Public sector pensions likened to ‘Ponzi scheme’

What planet is Brendan Barber on? The cost is borne by the private sector and, in particular, future taxpayers who don't presently have a vote.

bang on i reckon but why has it taken this long to come to this conclusion.

what an utter mess out political leaders have put us in and i dont just mean labour,everyone has to take their share of the blame for not tackling this problem not least the tories who refised to get involved in the past.

It's getting to the time when Unions should be banned altogether. They had their purpose 100 years ago, perhaps even 20 years ago to a limited extent, but they are now an anachronism we can no longer afford or endure. Banal, naive and now just leeches on the workers they claim to represent.

Time for them to go - the same way as the British Communist party finally admitted the game was up in the 1990s.....

The Civil Service Pension Scheme is used as the basis of MPs pension arrangements, they are free or virtualy free of employee contributions, which is hardly surprising as they eminate from an earlier financially incompetent labour regime . Whereas those of us in the private sector who wish to have a decent pension have had to contribute very substantial sums for our retirement. The government should be scrapping the civil service and local authority pension schemes and introducing an employee funded scheme based on normal pension investment criteria.

Investment of the employees contributions should be in genuine investment grade securities rather than reliance on the tax payer from one generation paying out of governments income for another generations pensions. This was clearly a system invented by the financially illiterate [i.e. the Labour Party and the trade union movemen]

What a bigoted, ignorant and uncaring lot you all are. Do you know anything at all about public sector pensions? I can only speak for Health workers, who have, contrary to the views you have expressed, paid for their pensions in two ways. Firstly, for working for wages whihch I doubt that any of you would accept, many of whom are highly qualified and all of whom are highly motivated to do their very best for those they care for. Secondly, by paying 6% of their salary throughout their employment.

Obviously,none of you have any knowledge of the meagre pensions which are achieved after a lifetime of working in the service - just one example is of someone, after 33 years in the Ambulance Service, who retired a few years ago, received just over £10,000 lump sum and now gets an annual pension of under £700 per annum. Does this sound like the "gold plated" pensions we hear so much about? I don`t think so!

It would be so refreshing if some of the correspondents who have written today and previously on this subject, could appreciate the dedication of Health Service staff instead of constantly and shaemfully vilifying them.

Sorry, this should read £7000 per annum not £700!

Such a lot of hot air on all sides. Just look at it dispassionately and,read the summary in ther report.

Blodwen, I understand where you are coming from but there are people in the private sector working just as hard who don't get the a comparable pension pension. If public sector pensions are correctly costed then true comparisons can be made between public and private sector jobs.

You mention paying 6% of salary towards your pension. The problem is that , broadly speaking, the government has valued the cost of each year's accrual of pension ( for which you paid 6%) at about 20% whereas the true cost is somewhere between 30% and 40%.

Unfunded public sector pensions have clearly,for years, been a potential disaster area

which can no longer be sustained in the current economic climate ,but,with

the unions showing a growing tendency towards militancy,any determined

government effort to tackle the problem increasingly seems likely to lead to a period of

major social unrest which will undermine the current weak economic

recovery.Depite the problems, rapid action is essential:any delay will only

exacerbate the problem.

Q. Why has it taken so long for people to realise there's a massive flaw in Public Sector pensions?

1. With probably four years and 10 months to the next election 'Joe Public' may have time to figure out it's not the current government's fault - it's been looming for decades

2. Actually, JP doesn't 'get' pensions, period. He doesn't really know that if he retired today at 65, after putting £50 into his private pension, every month since 1970 (gross with tax relief, at 6% pa) it would now payout about £100/week .... fixed, single life & with no index linking.

3. Meanwhile, 'Jeremy Public-Sector' looks at his monthly pay slip and says his pensions comes from his tax and National Insurance contributions.

Perhaps Jeremy, but where does your freaking Gross Salary amount come from!

That was 6% average growth pa

Blowden paying 6% or something that costs 40% is wrong and should be stopped.

In public sector you cannot be sacked unless you kill someone you just get moved to a new department if you are useless (even teachers).

The median wage in the public sector is higher than the private sector (the bankers and company directors skew the mean data).

The public sector workers have flexi time so overtime can be taken as holiday. They do nothing unless they get paid for it! Junior doctors excluded.

The public sector workers need to smell the coffee.

Dreckly,

I don't think people have only just realised, certainly I've been aware of the unsustainability for over 20 yrs, it's just that no administration has been prepared to tackle the problem because up until now it has always been easier to shelve it - the situation is now critical.

