PENSIONS

The Public Sector Pension Problem
A Living State Pension
Mr Brown Broke Your Pension

 

The Public Sector Pension Problem – 19/10/2009

 

The Country is spending approximately £95 billion more than it receives in tax revenue this year alone.

I can save a huge chunk of it in one change.

A change that is morally and ethically correct.

A change that corrects a huge discrepancy between those who have, and those who have not.

A change that re-instates a fair balance to something which is currently chronically unfair, and hugely discriminatory.

Public Services Pensions – the true cost of early retirements.

QUESTION 1) How much does it cost you, the income tax and council taxpayer, when somebody in public services is offered early retirement?

QUESTION 2) Why are so many people offered early retirement from public services in the first place?

The answer to question 2) is relatively simple -  In most cases, it is considerably easier for the managers to offer early retirement rather than face the employee with a straight forward redundancy, or indeed a dismissal, where the employee has proven to be incompetent or negligent. Of course, early retirement does not preclude the public sector employee from getting a redundancy payment as well.

They do in fact usually get both.

In effect, for the managers, an “early retirement with an enhanced pension and a redundancy package” is a much more preferable option, compared to putting an employee through a messy dismissal or a compulsory redundancy.

Of course, some cynical people may say that the committee who oversee such matters may well be looking towards their own early retirements as well.

There are a couple of other matters that we should bear in mind at this point.

First, an early retirement with an enhanced pension is also standard practice in our public services for “ill health” retirements. A qualifying “ill health” diagnosis is often for something such as a bad back or a nervous stress related complaint, neither of which can be diagnosed with any accuracy or precision.

Sadly, there are those who abuse the system, as evidenced by their miraculous recovery just after their ill health pension has been awarded – however, that is another issue.

Secondly, when our public services call for voluntary redundancies it is usually the higher paid, longer service, employees who take it, especially when they are offered enhanced pension benefits with a redundancy package as well. They rarely seem to operate the private sector standard practice of “last in first out”, and therefore the redundancy process becomes unnecessarily expensive because the people involved are expensive employees.

The concept seems to be “we will let people at the top go early in order that others, behind them, have the opportunity for promotion”.

So, early retirements with enhanced pensions are common practice in our public services, and yet virtually unheard of in the private company sector. Most of us will know someone who has received an early retirement, redundancy or ill health, package from public services, along with an enhanced pension, for whatever reason.

The public service pension is vastly superior to the private (company) pension, and vastly more expensive as a result, for a number of reasons -

1) their pensions are fully index linked

2) they get a tax-free cash sum in addition to their pensions rather than a trade off for a reduced pension

3) they get a full disability pension based on their total prospective service (i.e. they include the years NOT served rather than just the service achieved up to the date of disability)

4) they typically get to retire at age 60, or earlier, instead of 65

5) and the biggest benefit and the biggest cost of all – they often get early retirement for various reasons, including redundancy, usually on a pension that has been fully enhanced to the normal retirement age, despite the fact that they have not served the years concerned.

The question I want to address is “how much does all this cost, and who is paying for it?”

The simple answer to who is paying for it, is … you….. you pay their “employer” contributions because it is taken out of your Income Tax and Council Tax contributions.

In terms of how much does it cost, I can make the following observations gleaned from my own experience as an Independent Financial Adviser over the last 27 years.

In a really good private or “Company” pension scheme, employee contributions are typically set at about 5% of salary, and then they have an additional contribution from the employer of about 8% of salary, or in some really exceptional cases, up to 12%. However, it is an interesting comparison that the normal contributions for public service pensions are 5% or 6% of salary for the employee, and between 18% and 30% for the employer – that means us – you.

The following actions on public service pensions would bring some compatibility with private company pensions, and would save the Country tens of billions of pounds in the process -

remove the index linking,

put disability retirement onto a “current service calculation” rather than “prospective service”,

cease any further enhanced early retirements,

and make their retirement age 65 …. like the rest of us.

These changes would simply bring the public sector retirement benefits into line with everybody else, and at one stroke would reduce employer pension contributions by approximately 10%  – that is a saving of 10% of the entire public service sector salary costs.

Let us look at some approximate figures.

65 million people in this Country.

25 million people working.

Of which approx 8 million people work in the public sector.

It is likely that about 10% of the 8 million will be coming through to retirement (age 55 to 60) in the next five years.

Assume a lowly average public sector pension benefit of £8,000 per year (they are obviously much more than this).

800,000 retirements deferred from age 60 to age 65, saving £19.2 billion over 5 years in pension payments.

800,000 retirements deferred from age 60 to age 65, saving another £19.2 billion over 5 years in tax free cash payments.

200,000 early retirements deferred from between age 55 and 60 to age 65, saving another £9.6 billion in pension and tax free cash payments.

The total saving of £48 billion pounds is of course a very broad estimate, because I do not have access to the accurate figures for numbers of employees etc.

However, if the average public sector pension is more than £8,000pa, which it probably is, and if the numbers coming through to age 60/65 over the next five years is more than 800,000 people, which it probably is, then these figures are understating the reality by a very considerable margin.

The fact of the matter is that the public service pension is way out of line compared to that which is available to the rest of us in the private sector, and any action to redress the balance will certainly save tens of billions of pounds.

