John’s Blog 5 Pensions - Public Sector Pensions - 2

This blog will try to explain Public Sector Pensions as simply as possible.

The Pension Scheme is one of the few remaining Defined Benefit Schemes.

Shared with rapidly declining Company Schemes; it is the ideal pension solution and should be universal.

It ensures a guaranteed pension income linked to average final salary offering security in retirement.

Normal Pension schemes are funded schemes in which contributions are accumulated in personal accounts and invested and grow to build a pension fund to finance retirement. Such individual funds offer security and being centrally run, build up large fund reserves to act as a buffer against market and other changes.

 The State in its wisdom, because it found such large sums attractive, or for cost cutting reasons, decided on a short cut from saving to pension, using income as it came in to pay immediate pensions. It ignored the simple arithmetic that\;-

            Pension value equals contributions times the working to retired population ratio.

In the Public Sector this ratio has fallen to 1.4, requiring a 36% contribution to give a pension of 50% of salary.

Overall contributions are 17% which only allows a 24% pension and in fact the average pensions paid are around this level on the last figures issued.

The balance is made up with the State Basic Pension, which follows the same unfunded basis.

Increasing Life Expectancy with people living longer both in retirement and swelling the numbers entering retirement, affects the number paying contributions to support the increasing numbers in retirement, leading to the current crisis. This situation is not sustainable or self-sufficient.

The real problem is that contributions are spent before they can work and grow over the forty year work period available. As a result, the contributions needed for a given pension are three to four times that for a fully funded scheme.

The obvious solution is to change to a funded scheme; dismissed by the current enquiry as not possible economically.

The fact that the alternative is less attractive or sensible appears to have been ignored, or that in America all Public Sector and Local Government schemes are funded and highly successful.

In addition such accumulated funds could be available for vital investment in the UK in Schools, Hospitals, Housing, Energy and Transport.

I feel the result is a quick fix solution which will be unfair and only short term until the problems become completely insoluble.

The subject of the next blog is the proposals and the way they are misrepresented to gain public support.