Steve Bee: The impact of public sector pension reforms

'Help in making such decisions'? Of course. Little diddums cannot possibly make their own choice. No doubt there will be a boom in jobs for counsellors etc.

The report also did not venture to look at the vas number of senior personnel that have left with pensions and then been re employed shortly after retiring by the same organisation as a freelance consultant , or by a former public service that is no longer under the wing of a Local Authority e.g the Fire Service.

Based on the fact that 40 year's work to age 60 is followed by 25 years on a 50% pension, then 20% is required (assuming investment keeps up with inflation and no one gets a promotion - in that case the percentage can rocket) 8% is not much.

Many private employers pay 0% - 5% so the employee has to pay 20% - 15% for the same benefit. When will public emplyees get real ?

I will admit to being a retired public sector employee who has done very well out of the pensions scheme, retiring after nearly 40 years on almost 50% of my final salary, (plus a lump sum of almost 1.5 times my final salary). For this, about 6% of my salary was deducted at source.

However, when l joined local government in 1966, the scheme was by no means considered that generous. At that time, the norm in the larger private sector schemes (such as the Banks) was that their schemes allowed retirement on two thirds final salary, and they were non-contributory schemes. Those of my friends who went down those avenues are now much better off than I am after retirement

lt is only in the past decade or so that the public sector pensions have become so highly regarded. However, until the turn of the century or so, most senior public sector salaries lagged far behind what could be earned in the private sector. In my particular profession, a number of my colleagues moved from the public sector to the private sector over the years, but l cannot think of anyone who moved in the opposite direction. Indeed, I was offered, and turned down, three unsolicited approaches during the middle 15 years of my employment, each offering substantial increases in salaries (and a car provided).

What made me stay in local government? I valued most of all the freedom to fully maintain my professional integrity, without the motive of increasing a firm's profit (and my profit-share) being the ultimate goal. I regard my current pension as an apt reward for my dedication and the thousands of hours of unpaid (mostly out-of-hours) over-time l worked over the decades.

So there are many more facets to this pension debacle than the pure envy and bile spat out by most of the correspondents and pundits who have not worked in the public sector (and perhaps wished they had?).

Interesting comment Sundaygee. I'm paying into a local government pension scheme with about 25 years service under my belt. The problem with final salary pension schemes is that contributions are pretty static and liabilities fluctuate wildly. Much is made of the changes in demographics pushing up costs - but just as relevant is the return on investment. When inflation was tootling along, yet shares were outperforming it substantially, many companies found they had enough in the pot to pay in very little if anything. When the investment environment took a turn for the worse, regulation ramped up and capital in the pot shrunk, the contributions needed increased dramatically. The problem with final salary is that the weight of that is left with the employer.

Good post Sundaygee. There is only one point I would pick up on.

I think that the 'turn of the century or so' can be narrowed down further to 1997, when Labour entered power. They proceeded to greatly increase the size of the public sector with comparatively worthless jobs. That time was also (my feeling, no data!) around the time that the cry of comparability with the private sector took hold for salaries which, as you say, until then had lagged and hence few if any moved from private to public employ. I think the whole system and balance of private/public sector has become skewed (sounds like!) since round about that time, not just in salary but also in benefits such as pensions.

My cheap shot about counsellors was off topic and just plain grumpy old man speak!

Like most people, I suppose, I never thought much about pensions until retirement loomed, and I had no choice but to contribute 6% or so of my salary to an occupational pension to which my employer contributed another 12% or so. Employers and employees' contributions have increased over the years so that, combined, they now exceed 23% of salary. The fund has performed well and is not currently in deficit (although it was when the stock market was at is lowest point). The number of active members is likley only to increase as higher education itself is made accessible to more and more people. The pension scheme is, on any resonable understanding, fully funded.

But now the employers propose to close the scheme to new entrants, to increase the contribution rate for employees still in the scheme, and to reduce the payments to pensioners by changing the basis of indexation from RPI to CPI and to cap increases to a maximum of 5% p.a. The trustees have accepted those proposals. Why??? Reasonable investment performance of a well-diversified scheme should easily outpace inflation and the effects of pensioners living a year or two longer.

I fear that the employers are taking advantage of a government which is determined to spread the pain of deficit reduction . But to what end? If, as I expect, the pension scheme accumulates surpluses as a result of its investment performance, will the pensioners who have contributed the funds benefit? It seems far more likley that the beneficiaries will be the employers and perhaps those still in employment who continue to contribute to a scheme closed to new entrants.

Emigration looks increasingly attractive!

And now, Sundaygee, you must look forward to seeing your pension shrink in real terms every year as it will be inflated by CPI rather than RPI. I hope you put that lump sum to good use!

Sundaygee, I couldn't agree more.