In your point 3, you seem to be confusing "unfunded" with "non-contributory"

Most public sector workers make pension contributions it's just that the contributions don't go into a fund - they get spent - on paying existing pensions, the liabilities are no longer covered by the contributions of current employees and hence , yes it is a Ponzi scheme.

But don't forget that when contributions more than covered liabilities, the rest simply went into the pot to be spent on welfare addicts and quangos etc.

The simple fact is that the government`s own statistics show that people educated to degree level are more poorly paid in the public than the private sector . I and many others have spent much of my career in healthcare working long hours for which I was poorly paid. The compensation for this was the expectation of a decent pension scheme.

If this or any other government rewrites the rules on existing members, there last incentive for me and I would imagine a fair chunk of the other clinicians and nurses to remain in the NHS will be gone. Of course the government wil always find ways of filling the NHS with more (yes it`s been happening for some time already) foreign doctors and nurses and the "standards" they bring with them.

So you can all look forward to a third world NHS or an expensive private sector.

The other problem that noone seems to talk much about is that changing the rules for existing members would hugely undermine confidence in pension schemes. Why would anyone want to contribute to something that can be taken away 20 or 30 years down the line with the stroke of a pen ?

One problem with the public sector pension scheme is that it is a blank cheque. Also it is often abused. Promotions just before retirement so that the pension is higher. Also teachers that leave early with stress and firemen that go early with a bad back. They all get a pension made up as if they competed their service.

This is just if you can weed out the genuine cases.

I get taxed on my company car as it is a benifit in kind. How about taxing the value of pensions over say 20%

Pensions are taxed as income anyway.

Of course this attack on the Public Sector pensions is really more of an attack on guaranteed final salary schemes. Due to systematlc poor management of defined benefit funds in the private sector there seems to be a mentality that defined benefit schemes should be shut. How about some accountability for the poor performance and management before dragging the public sector into the mess.

I would also echo the views of Devils Advocate - many pubic sector workers have no choice but to work in the sector, and are therefore unable to just move if they don't like what is going on. Also, many public sector workers know that their direct remuneration is significantly lower than the private sector, which is why the guaranteed Pension is critical to these workers to balance the overall remuneration.

DAY TRADER,

The tax over 20% would be against the benifit in kind that the real cost of a public sector pension actually costs.

Or the 20% could be added to their salary and then removed. That way public sector and private sector wages could be compared on a level playing field.

Surely, the best way to deal with this is to do the same as we do for other benefits, taxes, penalties etc.

Set a system up for businesses and the public sector, where the rules are absolutely defined.

Employee contributions.... x%

Employer contributions......y%

Retirement age..........60 or 65 or whatever

Tax free lump sum........ 25%

Actuarial reductions... 4% p.a.

Defined contributions......

All have the rules the same for all, as in tax, murder, unemployment pay, stamp duty, VAT... why do we have to have different rules for public and private sector for something as important as pensions?

We are in such a terrile mess because as a country we love complexity and opaguness in every thing.

Why do we have a special public sector pension scheme? Scap it after 3 months notice and give public servants and MPs exactly the same shemes as operate in the private sector.

What asonishes me is that whenever I read anything from a public sector worker complaining about their terms and conditions (they make 6% contributions towards their pensions, they work for low pay and only retire on £7000 per annum and so on), it always strikes me that they are discussing what would, in the private sector, be regarded as near-Utopian conditions for the level of work they perform. We clearly don't occupy the same worlds but I don't know who lives in the real one!

As for Mr Barber, it has to be remembered that the unions - on which he depends for his income - mainly only exist in large number in the public sector. Inevitably, therefore, he does his best to defend his own interests. Personally, I discount anything he says on this subject.

Franco,

Scrap it? - How would you fund everybody's transfer value?

Or would you just rob everybody of their pension and leave them destitute?

Why do we have a State Pension scheme, or would you scrap that as well?

Workable salary related pension schemes could well be a vital part of retirement planning for future generations. Much as I agree that many public sector schemes are overly generous (the Civil Service are particular culprits here - their pay and conditions also more than matching those of broadly comparable jobs in the private sector), I would like to see this review used to realign the public sector DB schemes as beacons, examples for the private sector to follow.

If the public sector schemes can be made viable, possibly by going CARE, by reintroducing the salary cap (and lowering it - if execs want to save more, they can get themselves PPs) with reasonable contributions from both sides (perhaps around 10% each?) and definitely by being at least partially funded, then that would be ideal.

