Saturday, 29 August 2009

The Pension Game

A report by PriceWaterhouse suggests that the public sector has a very generous pension scheme. Well that was money well spent to find that out.

However, it isn't as simple as it seems. The average annual retirement income for an NHS worker is only £6,500 and the average local government worker gets around £3,800. The reality of all pensions is that only 4% of the retiring population get the nirvana of two thirds of their final salary income when they retire. That's because most people do not stay in a single job long enough, even in a final salary scheme, to qualify for full benefits. The vast majority either change jobs or enter public service late or leave early. So PWC's assertion that is causing a block to talent moving from the public to private sector and vice versa is a myth. You have only to look at some of the salaries on offer in public service jobs to understand that they are very generous pay packets to be earned as well. True, below management grade the salaries are lower but when you look at the incredible pension scheme, the draw to public sector can be strong. Private business salaries do tend to be higher and this keeps the lure of this sector going but that is because Britain has become a society of low savings and even lower planning for the future - we are a live-for-today society.

It is believed that as much as 35% of salary contribution would be required to match the generous public sector pensions for private sector workers - that is because they are back-ended. We accrue on average 6% of our salary at any time to toward our pension but our salaries grow and we pay the higher contributions for a proportionally shorter period and that is why we have huge shortfalls on what is required to live on even if we are diligent savers. In the public sector, this disparity is taken care of by the generosity of the taxpayer - we pay disproportionally more for public sector pensions than the pensioners themselves. That's a simple fact. In other words, we probably pay as much to fund other people's generous pensions as we do for our own over the course of our careers - you would have to check the sums but it cannot be far off the truth with nearly 1 in 4 jobs in the public sector.

There has been controversy lately as companies like Barclays and especially RBS have cut the payouts from their pension schemes after culling staff in the wake of the financial crisis. For RBS workers, it was particularly galling after the fabulous payout and topping up of ex-CEO's Fred Goodwin's pension which he can draw early anyway. At Barclays it comes as a hard blow as staff have been cut and traders are again courting controversy with more bonus payments worth the pension saving in a single year while new teams of 'talent' arrive with amazing packages worth the salaries of hundreds of low end staff individually. It seems very curious that these companies are not saving cash on bonuses and putting it into pensions schemes or, indeed, why have they not been doing this in the past?

Pensions is a looming time bomb for us all and the Government. Our good friend Lord Turner found time between his many jobs to put his name to a report that someone else wrote, I dare say, as he has to earn multiple salaries, which urged pension reform in public service and a potential switch to average not final salaries as the basis for pension entitlement calculation, which would make sense. Pity he doesn't look at other problems with such diligence but as with many high level business people they are great at cost cutting but poor on working out how best to deal with profit as most of it goes to a very narrow band of people leaving little to be invested in pension funds for staff.

It is a question in the private sector that the Government tried to address with the pathetic implementation of the dreadfully poor and ill-thought out stakeholder scheme. It got us nowhere but hit the soundbite machine as usual. Reading Niall Ferguson's Ascent of Money, it shows how our Welfare System has been so badly thought out compared to even under developed nations in South America as we are the most highly insured nation in the world by individual cover yet we have so little benefits at the tail end. It seems the money just goes into a massive sump - much of which and more was consumed in the bail out frenzy but a great deal of which funds a very uneven balance toward the public sector remuneration.

There isn't a great deal of time to sort the issue out. This year the population grew to 61.4m in Britain and for the first time in a long while it was births which accounted for the growth rather than immigration as mothers gave birth, on average, slightly younger than usual to far more babies than the rate of deaths in the UK. The old are growing older.

The problem of pensions, benefits and, now, unemployment are issues which are right at the head of the agenda but no one can see it.

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