Phillip Hammond speaks
Orignally article appeared on MoneyMarketing a few weeks back.
The comments below are taken from the article and sum up some of these issues. There is a big problem with these schemes. Not only from a funding perspective, because the taxpayer is going to have to pick the bill up but from a fairness perspective.
Ordinary working members of the public end up with a crappy, high charged, non guaranteed pension scheme but those lucky enough to get a job in a hospital or the local council end up with a massive pension pot – in the main funded by us.
This cannot continue.
Patrick as someone who works in a company that specialises in dealing with those in the Public sector, especially the NHS, the “myth” that they are poorly paid etc, is just that, it’s a myth. The contributions they make towards their schemes other than for those on bigger salaries has hardly changed, despite a massively increasing cost burden to the tax payer of supplying those schemes.
Take for example the NHS pension scheme, the only really substantive changes to it to reduce the cost, has been the change from the 1995 version of the scheme, where NRD was 60, to 65 for the 2008 scheme, now state pension age for the 2015 scheme. At the same time when changed to the 2015 scheme it was changed to career average earnings (adjusted for inflation) over the older final salary version. That sounds like a good change? Well at the same time they changed it to a 1/54th scheme, with no cap on service.
So now, we have gone from the 1995 scheme, which was a 1/80th + cash scheme with an NRD of 60, with maximum benefits capped at 40 years service, to a 1/54th uncapped scheme, with the only sop to the cost of it being the NRA being increased to state pension age and the “contributions” for high wage earners going up.
Cleaners etc are no longer employed by the NHS, so other than clerical staff and the such as groundskeepers, the lowest paid staff are usually nurses. However like all public sector employers, earnings are partly down to the job you do, but also massively down to how long you have worked there, with guaranteed service related pay increases, such that in the literally hundreds of retiring nurses I have reviewed the pensions off, less than 5% are on a full time salary of less than £40kpa, most are on £40-50k FT equivalent and significant number are on £50-60k+ FT equivalent. The fact that they don’t get major promotions over the years, means that career average actually frequently works out more beneficial than a slightly lower acrual rate with a final salary link.
So now we look at the contribution levels. Most will be on a 9.3% contribution rate, but given that they will also be into higher rate tax, the actual “net cost” to them becomes only 5.58%. So lets assume a starting pensionable earnings now of £28k and their actual contribution rate now is £1,562.40pa net. If we assume the equivalent of say 4%pa pay rises over their career and assume a 40 year service record by the time they reach their NRD, the total cost to them in 40 years time would be calculated to be approx £156,000. However by this stage, their earnings would now be approx £134,500 and based on that, (and assuming that the revaluation rate averages 2%pa) they would then receive a pension of approximately £71,682pa. Even if we assume that annuity rates had risen a little bit by then (seems unlikely) to say 3.5% for index linked annuity with the appropriate indexation, spouses benefits etc, the capital cost of that income would be £2,053,200. Yet they wont have even paid in 1/10th of that amount. Even if we assume that their contributions were invested throughout that period (which they won’t be, because the whole scheme is unfunded), if we assume that a net rate of return of 6%pa was achieved, then that would provide a fund of £429,000 after 40 years, compared to the cost of £2,053,000. Even if we increased the average rate of return to say 7%pa, then the fund still only reaches £531k. As such the actual funding level required as a “tax payer” contribution to make the numbers add up is at least 4 times the net personal contribution level in other words its 22%.
So are you honestly trying to suggest that even with the changes, that this scheme is not MASSSIVELY generous and unsustainable by the tax payer, even before we take into account the unfunded nature of the scheme.
Hell if we assume that 1.5m people work for the NHS at any one time and that this is the average (which is in reality much higher, because of the huger numbers paid large salaries) and assume an average retirement life expectancy of 30 years, this means that there will on average be 1.125m NHS pensioners at any one time, receiving an average of in todays terms circa £25,000pa each. So in todays terms, that’s going to cost the tax payer £28bn a year, just for NHS staff, now add in all the other public sector schemes, most of which are unfunded and the cost is going to be at least say £75bn a year, which is 14% of the total tax take! Just to pay out for public sector pensions.
Concerned about your NHS Pension, you can borrow my brain and get all the guidance you need.