There is little doubt that many public sector workers have far too easy a ride when it comes to pay and conditions (Civil Service), though others (the lower reaches of Local Government for instance) do not necessarily - greater parity across the public sector in all areas would be a huge help before considering pensions.

Despite the fact it's easy to sit in the private sector and moan that public sector schemes are far too generous, I wouldn't wish the average private sector pension provision on anyone. This whole review could and should be used as the spur to reform our whole pensions system, our whole outlook on retirement. It's a golden opportunity that will almost certainly be wasted in favour of making some short-term savings.

The unsustainability of current pension systems is a problem of simple arithmetic. The solution will require a radical cultural change.

Until recently pensions were an irrelevance. After 45 years of working life you retired and lived for a couple of years before dying. Who paid your pension, usually not very much, didn’t matter. Average working lives are now likely to be less than 40 years while retirement years may be as many as 30. If you want to have a standard of living when retired similar to that enjoyed while working you will have to think in terms of saving a third of your pretax income so as to shift consumption from working years to retirement years. Think of it this way; you are quite happy to work for five days and keep some money aside for the week-end without arguing that some employer, pension fund or other should pay for it. The same principle must be applied to a longer time period.

No doubt there will be those who say that they cannot afford to live let alone save. There is no doubt that this is the case and those people must be protected, but we cannot expect future generations to support us and we must therefore build a productive economy that can reward the lowest paid sufficiently well for them to effectively provide for their old age. Is there any government who understands this and is capable doing what needs to be done. Every government in my living memory has taxed and regulated the life of enterprise, vision and success.

Sooooooooo predictable. Any views espoused by the IOD are always 100% against the interests of 90% of the people in this God-forsaken country, so no-one should take any notice of them.

The last 6 years has seen the almost total destruction of the retirement plans of 30% of the population already as a result of financial fraud and incompetence, pension schemes being valued at market lows used to justify their closure, when we all know that pension investments MUST be looked at long term, and excuses on excuses found to end reasonable (and I think that's all they are, "reasonable", not "generous") pension schemes for people who have contributed to them. Many state workers, - and I'm not one of them - don't get paid that well, and so a non-contributory pension scheme is appropriate - just like some banks I know - and to attack both their pensions AND threaten to make 1 Million redundant on much worse terms than previously agreed at the same time is frankly more akin to Feudal or Stalinist treatment of these people rather than enlightened 21st century "civisation".

No doubt the authors of this report have very comfortable pension schemes thankyou very much, so what do they care?

Public Sector pensions are a model of what we all would like, but are unaffordable/unfair as currently constructed. The reforms needed such as increased retirement age, reduced accrual rate or increased contributions are all well known.

But even when public sector pensions have been reformed it is pie in the sky to expect a big voluntary upsurge in similar private sector provision. This is because the Brussels Dictatorship has destroyed most benefit to employers of providing pensions. The 1990 “Barber Judgement” ruled pensions were deferred pay.

Prior to this pensions, or retirement gratuities, had been a reward for long loyal service and survival. For the employer, the benefits of offering a good reward at the end of loyal service had been recognised since at least the time of the Pharaohs. But if pensions are merely pay and entitlement is not dependent on loyalty there is little benefit to the employer in doing more than the legal minimum. (Older subscribers may remember Norman Tebbit’s comment on Barber). Of course, some people might argue that the Barber Judgement was reasonable, but the point here is that it cut the link between loyalty and pension entitlement and why should an employer bother providing one if there is little or no recognisable benefit?

I would quite happily take responsibilitiy for my own future annual pension if the Government gave me the value of my pension pot. I can then decide what to do with it (probably leave the country with it). Of course they would not want to do this as the liability would materialise immediately rather than having the benefit of spreading the cost over the years when the pension is taken but at least I wouldn't have to listen to the bleating about how taxpayers are currently having to pay for it (I did forego pay for the contributions to the scheme).

OK I hear you say but you haven't paid enough. Well that's not my fault the Government had the pension scheme actuarially valued every five years to assess the liabilities and decide on the contribution rate. I sort of relied on the fact that they got it right over the decades. In fact they are still saying they got it right.

After 40 years of contributing to come back and say we want to change your accrued rights, I take some issue with. Make no mistake they have reduced the value of accrued rights. They have already confiscated a part of public sector pension "fund" by changing the uprating factors. Yes, they took uprating into account in the contribution rate set. I also purchased additional benefits including RPI uprating, at enormous cost. Part of this money has now been confiscated. Whether you think it is fair or not (I expect the private sector people will be jumping up and down rubbing their hands with glee) it sets a dangerous precedent where a Government confiscates money built up over decades (not through taxation or because of something illegal but just wipes it out). To put this into perspective it is as the same as you buying an annuity from an insurance company with RPI uprating and they then turn around and say we don't actually want to pay you that but something much lower. I guess most people would be a bit upset about that but hey ho life was never fair.

