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Full inflation proofing of a pension is worth a lot

Retired public sector workers will receive a gold-plated pension increase worth twice as much as the average pay rise this year.

The taxpayer is on the hook to fund next week’s 10.1 per cent inflation-proofing boost promised to the five million pensioners with a retirement income guaranteed by the state.

Really, a lot a lot. One of the reasons why that public sector pay is very much higher than private…..

11 thoughts on “Full inflation proofing of a pension is worth a lot”

  1. Amazingly, many retired State employees seem to think there is a fund that their contributions went into which is paying these pensions. These disappeared from the private sector many years ago as part of Jock Brown’s plan to make everyone vote Labour. Perhaps there’s a secret fund invested in Spudbonds that pay 50% interest that’s paying all these retired doctors, teachers, coppers and public lavatory cleaners their second pensions?

  2. Allthegoodnamesaretaken

    Good article about this in today’s Daily Telegraph. Makes the argument that you should give the public sector a pay rise and remove their unfunded pension entitlements.

    Would be an interesting experiment to see who values the long term pension and who wants to invest it themselves.

  3. (1) I object to these bastards being described as “public servants”. They are, or were, government employees, that’s all.

    (2) There’s a wrinkle that the Tel article didn’t mention. (This is from memory so even more open to correction than usual.) When those of us with a suitable “private sector” DB pension get it, it gets less than the promised full index-linking because of interaction with our “contracting out” when we had the joy of paying reduced NICs. So be it – there’s even a helpful chap here who understands the detail of this.

    However the government employees’ pensions are specifically exempted from that deduction. Bastards!

  4. Central government public sector and State Pension, yes: unfunded. Local government public sector, no: funded, Local Government Pension Scheme. Whether it’s fully funded is a different question (screams of horror at having to increase payments from 5% to 6%), but LGPS is a funded scheme.

    This is another of the things forgotten about when Whitehall confiscated all the local healthcare services across the country in 1948.

  5. The rules of my (otherwise rather generous) DB pension limit increases to 5%, even though last year inflation (at the relevant date) was over 12% – so a 7% pay cut in real terms. When inflation was last this high (late 80s and very early 90s), the company made ex gratia payments to top up, but I doubt many funds will be doing that these days.

  6. @ dearieme
    It’s the bit excluding the contracted-out part where we get less than inflation because NO private company, not even Exxon or Shell, can guarantee unlimited inflation-proofing and still get an auditor’s approval for its accounts because it would be a vast and unquantifiable potential liability, so no auditor would sign off on them as ” true and fair view”. My former employer did, as Chris relates, make ex-gratia pyments to its pensioners to protect them from the Wilson-Healey hyperinflation but it could not contract to do so – the regulator would have jumped on us with all four feet if we had done so.
    The DWP is *supposed* to provide the inflation-linking on the “contracted out” part of our pensions – I say “supposed” with good reason, but that is irrelevant to the discussion.

  7. @ Tim
    I consider that the government has a moral duty to protect pensioners from inflation, just as each individual has a moral duty to honour contracts freely entered into.
    The “sequitur” is that comparisons of private sectyor and public sector pay should take into account the lower value of private sector pensions that are not inflation-proofed.

  8. My understanding (which of course may not be entirely correct) is that Teachers’ pensions are funded each year from the contributions from teachers’ salaries and from their employers. I suppose that this all derives ultimately from taxation, but I can tell you for a fact that many teachers, particularly those earlier in their careers, view the pension contribution as a tax, and the employer contribution as salary that they didn’t get paid! Currently, the employer contribution is something like 23.8% of salary, while the employee contribution rates increase marginally this year to between 7.4% and 11.7% depending on salary level ( see ). You can work out the whole deal in the main website.

    There are also many oddities about the scheme, such as for many years, each year of service contributed 1/80th of final salary to the annual pension amount, with 3/80th going into a lump sum, changed a while ago to a 1/60th scheme with no lump sum, and some pretty bizarre ways of calculating that final year’s salary – although now it is on a ‘career average’ basis. Also, at one point in the past, the retirement age for men was 65 but for women 60, and at first the harmonisation was to 60 for men as well! When same-sex marriage and partnerships were legalised, the pension contribution rates were increased to cope with the increase in ‘widows’ pensions – the surviving partner gets half. Yes, teachers, you have been charged to support your LGBTQ+ colleagues’ partners’ futures!

    In my experience, few teachers understand the system and what it will pay out (except as they approach retirement!), but trust me it is pretty generous, all things considered, especially what they get out, compared to what they ‘put in’. That is, it is a great deal if you can get it. Retired teachers will get the 10.1% increase this year, which no doubt makes those still working pretty fed up.

    However, for those who see their pension contributions as a tax, seeing their contribution rates go from around 6.5% to over 11% in a decade or so has meant that their take-home pay has not increased by the same percentages as their gross pay did, and no doubt that this has led to the more myopic in the ‘profession’ thinking that they have been short-changed. As Spock might be paraphrased: Live long, and you will prosper! (i.e. don’t top yourself because of a bad Ofsted report, because then all the contributions you and your employer made will vanish into the margins).

  9. Of course pension contributions are salary that wasn’t paid – it’s a deferred income arrangement. That’s the idea, hence the income tax deferred at the point of having some part of income deferred. And once again, may I politely point out that in an unfunded DB public sector scheme there is in reality no such thing as an “employer’s contribution” to the pension scheme; the public sector employer will not generally be earning income to pay for such a thing so it’s passed on to the rest of us – to whit, the poor bloody taxpayer.

    And that’s before we get to the Frankenumbers dealing with fund valuations, transfer values and so on and the howling about “underfunding” and “overfunding” of schemes.

  10. @formertory,

    Of course you are right, and you don’t need to be particularly polite about it: in many respects it’s scandalous. The point is that many school teachers are so dim that they don’t see the benefits until very late in their career. In pay negotiations, there’s the ‘finite difference’ theory: e.g. I think I am worth more than that other person by a certain percentage (difference) and even if I can’t articulate how much exactly I am worth, I can define it in relative terms. Just think about the way in which pay demands are so often couched.

    I beg to differ about the “employer’s contribution”, which of course in many fields such as civil servants and local authority staffing isn’t really paid, but in Universities it comes from the £9k plus a year charged to each student and genuinely does go to pay retired staff pensions. (“New” Universities – ex Polys – have staff on the Teacher’s Pension Scheme, “Old” Universities have their own scheme in which the percentages and rewards are different, but not by much). Agreed, there is no actual fund invested anywhere for the whole amount paid in, but there is a fund to buffer day-to-day and year-to-year variations.

    It remains a fact that early career staff do see that “employer contribution” as salary they aren’t paid (which is, as you say, absolutely correct), but they see it as something that they would rather have and spend themselves than to have it “stashed away” (even if it isn’t) on their behalf. From experience, I’d add that they see it gross, whereas if it were to be paid to them, it would attract NI and income tax, and would end up being a lot less!

    But then there is a shortage of maths teachers!

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