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.

Paying The Price

If you have steadily put money aside for your future in something like a pension, ISA or savings account, have had a relatively secure job over the last 10 years and are due to retire in the next 5 to 10 years, then you are probably bearing the brunt of the financial mess the country is in.

With interest rates at 0.5% and the stock market behaving like a lead-weighted yo yo, prudent savers have been amongst the worst hit by the financial fiasco. It is also likely that the same people will be the major port of call for solving the long term borrowing problems that the Government has bought for the future.

The Pension Pain

If, like me, you have seen your potential earnings in retirement trashed inside of 18 months, it is pretty disheartening to watch the massive monies being spent which we will have to pay back in the future. It can only mean one thing - higher taxes which will probably mean that we will have to work longer in order to save enough money to retire while the burden in retirement will be higher.

The reward for sensible financial controls and diligence by individuals is to have a shorter and less comfortable retirement.

The problem is very serious and there is no longer any real solution to it. The stock market may recover over the next 5 to 10 years but that will for many just get their pension pots back to some kind of parity to the value just ahead of the Crunch. How galling then to see Fred Goodwin lose billions and walk away with a highly lucrative and secure pension from the age of 50 for the rest of his life. But then again, how galling to see rafts of Civil Servants and Politicians get the same benefit but paid for entirely out of your pocket in current tax payments.

Making Pensions Pay

The serious outcome to all of this is that there is a greater potential for people to retire and move abroad to where tax regimes are kinder. Cyprus is currently a country that offer a superb climate, is very anglophile, and has a tax rate of just 20% on pensions. Properties are still reasonable value, the infrastructure and law mimic the UK, English is widely spoken and you are never far from a beach. For the homesick, there are branches of Debenhams to get the essentials like HP Sauce.

I am sure there are many other places, hopefully, that will keep such status despite the onslaught of the EU and 'harmonisation' which is not the process in which Harriet becomes first PM and then President of the United States of Europe - what a terrible nightmare that would be.

But certainly, this is a very real problem for the future and threatens to be another blow to the Government's plan on paying back its borrowing. If less people in retirement stay in the UK, then again tax revenues will fall - particularly if they take their estates beyond the borders of the UK and out of range of Inheritance Tax.

This Government has systematically ignored the growing problems of providing an income in retirement unless you are a Civil Servant or Politician where the fabulous pensions are paid for in current taxes - a nice 'Ponzi Scheme' for those in it. With better than 1 in 4 jobs now in the Public Service, more of our tax will be paying for these pensions as time goes on while we get nothing in return from the Government.

Personally, I think guaranteed, end salary schemes for Civil Servants and Politicians should be stopped immediately and make them carry the same burden as the rest of us and stop us paying for lazy bureaucrats' retirements funds.

Next up - Public Servant Expenses Accounts.