There seems to be continued misconception here that public sector pensions are non contributory - get your head round this - THEY ARE NOT! - some are (some civil service pensions) but the majority are contributory (up to 11%) and it has nothing to do with levels of pay either.

I think it's fair to say that Gordon Brown robbed and continues to rob every private sector and personal pension when he removed the dividend tax credit in 1997.

I therefore think it would be a huge mistake to have any sort of joint overall scheme in which the government had any say at all.

It would just end up like the State Pension (another Ponzi scheme) where benefits bear no relation to contributions.

I tried to leave a comment under another Citywire pension heading today but it failed to appear - so here goes again.

The maths says it all - public sector pensions require between 40 and 70% salary contributios over a lifetime to deliver the defined benefits on retirement. No-one could afford that so by definition the scheme is unaffordable and it doesn't matter what the amount of the pension is.

Private sector pensions require the same huge pension pots to deliver final salary scheme benefits - perhaps £400k for a pitiful £15k a year with current rates of annuities and gilts so low.

The reality is pensions are a sham. The best pension is a paid-off mortgage that enables you to sell the house on retirement, downsize and eek out a living with the surplus. At least you control the money - not some financial institution that wants to make a profit from your deposits.

The nub of the issue is that private sector pensions rely on earnings from the stock market to deliver growth - look at the mess this creates and the massive impact on personal returns since 2007. They also require us to deliver our lifetime savings into the hands of a "regulated" 3rd party and we can never recover more than 75% of what we gave them. Who dreamed that one up?

My solution is to pay every pensioner ALL his savings back in a lump sum and then let him deal with the rest of his life. I want to see a case brought before the European Court of Human Rights to annul all the stupid laws governing how a pensioner can get hold of his savings. And to make matters fair insist that every pensioner gets back every penny he saves - but no more. This would resolve the public sector fiasco once and for all. If the State says it gave 25% contributions - fine. Lets see if the public servant can fund his gold plated returns with that!

Who would buy an annuity.

They are the biggest scam out there, particularly ones with indexation.

Only the financially illiterate would purchase an annuity unless forced.

Not only are the payments mostly return of capital but they are taxed as income! Scandalous.

I agree with your comments on housing, particularly appropriate for pension provision as over time, house prices tend to keep up with inflation, naturally.

I also tend to agree with your comments on self provision although many people would either not be capable or could not be bothered to look after their own pensions.

It is very interesting that most of the "hang `em and flog `em" macho type comments above come from men! The degree of opinionated ignorance shown in some of the comments is mind boggling. How many of the writers have actually worked in the public sector, had direct experience of the extent of low pay or issues such as employees having to "kill someone" before they can be sacked. This is not only totally untrue but absolutely ridiculous. Public service workers would have to be paid a great deal more if they had to pay 40% of their salaries into a pension scheme as another contributor has stated. I wonder if Bob and others have private health schemes as part of their remuneration - if not, in the Health Service he advocates, he will find much longer waiting lists for every kind of service, delivered in dirty hospitals - if they haven`t been closed down - perhaps this is what he deserves!

Had I invested the contributions that I've made to my gold plated scheme and insured against death etc appropriateley then I would have a rather good lump sum by now.

The problem is that the public sector pensions were not properly invested, had they been then there would be less of a mess and less of a political football game going on.

Now those who are still working will end up paying more for poorly managed public schemes and somehow this is the fault of the workers?

Let's ask Mr Clegg - oh I forgot he gets his bills paid for him!!!! Some animals seem to be more equal than others!!!!!

How interesting to read all these comments. It seems the same problem in UK is also what we suffer in New Zealand. It is also rife in USA and I guess elsewhere.

It seems to me that a fundamental fact is being overlooked - and this in encapsulated in the articles heading 'Ponzi Scheme'. Almost invariably, where employers (whether private or public sector) gave the employees to understand that the employers would physically pay cash into pension schemes to be held on trust and prudently invested to fund a retirement income, these same employers did a paper exercise only. They did not actually seed the funds at all, and were going to manage future payments simply from future employees contributions - a ponzi scheme. What has now come unstuck is the realisation (some as a result of corporate collapse and redundancy payouts and some from future cashflow analysis) is that the funds are insufficient to meet obligations. Not because the schemes were daft, but because the employers did not honour their bargain. The Institute of Directors have among their members many of these employers, and in my view are trying to change the rules to save their finacial arses.