Like you, in mid-career I received generous offers to join the private sector - two offering me a sum roughly equal to my full-time salary for an afternoon and evening's work once a week. I was therefore never in any doubt that my salary lagged far behind my potential income in the private sector, even after pricing my public sector sector pension at 17.5% of salary.

When the Ted Heath government tried to bribe public sector workers to forego a pay award in exchange for pension enhancements, it was cleat that even after these enhancements public service pensions compared unfavourably with what was available in the private sector, particularly the non-contributory "top hat" pensions awarded to senior executives.

I don't remember any outpouring of vitriol from public servants at that time; we accepted that we had chosen public service with its relatively low remuneration and relatively low pensions, and while we might have been envious of our colleagues in the private sector, we accepted that we had chosen public service and had the good taste to keep our mouths shut.

Many thanks for all the support above.

On reflection, I would not argue with 'rot' starting before the turn of the century. Certainly my salary showed significant increases after 1990, via job-evaluation by external consultants (Arthur Anderson), which compared rewards in the private sector. I also seem to recall that, by 1990, the discrepancies were such that many professionals (but not administrators!) were leaving the public sector

The potential impact on my future pension being eroded in real terms when future increases are in line with the CPI, rather than RPI?

Personally, l would not object to this, since my former colleagues still working have had to suffer salary increases over the past 5 years well behind the percentage increases l have received via the annual RPI adjustment. Indeed, if l had not retired, my pension paid from April 2011 would certainly be less than l now receive 5 years later.

As regards the intention of the current Coalition to renege on the RPI adjustment to existing Public Service pensioners this still may be challenged in Court.

The documents l have from my retirement are very specific, and my bet would be that the Government will fail in its endeavours to make legislation that retrospective.

To answer the 'quip' over did I do with my lump sum?

Well, I invested most of it in a flat for my three children to see them through university (bought in the name of my elder daughter). That is now refurbished and sold, with a handsome (tax-free) profit shared to establish each of them on the housing ladder.

Why is it that everyone forgets the Gordon Brown pension tax raid that started in 1997 and took £5B a year from private pensions? So far this amounts to £65B and has been a major contributor to the demise of private DB schemes (note that it didn't affect public sector schemes). Even Jeremy Paxman on Newsnight seems to have forgotten to ask the question when interviewing pensions ministers.

I have to agree with Roger Cole and the amount of those in the public sector has increased significantly and it is 1 in 2 in some cities so I believe. I can remember working in the public sector and the amount of seemingly meaningless jobs that were advertised all with very generous salaries and car allowances and police officers who due to health are all transferred to clerical jobs but with the police officers salary. Lets also not forget local government re-organisation in the 90's where there was say 1 Chief Exec and 5 Directors in the Region now we have 3 or 4 Chief Execs and 15 - 20 Directors covering the same geographical area. Also the cost of the enhanced "packages" that seem so common in the public sector have to go. I even recently read of a binman in Birmingham City Council who earned £51,000 due to a 160% bonus which lead to an equal pay claim (pending) from cleaners and dinner ladies who also wanted the bonus. The public sector has treated money like water and needs to stop.

I have spent some time in the public sector and some in the private, I started work in 1961 and finally retired a couple of years ago. At no time was I ever in any doubt that my public sector pension was far more generous than my private ones, the only reason I could afford to retire is that I did not sell out of my public sector pension and move it t a private one and whilst in the private sector contributed about 18% of my income to pension. Those who are in the public sector now who fail to understand how lucky they have been need a basic education in maths.

Pensions are a long-term issue, and in the long run things look a bit different.

The funding deficit doesn't look at all the same if you assume (which is not unreasonable) a long-run ROI of 3-4% above inflation.

And, more significantly, in the long run the total reward package (pay plus pension benefits) of public sector employees has to be about the same as that of private sector employees, or else public services will no longer be provided. The issue is only how the reward is divided between salary and pension.

On this, my own assumption is that (i) the penalties which the media visit on politicians' failures are fiercer than those which shareholders visit on directors, and that therefore (ii) the policies followed in the public sector are more risk-averse, and that therefore (iii) public sector employment tends to be more stable than private, and that therefore (iv) risk-averse people are drawn more to work in the public sector, and that therefore (v) a better pension and a worse salary is the best way of attracting the right people to the public sector. Hence, while some very recent increases in public sector pay may have been excessive, I'm not convinced that the general level and balance of public sector reward has in recent decades been incorrect.

Dennis,

You are wrong. The 'Gordon Brown pension tax raid' was not only a raid on the incomes of private pension schemes, but also on those public and quasi-public pension schemes that were fully funded - including the local government and universities' schemes. Brown also ended the ability of savings schemes such as PEPs / ISAs, and of non-taxpayers, to recover the tax deducted at source from dividends. Compound interest means that pension funds and savings have been steadily eroded, and savings made less attractive . Which is why it is so irksome that the present government proposes to tighten the screw yet further for those responsible enough to have saved and who, being retired / close to retirement, are unable to take defensive action.

