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Steve Bee: The three crises at the heart of our pension system

pension systemThere has been more talk lately about the disparity between the value of pension entitlements accrued by public and private sector employees.

It appears many are still surprised how much more some public sector employees’ pensions are worth than those in the private sector.

There are many reasons for that but it is the confusion around it which epitomises the real problem with the UK’s pension system.

It is just not well understood. It is not understood by employers or employees, certainly, but I doubt it is properly understood by those in the government or the media either.

We regularly talk of the “pensions crisis” in this country without realising that we have, and always have had, three such crises going on here, not one.

Steve Bee: Why we need an extra pension system

The main one of these is that half the UK workforce has been completely reliant on the state for income in retirement for over half
a century.

The state second pension (in all its many forms over time) being used to supplement the basic state pension entitlement was perhaps one of the biggest mistakes we have ever made in the field of pensions. That it has now been replaced by auto-enrolment for all is significant but, at the low levels of contribution currently required, it is unlikely to make a substantial difference to retirement income for many millions of workers.

Our second crisis is that most public sector pensions are paid for out of general taxation rather than being funded by money invested the way private sector pensions are.

So, in a world where generous defined benefit schemes are still being built up by public sector employees, most private sector bosses are unable or unwilling to cover such expensive schemes for their staff.

Our third crisis derives from that very point. Over the last two decades, private sector DB schemes have been phased out for new employees, as well as for some existing employees too.

What do advisers charge for pension consolidation?

The switch from DB structures to the simplicity of defined contribution has unfortunately come hand in hand with a general decrease in
the amount that private sector employers are prepared to pay into workplace schemes.

This has brought the disparity with public sector pensions into sharp relief, leading many people to feel they are paying more in taxes for others’ pensions than they are in contributions for their own.

If we have one element that is common to these three distinct crises, it is the level of contribution that employers are prepared to pay towards their employees’ pensions.

Those in the public sector are clearly willing to pay more than those in the private sector.

So, with this in mind, is it not time to consider whether inducements could be offered to companies to increase the value of the contributions they make to their staff pensions?

Perhaps differing levels of corporation tax or other taxes on business? It is something to think about.

Steve Bee is director at Jargonfree Benefits

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Comments

There are 13 comments at the moment, we would love to hear your opinion too.

  1. Steve, I think your slightly off here. Nobody is “willing” to pay more for pension benefits in the state sector, it is what they have to pay to be a member of the scheme and given how generous the schemes are most are not daft enough to opt out.

    Most private sector employers, took the switch from DB to DC as an excuse to reduce the employer contributions, not because they had any reason or need to, but it makes the bottom line look better.

    Education is the key, not incentives to private sector employers.

    Additionally all state sector schemes should be switched to funded from a certain date, so the true sustainability of those schemes can be demonstrated or not.

    And yes you find me one person in the private sector who thinks paying more tax to fund the pensions of those who now earn more than the average for the same job in the private sector is fair..

    It’s all about government policy and the vested self interest of politicians and has nothing to do with what’s in the country or people’s best interests.

    • I agree with much of what you say, Duncan, but nobody was complaining about high public sector pay (certainly not for nurses and midwives) until the crash, which was caused by the private sector.

      Certainly, for a period, salaries had improved (to some extent) in the public sector but they have slipped back, so far, that their is a huge shortage of nurses and midwives, which won’t be addressed until pay and working conditions improve.

      Workers in the private sector (which includes me) should remember they are not paying tax just to fund somebody else’s NHS pension, they are paying tax for a service so that we have someone that can fix us when we are sick or save us when we, or our family members, may otherwise die.

  2. It would help if the valuation against life time allowance was truthful re DB arrangements. The 20 times income was set in the early 90’2, today you would need 40 times income to purchase the annuity. Explaining the value of a DB pension arrangement is simple, but few actually understand the true value, especially in the Public sector.

    The biggest boost to confidence would be Governments to stop changing the rules every few years. The public have a very big mistrust of pensions, as the goal posts keep being moved. How can anyone plan for the future not even knowing if they will be able to retire at that age, as it might be increased.

    I suspect the public would be far less understanding if they actually knew how much the Gold Plated pension enjoyed by Government works cost them in taxation. Maybe it is time to balance the playing field and for the Public Sector to follow the Private sector and move to DC arrangements. No that would be interesting.

    • Just what I am speaking about in my comment, below, Martin. I don’t know a single nurse that has a gold plated pension. That is just Daily Mail speak.
      They are not all earning £50,000 per year you know, and many have had to take a few years out to bring up their children.
      If you don’t want a health service (and you soon might not have one with stealth privatisation and disappearing staff) don’t use it next time you have an accident.

      • My wife is a Nurse and she had no idea what her £15k pa pension costed. She has retired at age 55, gone back part time and earns as much as she did before, working a band lower, 2.5 days a week with half the responsibility, not in emergency ward afraid of what might come through the door next and a far easier life. A private sector worker would need funds in the region of £600,000 to purchase and escalating annuity with 50% spouses benefit at that age.

        It is not the pay killing the NHS its over management, inefficient practice and miss use of the service, her words not mine.People in A&E for minor things that should have been referred to their GP doctors and EU medical holiday makers.