Do you recall how the last government said it was 'vital to encourage immigration' to improve tax revenues, national wealth, etc. Yet never was there a suggestion they were wanted for the civil service. In that, it was tacitly recognised that the civil service is a net absorber of resources and not a wealth generator. So just cutting the CS will allow many highly trained people to join the productive side of the national workforce.

Obvious really but nobody ever seems to say so.

Also all those people saying how little they were paid as civil servants strike me as a a tad biassed. The National Statistical Office says unequivocally that civil service average salaries are higher (by around 10% - £26,000 vs £24,000) than the labour force in general. They appear victims of their own publicity re. their own pension expectations ('gold plated' was the term used, rather sadly when pensions failed to live up to those expectations). Every employee has their own benefits handbook. they could have worked out for themselves how much pension they were to receive and not then be disappointed.

And, Blodwen, I don't believe your story about the ambulance worker on £7,000 a year pension as that would have made their retirement salary just £17,000 per annum. Yet a friend who is a paramedic ambulance driver is on around £36,000 per annum. Something strange somewhere.

Other public sector workers of course have to contribute to their pensions and their employers have to also. But it is the national and local taxpayers who are paying the money both for their services and for those pensions.

Yes, DC pensions wil be a rip-off for everybody until the government issues a 'pensions gilt' for annuity purchase with a guaranteed rate of, say, 10% yield, rather than the miserable 4.25% average at the moment.

Your "fac ts" are quite simply incorrect, Orlando. The leaving salary of the qualified ambulance worker I quote, and have personal knowledge of, was on a salary of £13,000 a year when, after 33 years service, work-induced injury forced early retirement a few years ago. The "something strange" which you refer to is thefact that your paramedic friend must be working a massive amount of overtime, or is working for an Ambulance Trust which is not paying NHS rates.

Most of the people who have responded on this issue seem to think that alll public service workers areCivil Servants - they are NOT. Local Government staff, Health Service staff for example are NOT and should not be included in the vituperative comments of those who should know better.

Whatever the rights or wrongs of public sector pensions (a subject that seems to generate more heat than light) you wouldn't expect a report produced by the IoD and the IEA to come to any conclusion other than the one that it came to, would you?

The very generous deal for those nearing retirement has to be paid for by Joe Public.

I know a fireman who was promoted to shift manager or watch manager a couple of years before he retired. My guess is that his pay increased by £3000/year for 2 years. He may have paid an extra £540 in pensions contributions (£6000 x 9%). His pension may increase by £2,000/year if he retires on 2/3rds final salary. If he lives for another 25 yrs, then he gets £50,000 index linked over his lifetime.

Extra pension contributions = £540

Additional pension = £50,000

I know a senior police officer who is applying for the next rung of the ladder. Let's say that her salary increases by £5,000/year and that she pays 9% of her salary for 2 years before she retires - she pays £900 additional pension contributions. If she then retires on 2/3rds final salary and lives for 25 years, then her pension will increase by £5,000 x 2/3 x 25 yrs = £83,333.

Extra pension contributions = £900

Additional pension = £83,333

These massive costs have to be paid for by young graduates who are now having difficulty getting a job - having left university with £20,000 debt!!

It's so nice to know that after alife time of serving the public, these people can look forward to all you nice folk rewarding them with your integrity and decency.

How many of you have used Teachers, Nurses, Doctors when you or your children had to?

Did you say "Hey, no way is my child going to be treated by this stealer of tax payers money"/

No, course you didnt, you thanked god that this person was helping you. Same goes for anyone treated by Fire-Police-ambulance.

The only thing these workers have to look forward to is their pension..

Gold plated pensions they are not. Police and Fire pay 11% of their salary into these schemes, so after 30 years thats £92,000 in their pots, assuming average wage of £25000

Imagine if that money had been invested properly. It would be worth far more than the actual money they receive

Teachers and NHS pay 6% which is still a big pot of money.

Are you guys saying you begrudge someone a decent pension after 30/40 years of hard graft?

What a sad society we now live in.

Yet as taxpayers, I don't hear you folk moaning about the cost of Trident, which dwarfs the pension costs, or about the Trillions that Iraq has cost, or the embarrassing welfare system. No, lets pick on members of our society that help us and we look up to.

Muppets