“David, apart from anything else, are you seriously suggesting that you want to review the £95 a week state disability benefit, whilst the public sector carry on taking their extraordinary fully enhanced pensions on the basis of some obscure disability?

Are you really suggesting that you want to move the state retirement age for the rest of us to age 66 or 67, whilst retaining the public sector retirement at age 60?

I don’t think your people have thought this through.”

 

Restoring A Proper State Pension

 

This Government’s destruction of our pension system, is  a lesson of epic social disaster, probably unsurpassed in modern history.

The facts are simple. The Labour Government started taxing all our private pension funds within days of coming to power in 1997. At the time, the professions, protested about this dreadful piece of “smash and grab” taxation, but nobody in Westminster listened, not even the Conservative Party who were too busy playing party political games with themselves, now that they were in opposition for the first time in 18 years.

Since 1997, the inevitable effect of Chancellor Brown’s new £5billion per year tax on pension schemes, was that it reduced investment growth by that same amount inside pensions schemes throughout the Country, which in turn substantially reduced their viability altogether. As a direct result, most of our “final salary” company pensions, which were once the envy of the World, have now been closed, and quite a number have collapsed completely.

To give you an example, if you were one of the unfortunate members of a collapsed scheme, you might have expected a pension of say £12,000 per year, but now you may well be offered nothing, or perhaps just two or three thousand pounds per year.

Imagine working all your life, being cautious and  sensible with your money. Imagine anticipating a comfortable retirement on £12,000pa private pension, with perhaps another £4,800pa state and £3,000pa additional state pension (SERPS). This is not the stuff of luxury retirement, this is a very modest £19,800pa pension. Then, just before you achieve this modest goal, due to the knock-on-effects of Chancellor Brown’s 1997 tax on pensions,  your private pension scheme goes bust, and your pension is therefore reduced to £3,000pa.

Not only that, but Mr. Brown has also decreed that you should be “means tested” before you get your State Pension benefit, and because you have a few grand in savings, you will also be refused the additional State Earnings Related Pension (SERPS) as well. Your total pension income has now been magically reduced from £19,800pa to a mere £7,800pa.

Now contemplate all the massive increases in petrol, gas, electricity, food and council tax. This really is the stuff of nightmares, but it is all too true in all too many cases.

The damage to the attitudes and beliefs of our working population is immense. Just consider what this does to a man’s self esteem, his pride, and his ability to retain his family’s confidence?

Working men and women, must have dreams and objectives in their working life, and within that dream there will be security, honour, and some moderate achievement later in life. A decent pension is a very big part of that. The working man is the cornerstone of this special Country. Remove his pension at your peril.

 Of course, whilst the Politicians will deny it, there is in fact a way to correct this social disaster.

I would advocate a State Pension for all, man and woman, of at least £10,000 per year (£192 per week), based simply on age and the number of years National Insurance contributions.

I am a professional in the world of pensions, and I can assure you that this solution is affordable on existing levels of taxation, and it is perfectly viable for our Country in the longer term too. It is a matter of getting proper value for the taxpayer’s money, whilst also establishing some modest priorities in all our national expenditure and our public service pension schemes.

On the basis of financial and social necessity, it is absolutely essential that we reinstate a proper living state pension. Apart from anything else, we seriously do owe it to our older generations.

 

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What Mr Brown Has Done To Your Private Pension

 

We urgently need to repair the massive damage that this government has done to our pension systems, and as a small step in this endeavour we mast restore our State Pension to a “living wage”.

I would advocate a minimum basic State Pension of at least £10,000pa for a man and £10,000pa for a woman regardless, of marital status.

Even this level of pension is not as much as is paid in many parts of Continental Europe, and despite what many Politicians will tell you, it is indeed perfectly affordable, depending on your priorities.

Creating a worthwhile State Pension is the very least that we can do for the older generations who have given so much to this country in the past. They have been promised a decent State Pension, and yet at the last minute it has been taken away from them.

Surely, “means testing” of The Sate Pension should be eliminated completely?

Providing a realistic State Pension for our people is of fundamental importance, not only to the health of the nation, but it is critically important in order to retain the trust and ambition of the people. They have paid for it and they should have it. We betray them all, and therefore ourselves, by not making proper State Pension provision.

If the older generations have a worthwhile State Pension with which they can then afford the products and services of the economy, the entire economy will then benefit.

With a proper State Pension for all, there will be massive savings to be achieved in the Civil Services, many of whom currently spend their time deliberating on who should get which microscopic state benefit, how much, and why. The bureaucracy surrounding State Pensions could easily be eliminated simply by paying an “across the board” livable State Pension to those who have 40 years qualification.

In terms of Civil Service staff, this alone would produce massive savings at both national and local government levels.

Furthermore, long term care and for the elderly would also be directly funded by the pensioners themselves to a much greater extent than is currently the case. The money will not have to go through the waste and the myriad complexities of Local Government. Therefore, massive savings will be made in Local Government, and with a wealthier, healthier aged population, the National Health Service would be under much less pressure.

Even larger savings could be made by eliminating the gravy train of early retirements and enhanced pensions in the Public Sector, other than on ill health grounds. Even then, early retirement on the grounds of ill health can, and should, be rescinded on recovery, and then such people could return to work.

In short, I would advocate that we should give a realistic and livable State Pension to everyone, simply based on age, and the number of years National Insurance contribution.