions holidays" because their funds were so flush).

How things change! And pensions reform is necessary, but retrospective changes (or a punitive tax regime designed to effect a retrospective change) are notthe answer - and set a hideously risky precedent for other areas of tax policy.

Oh - and a post above said the gift must be investing pension funds over-cautiously. For central government (and to an extent in other public bodies), this is not the case - the schemes are totally unfunded. Pensions are paid out of current tax revenue. The deductions from salary are not put aside in a pot, they are used to pay the current pensions and any shortfall is made up from general revenue. Some schemes are part-funded, but shortfalls are still made up from taxation revenue.

But thats the problem. Paying pensions out of current revenue is not sustainable! That's how we got into this mess. Why should today's generation have to pay for the prior generation? That can't work as the demographic pyramid inverts and lifespans increase.

Pensions should be fully funded by those who will benefit form them later. That is fair.

At last - well said Siasl. I would like all public sector workers to understand just how much their pension costs. I don't think this is understood at all. (see my calculator) above.

And which generation will be able to carry the double-whammy of paying for those who have already retired on those terms (how big a bulge are the baby-boomers?) whilst fully funding their own retirement?

No-one could, so evolutionary change is needed - the time-scales for adequate pensions planning are just too long for quick fixes.

My problem is that I no longer trust the Coalition to work on this fairly.

onimolap - fair point. But at least they are tackling it. What did Labour do to tackle the deficit, heads and sand come to mind.

not all public sector pensions are unfunded (ie paid out of current government revenue) - for example those in university sector have a pension fund that is funded (ie money is invested to pay for pension payouts) and is currently in surplus - but still there is pressure to change the pension so that the pay in is higher (for employees but not employers I think), and benefits will be cut and retirement age increased.

It seems that regardless of how your current pension provision is set up they will jump on the band wagon to squeeze it.

My query is at what stage will people decide it is not worth gambling on paying into a pension ? Is the current generation really so fit an healthy that we will all live to 90+ ? compared to say our parents generation ?

I wouldn't bother with a private pension and wouldn't advise anyone else to bother either. about 80% goes on fees (well that's my daily mail quote of the day ) then the pension fund goes bust and loses all your money (equitable life) or even worse it doesn't actually go bust (so no govt payout) but limps along paying out thrippence ha'penny. my dad's entire contributions all his working life have been pretty much a waste of time. also you can't manipulate your pension income so in future if you are 50p over the tax threshold between poverty handouts and fa, you get f.a. At least you could give away assets or sell them as and when
my local govt pension of 2 years part time (oh wow the benefits I must be expecting) is self funded - they invest the money and the pensions come out of that. many of my colleagues don't bother paying into it. I'm probably the fool for bothering. I won't bother in future if contributions go up much more.

Ca

You said employees get 3/80th for each year. According to my knowledge 3/80th was just the lump sum that people get at retirement. They then get 1/80th in pension for each year on top. Therefore it is not just £7000 but also a £21,000 lump sum at retirement (60). The pension also provides a spouse's pension and is inflation proofed. In order to get that level of pension, you would need a pension fund of approximately £240,000 at retirement. Now you need to contribute 6% of your salary (assuming £24,000 that would be £1440 per annum. Times that by 30 years and that is £43,200. Where is the rest coming from? Yes we know that 6% is a lot but please bear in mind that that this still leaves an awful lot to be funded. In most private companies the pension contribution are matched by the employer if paid at all up to 5% so on that basis the fund would be £1440 plus 1200 * 30 years leaving a fund of £79200 and a pension per annum that is inflation proofed and provides a spouse's pension of £2,376. There may be some extra earnings-related pension that contracted in people get but this is minimal and has been reduced by the Government sucessfully over the last few years because nobody understands it and most union employees are not affected it by it because they are in contracted-out final salary schemes.

I am sorry but there is a clear advantage and it is not always valued enough by the people who will receive it.

Most private companies have also closed final salary schemes to existing employees and not just new entrants.

Some very good points here.

I don't think you have to invest in a "pension" product. ISA (Individial Saving Accounts) often have low charges and you can stop and start when ever you need to and have access to you money at any time. There are some very decent funds out there and you don't a financial adviser to access them.

It was about a decade ago that the wave of "closures to new entrants" happened, and a wave of "closure to all" is underway.

I'd like to reiterate my point about the baby booker generation doing OK after this: if you're in your late 50s and have 30+ years on the final-salary scheme and less than 10 on the more risky money purchase, you are still doing much better than the generations who come after you.

