NHS Pensions
I read a very interesting press release today from Ros Altmann who is an Independent Pensions Consultant. The press release contains details of Ros’ latest work analysing public sector pension schemes and calls for an informed debate on the subject.
The reason I've reprinted the text of the press release below (with Ros’ permission) is just to illustrate the considerable advantages of being in the NHS Final Salary Pension Scheme and the potential costs you might give up if you decide to leave NHS dentistry and work privately.
Ros points out that she is not trying to argue the case that the pension benefits awarded to public sector employees are either wrong or right, but simply that there needs to be a better understanding of the real costs of such promises.
This is the full text of the press release:
IMMEDIATE RELEASE Dr. Ros Altmann
Transparency urgently needed on public sector pensions
Summary:
Since 1997, there has been a dramatic improvement in the fortunes of public sector employees. Without fanfare, they have achieved massive pay increases and retained hugely valuable pensions, while private sector pensions have been decimated. The tables below demonstrate some of the privileges that public workers enjoy. They earn more, pay lower national insurance, do not contribute to their state second pension and will receive much better pension benefits than private sector workers. They will still receive their pensions at age 60 while state pension age rises to 68 in coming years. Their pensions are fully inflation-linked and taxpayer guaranteed. Yet the costs of these superior pay and pension benefits are not transparent and are outside the Chancellor's fiscal rules. They are also not being factored into the current public sector pay negotiations. I am calling for proper transparency and an independent inquiry into all aspects of public sector remuneration. Abandoning contracting out would bring in up to £10billion in extra revenue to the Government each year.
Higher pay: It used to be that the very generous public sector pensions were justified because public sector workers earned less than their private sector counterparts. That is no longer the case. Since 1997, the public sector workforce has expanded significantly and pay has outstripped private sector earnings. Average public sector full-time weekly pay is now just under £500 compared with £440 a week for the private sector (Source: National Statistics).
Much better pensions: In addition to better pay, actuarial calculations show that the public sector government-guaranteed, fully inflation-linked pensions, paid from age 60 or even earlier, are worth at least 30% of each worker's salary, each week. That means a median public sector earner on £500 a week also earns another £150 every week in the form of pension accrual (deferred pay), making a total average full-time public sector worker's pay at least £650 per week.
Higher total remuneration: In contrast, an average private sector worker on £440 a week, with no private pension, effectively earns £210 less each week than the public employee, when today's pay plus deferred pay in promised pensions is considered.
Even assuming an average employer contribution to a private pension of around 6.8% of salary only adds £30pw which would boost private workers average pay to £470 a week. This is still £180 less each week in pay and pensions than public sector workers. This reality does not seem to be factored into the latest public sector threatened pay strikes.
Public vs. private sector pay and pensions
Public Sector Private Sector
% full-time workers in final salary scheme c.90% c.15%
Gross weekly pay (full-time workers) £500 £440
Value of average pension accrual (% of salary) >30% <7%
Value of pension accrual (£pw) £150 £30
Total pay - earnings plus pension contribution £650* £470
*in addition, the public worker pays 1.6% lower national insurance each week too!
Lower national insurance contributions: In addition to earning much more than private sector workers, public employees are also being allowed to pay lower national insurance. In particular, the 3.4 million employees in unfunded public sector pension schemes pay only 9.4% national insurance instead of 11% and public employers pay 9.1% instead of 12.8% of salary per worker. The lower national insurance payments are given legitimacy by calling them 'contracting out rebates' for pensions, but this is pushing billions of pounds worth of extra burden onto future taxpayers[1. (for explanation of contracting out see footnote below).][1]
Public Sector contracting out in unfunded schemes - some statistics
Number of public workers in unfunded schemes 3.4 million
NI rate public sector worker: 9.4% of salary
NI rate private sector worker*: 11.0% of salary
NI rate public sector employer: 9.1% of salary
NI rate private sector employer*: 12.8% of salary
NI shortfall from workers: £ 1 billion each year
NI shortfall from employers: £ 2.5 billion each year
TOTAL SHORTFALL: £ 3.5 billion each year
* most private sector pensions are not contracted out
Contracting out in an unfunded scheme is a makes no sense: However, for public sector workers in unfunded public sector pension schemes, this contracting out is a nonsense. In an unfunded scheme, there is no fund building up to pay the workers' S2P in future. All the money will still have to be found by future taxpayers!
In effect, public sector workers in unfunded public sector pension schemes (such as civil service, NHS, teachers etc) are not paying anything for their state second pension. They will get it for free. Furthermore, they start receiving pensions at age 60 as part of the public sector pension scheme, whereas state pension age will rise to 68 in the future.
So contracting out amounts to a hidden pay boost for public workers and hidden subsidy for public sector employers today, which will have to be made up by taxpayers in future.
Hidden costs: None of the costs of public sector pensions are included in the Chancellor's 'fiscal rules' - they are hidden away as if they do not exist. But there are nearly 6 million public sector workers altogether - one-fifth of the entire labour force, who are being paid more today and will also be paid better pensions in future.
It is not the fault of the public sector unions that they are demanding better pay and conditions for their workers. That is their job. But it is surely the job of Government to behave responsibly with our money. At the very least, the public should be told the truth about the future build up of liabilities.
Private sector pension provision has collapsed, as final salary schemes have closed and employer contributions are cut, but public sector schemes remain unaffected. Hiding the true costs off balance sheet does not fit with transparent and open Government. It is time for proper openness about all aspects of public sector pensions. An independent inquiry into the costs, both now and into the future, is long overdue.
ENDS
Dr. Ros Altmann