        As for Gold Plated, yes I agree the new starters do not get as good a deal, but it is far better then almost all private sector arrangements who will have to pay for it. The issue as an example is teachers shouting about their changes and fair pensions, as they really do not understand what the pension package is worth.

        As for blaming the private sector, without the private sector and the taxes they pay, you have no public sector. Public Sector do pay taxes, yes, but where has the money come from? Taxed from the private sector. You could pay them net and save paying the money only to claim it back.

        There used to be a time not so long ago Public Sector workers accepted they got paid less because of these generous benefits and in the main job security.

  3. Another crisis is the fact that a few, just 4%, of the UK’s state pensioners are not treated fairly or equally and are discriminated against, with their pensions being frozen if paid in some countries overseas. This freezing applies to 95% of these pensioners who live in 48 of the 53 Commonwealth nations. The UK government’s excuse of affordability is disingenuous for the NI fund balance, from which State pensions are paid is usually several £billions above the Government Actuary’s prudential balance. Moreover a minimal increase in NI contributions of about 40pence/week [i.e. the equivalent of 1 cigarette/week] from the average contributor, would fund the annual £600 Million the Government claims it cannot afford. This British pension practice is at odds with all British core values of fairness, equality as well as non-discrimination. The 500,000 overseas based pensioners affected will fight the UK government to force it to change their outrageous pension practice. Visit http://www.pensionjustice.org .

  4. I have long said that a switch to money purchase schemes, in the public sector should be acceptable, but only for new employees. Then everyone would know exactly what they were getting into at the start of their employment and existing employees would not feel hard done by because they wouldn’t be affected. However, it should be considered (or remembered) that the final salary public sector pensions were a part of the overall pay structure and did, to a great extent, compensate for doing some pretty crappy jobs that were low paid.

    A ‘decent’ pension was, at least, one thing to look forward to for (just as an example because I have long term knowledge/contact of/with these occupations) nurses and midwives, who often suffer their own, lifelong, physical problems due to their duties.

    It must also be remembered that these same nurses and midwives (along with others) have had many years of pay cuts, in real terms, and have taken more of a battering than the rest of us since the financial crash of 2008; and any that have recently retired, or may soon do so, have also seen those massive pay cuts affect their pensions, for the rest of their lives. Not only that but they have been treated with a fair amount of derision from various sections of society and the media and, I’m sorry to say, some unsympathetic advisers that use this website.

    Any future changes that occur have to be accompanied by a fair review of pay and working conditions which, at least in the NHS, are appalling.

    • Don’t quibble with what Patrick says about the nursing fraternity in particular. However the Public Sector is about more than NHS staff. There is a huge administrative function in the public sector in general where pay levels and job conditions are probably similar to those in the private sector. But their pensions are likely to be much better than private sector employees. How long can this go on?

      • I can’t argue with what you say about other public sector workers,Calum, because I just don’t know enough about it. I wouldn’t condemn everybody, though, because many of them might be like one of my clients who worked for HMRC for 38 years and his salary was only £23,000 when he retired this year. So I wouldn’t assume the public sector salaries are better, en masse than private.

        Also the public sector includes police and firemen/firewomen and the army (unless that comes out of a different pot) who are treated pretty badly in a lot of cases.

  5. Steve, I think you perhaps miss a point or two.

    Public sector pensions are more generous quite simply because it is easier to spend other people’s money.

    The private sector are really not benefit agencies. We see what happens both here and in the US when firms forget that basic fact – they go bust. Their first responsibility is to make profits and pay their employees a competitive wage with decent working conditions.

    What we have in the UK are governments who wish to completely abrogate their responsibilities in paying a decent pension. (If that means higher taxes then so be it), but not PAYG, a proper and well managed sovereign wealth fund is what is needed.

    Personally I don’t see what was wrong with the second pension (I presume you mean SERPS). Those who earned more – and therefore paid more tax – got a better pension.

    • You beat me to it Harry. Of course those in the public sector are willing to pay more than those in the private sector ~ it’s all OPM, so why wouldn’t they be? But, anecdotally at least, we’re finally seeing some measures to curb the completely phony and lavishly excessive redundancy early retirement deals that have, for so many years, been such a common feature of public sector pensions. I knew a guy who worked for the MoD public relations department (yeah, really crucial to national security that was) and was pensioned off early at the age of 53. He was given the seven years worth of accrual for which he wouldn’t now have to work and granted immediate payment without reduction for drawing it seven years early. That, to my mind, was virtually nothing better than tax payer fraud.

  6. Steve, I can’t disagree that there’s quite a difference in what employer’s pay in to DB as compared to DC schemes for their employees. Is this though more due to what has to be paid (in to DB) compared to what they are willing to pay(or can afford in some instances?)in to DC schemes? I’d be interested to know what the contribution rates were way back pre Maxwell etc..
    I do though think that existing public sector DB arrangements are so much more generous, but that’s possobly jelousy talking

  7. The state funded public service pension even for poorly paid nurses is a lot more than better paid workers get.

    If the actual cost was shown on the payslips then this debate may be more balanced.

    Auto enrolement is a good idea but as a country we still live in a cloud. My brother works in the US. His employers contribution is 10% and his is 12%. This means that he has a chance of a half-decent pension. If one retires at 60 you may have 30 years of pension to take. Thus the problem is not enough is being put aside. AE for new employees must be at a much higher rate and no opting out unless one hits the limit.

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