Sundaygee may not be dismayed by the switch from RPI to CPI indexation, but spare a thought for those whose pay has, as he observes, risen more slowly than RPI during recent years and who now face retirement on pensions based on those deflated incomes and indexed only by CPI capped at 5%.

chazza - you are right that Broons pension raid has affected all funded schemes. But the DB schemes are made up to compensate by the companies and taxpayers. Those with personal pensions are hit twice - once by the tax and then again by lower yielding shares as companies have to divert more income into their pension schemes. In fact the latter is recursive, as this also means that their pension funds fall further.

So the only people to lose were the personal pensioners - and twice.

There are two other reasons why DB schemes are unaffordable. Firstly longer life expectancy which has risen more than 4 years during the last 10. And the second is apalling bond returns which has not only reduced pension fund performance, but has also reduced annuities. So whilst some may have been fully funded 15 years ago, they have since become far mire expensive and have become unaffordable.

So the value of public pensions has increased very very significantly over the past 20 years - so the benefit is worth much more than when many public employees chose that route. Quite simply ALL DB pensions should have had their final % of salary reduced as each factor above came into play, as the alternative is not just the cost to the taxpayer of pensions for more and more public employees, but also the cost of topping up the benefits as people live longer and inflation runs ahead savings. Very simply public employees cannot expect that when economic circumstances change, they take a growing amount from a shrinking pot.

I also note that many contributors in public employment often quote top hat schemes and so on as justification for their position. But these cases are minimal compared with the millions of people in private schemes. And by far the majority of people in private companies are in DC shemes with minimal conributions (if any) from their employers.

So let us not keep quoting the exceptions as if they are the norm !!

Jon,

I'm sorry, but a lot of this is just nonsense. The funded DB pension schemes in teh public sector are regularly monitored, and where the actuaries envisaged deficits, both employers and employess' contributions were increased. Recently, only at the low point of stock markets have there been actuarial shortfalls and in the case of USS these were shortlived. The pot is not shrinking, as you suggest, and partly because investment performance has been generally good, though the requirement to hold a proprtion of funds in gilts / fixed interest is a worry, but a product of governmentt regulation, not the greed of pensioners who refuse to die in a timely manner.

The erosion of DB pension schemes in the private sector is a naitonal scandal - and governments of both flavours bear responsibility for that. But it won't be mended by welching on undertakings to public sector workers. And if that does happen, then we will all lose, because no-one will in future believe promises of a decent pension in lieu of salary in the public sector.

Chazza - by "pot" I meant the total average real (adjusted by inflation) income per head of population. As you have noted some funded schemes in the public pension had increased employer (= taxpayer) contributions. These contributions would have been less if Boon had not acted. I accept that some public employye pensions were funded, and that until recently were sufficient. But this does not change the economic facts or the present shortfalls of some.

Over 13 years at £5bn pa in to-day's terms is around £80bn - enough to fund around 350,000 extra public employees. In simple broad brush terms it is £1250 per adult, or £5.000 per person in a funded pension fund. On average it is £0 for those just starting to £10,000 to those just retiring. And forgetting the many who do not have significant pension funds, it is a shed full for those who really saved everything they could for a pension, and went without many luxuries.

The comments I made about personal pensions was not nonsense but fact. The economic effects of Broon's tax as stated is well understood by fund managers. And, of course the effect was retrospective in that it applied to funds already built up under a tax free contract. This sets a precedent for even reducing the currently earned benefits of public pensions. The personal pensions being offered now are 50% of what was forecast 10 -15 years ago..

So if so many in the private sector are losing their jobs, cutting their wages, and also seeing a halving of their pensions, then how can it be just to now ask these people to pay more for public pensions?

Amazing! So many of the above are really well informed and reasonable contributions. thanks Sundaygee for setting the tone. This is a really serious issue and deserves attention. The present government is having to do the dirty work left by the previous incompetents. Lets all remember what a betrayal of the working class all socialist govenments are guilty of. Brown ought to be brought to trial for his treachery.

Having worked in both the private and public sectors I just wonder if, 10 - 15 years ago, you would have said in a crowded pub 'I say, its worth taking a job in the publlic sector for the good pension you will get'. Laugh? they would have drowned in their beer.

Not only did Brown raid our pensions and ISAs but you may recall in 2000 the auction of 3G spectrum to the mobile phone companes which raised £22Bn and blew it on god knows what. Does anyone have the phone number for the war crimes people in The Hague? We might have some extra business for them.

I suppose he real message is don't ever get involved in anything long term which the government has a hand in. Unfortunately this includes pensions.