Baby boomers are doing well but only the top 1/3rd. Don't forget there are people who were self-employed, worked for small companies who do not get anything and were completely unprepared for retirement because they had relied on the State which was the tradition. There are plenty of divorced women who did not pay towards the state pension who get nothing as pensions were not previously taken into account in divorce. Also many people encashed valuable final salary pensions when the regulations allowed it. I agree with the companies taking payment holidays and the short-sightedness of that but for me the most short-sighted idea was to promise to pay somebody something years away and make no effort to plan for this by starting a fund. This applies to the State Pension and most public sector pensions. This is why we are now in the situation we are in. The whole system has been destroyed by the fact that nobody planned that people would live for thirty/fourty years after retirement. If I came out with that idea today I would be laughed out.

onimolap - indeed the income of the 50+ have benefited the most and need to pay more tax. Trouble is they are the most active when it comes to voting.

I think contributing to a company pension is a good idea especially if the company matches the contributions.

My DH's company pay 8% of his salary into the company pension. He then adds 5% and they match it will another 5%. As his marginal tax rate is 50%, if he kept the 5% he'd only get 2.5%. So effectively this is 4 times better.

yeah that's what my dad thought too. now they go to court every few months to try and stop the whole fund going bankrupt and him losing everything. not much you can do once it's invested. of course, it won't actually go bankrupt, they'll all just get pensions of about £5000 a year - he was on a similar income to your dh by the sounds of it

If the pension is a defined contribution pension set up correctly as a ring-fenced trust that won't happen. There is no fixed long-term liability that needs to be funded.

Unfortunately with final salary schemes the liability could not be funded. The company simply couldn't provide the defined benefit without going bankrupt.

Hence the reason all pensions should be defined contribution.

Ok, didn't realise that on top of a work pension I would get a state pension too.

Surely not everyone gets a state pension?

Everyone who has paid NI contributions for 30 years from 2012 will get the Basic state pension (the £97 per week).

There is a smaller earnings related pension that is as it says on the tin, earnings related that is for employed people who are contracted in and not for self-employed. Contracted in people pay higher national insurance contributions than people in final salary schemes as a result. This is the bit that the Government can do what they like with and get no backlash. It may not be around when we retire but you will not get your money back. This is the bit that has been reducing over the last few years. It is shocking that nobody has fought about this part of the pension.

Not many pension schemes get lost now as the Government has provided better protection with the FSA protection scheme for DC schemes and the Pension Protection Fund for final salary schemes. If your employer is prepared to contribute it is worth joining. If you have to do it all yourself like my DH (no pension contributions or life cover from his employer and no pay rises for 4 years) then it is questionable as to whether a pension is the right route especially for basic-rate tax payers which most people are. My employer contributes more the older you get but still nowhere near 8%.

Plus don't forget most pension schemes offer additional life cover that you would have to pay for yourself otherwise and some also have longer term income protection if you are off ill. Would you give up a pay rise?

Do the banks still offer their employees non-contributory pension schemes?

If you're going to jump ship from the public sector maybe thats the place to go.

I don't think those are open any more and the pay in banks is often really low. There is so much about big bonuses but the general bods in banks do not earn much at all. Insurance companies have also stopped their final salary schemes and accountants are the meanest. I still think even with the proposed changes the Public Sector pensions will be better because of the inflation-proofing. As far as I was aware there were only three defined benefit schemes still open in the private sector, Cadburys, Severn Trent and Tesco(career-average. Perhaps somebody else could give us some more info.

I read yesterdy a bit more on the Hutton pension report and it said in the article that if we were to put a pot of money aside now to meet all existing public sector pension obligations the money required would be equal to 92% of a year of GDP. Given that it was based on the Govts own estimates it would almost certainly be far higher if based on more realistic private sector commercial asumptions.

Putting that pension pot aside now would almost double our existing national debt. This is the dirty secret of public sector pension funding, it just isnt funded at all. It is paid out of current taxation and the long tail of future liability has been repeatedly kicked down the road by successive Govt and it just keeps growing.

That is why future payouts have to be cut for existing pensioners drawing pensions now or about to draw their pension. It is going to bankrupt the country eventually if the existing liability is not cut by reducing promised payouts.

The sad thing is this has been known for years and the last Government would not do anything about it and just hammered the Private Sector. The only reason I can think that they did not look at this is that their traditional voters and union support covers a lot of public sector workers. Perhaps I am cynic but I am appauled that when the private sector realised how impossible these funding promises were then the Government should have acted then.

If there are pay freezes for existing public sector workers and the pensions that are currently being paid come from the same pot I would see an arguement for a pay freeze on the pensions currently being paid out and the Government were quick to change the basis of inflation to CPI for this very reason as this will also affect the pensioners so they will be hit by this. CPI is more relevant for pensioners as it takes out mortgage costs which the majority of pensioners will have cleared.

anyone watch the tv tonight about pensions? what a scam