I retired in 93 on a pension of £13000, half salary. It has risen to £19k but an equivalent job to mine now pays £50k and the pension entitlement £25k. With CPI am I going to be robbed again?

I find the envious and frankly objectionable comments about public service workers needing to

"get real" somewhat unrealistic. I agree it's beginning to look like a witch hunt where the truth is the first victim.

As for the salary rises then apart from some dazzling examples at the top of the tree I am not aware in my field that salaries have in any way closed the gap between private and public sector jobs. I just happen to believe in what I do and so have continued to work in the public sector accepting for many years that my pay would lag seriously behind the private sector and seeing every year the real value falling. For many public sector workers job evaluation has also meant serious wage cuts on what in some cases were spurious grounds.Sundaygee's example is not typical in my experience.

So with 35 years service and many unpaid extra hours worked I am not going to apologise for being a public service worker and I will defend any pension rights accruing to me in whatever way I can

I am no expert in this area. Easy to agree with all comments. However, I do feel the following may be true...

1) The ex public sector workers on this forum and their modern day equivalents are not the problem.

2) The public secotr is horrib;ly bloated, I know several public sector employees who feel they contribute very little benefit.

3) Many public sector employees do not really appreciate the value of their pension, surely it is only fair to charge them appropriately for their benefits.

Change has to happen and public sector jobs need to be cut or costed properly.

Sad for anyone this effects but as a private sector entrepreneur who lost his business and all his savings in the recession I do feel that changes need to happen. I never moaned as I accepted it as a risk of what I did.

Happy bust businessman - AFFECTS! - duh!

The pensions for public sector cost 2% of the gdp. Thats nothing in our mad economy. Do we really want 6 million public sector people never to retire after looking after us and our familys for ever.

Do you people ever think about who teaches your kids, or treats them so sympathetically when hospitalised, I could go on and on and on. Just cause the private sector sucked out (and I blame the government for allowing private sector firms to cop-out of their responsibilities) don't try to drag everyone down to that level.

It's all very sad. Yet you quite happily pay your taxes for MP' expenses, doleits, etc etc without so much as a shrug!

Mike - it may not sound like much, but EVERYTHING has to be cut if possible to eliminate our deficit (let alone repay the borrowing). On the basis that any one item is only a couple of % of GDP, then we would cut nothing.

At market rates the current public pension cost would be 44% of the payroll cost if it were funded. The cash cost of public pensions is going to rocket, with longer life expectancy, a large increase in the number of public employees, and some significant pay rises for many middle and senior managers, GPs etc following restructures and the race for higher pay of those at the top. The current liability is £20k per person in the UK.

But, all in all, the public pension benefit has grown very significantly over the past 20 years, although most public employees have little idea of the value. Bearing in mind that it costs some £30k in a fund to buy £1k pa index linked pension, then you can work out that for 40 years work even someone on just £15k pa 50% scheme has an asset value above the average house price, or 15 years extra salary - not to mention any lump sums. With private DB schemes being closed in recognition of the escalating cost, the public sector has to follow - or face a pay cut by significantly increased personal contributions.

Jon

I don't know where you get your figures from, but the same actuarial projections that show the cost of UNFUNDED public sector pensions (and not all of them are unfunded) rising until 2014 do not show the cost 'rocketing' thereafter but falling!

I don't know which schemes charge £30k to buy £1k pa of indexed pension, but they must be presuming terrible investment performance. Mine charges £25k, an amount that would be lower once tax relief is taken into account. But given the choice of whether to contribute to a pension scheme or not (which most in the public sector were not), it would surely be a better deal to invest the money elsewhere, somewhere safe from the meddling of politicians and the envy of those who fail to understand the meaning of public service.

look at this :

http://www.bnac.org/files/BNAC%20Release%20on%20public%20sector%20pension.pdf

And try to get a quote on any index linked annuity on any of the common sites such as hargreaves landsdown

And I agree that with current depressed interest rates to help the Uk to repay its debt and the overborrowed overspenders to cope we savers need to find a home for our hard erned cash which will not simply subsidize the fools who borrowed more than they could handle

A good discussion without the usual mudslinging at public sector pensioners. Still missing the point - the aim should be to work out ways for EVERYONE to get a good pension. The biggest pension problem is people who are not saving anything or not saving enough - either themselves or through employer contributions - to be financially secure once they retire.

That is what is in the naitonal interest.

That it does not happen suggests that either it is not seen to be sufficiently worthwhile or that the system is not set up to make it easy to do.

psst - are these the same actuaries that overpromised on endowments, personal pensions, final salary pension schemes and were allowed to run famous historic life and pension offices into the ground, destroying thousands of livelihoods along the way? Mathematical snake oil salesmen the lot of them.