A tale of two employees
Posted by Christie Malry on June 30, 2011 at 12:53 pm
Today, 30 June, lots of public sector workers are going on strike, in a protest over proposals to make public sector workers pay more for their final salary pension schemes.
So let's think about two workers. One, Miss Aubergine, is a newly qualified teacher, on £25,000 per year. The other, Mr Banana, is a "fat cat" on £100,000 per year.
Miss Aubergine's scheme asks currently that she pay 6.1% toward her pension. Under the government's proposals, she will pay another 3%. If we use this latter figure, she will contribute £2,275 per year.
Meanwhile, Mr Banana receives the average defined contribution amount from his employer, 6.1%. He contributes the same amount himself. So his pension pot is receiving £12,200, over 5 times Miss Aubergine's contribution.
What do they get in return? Miss Aubergine gets 1/60th of her final salary, currently £416.67. Meantime, Mr Banana must buy an annuity on the open market. At current levels, a pension with the same inflation protection as Miss Aubergine's would require an annuity rate of 2.9%. In other words his pot would buy him a pension of £353.80, almost 10% less than Miss Aubergine's pension.
Typically, Miss Aubergine would enjoy lots of public sympathy and Mr Banana none. But can it really be right that her incredibly generous pension rights aren't recognised in a transparent and honest way?
And also spare a thought for Mr Coconut, a private sector worker on the minimum wage on the NEST contribution rates of 4%+4%. Should we really continue to tax his income to protect Miss Aubergine's current pension arrangements?
I think you have to take into account the employer contribution for Miss Aubergine - otherwise you are not comparing like with like. We can, of course, argue that the employer contribution to the Teacher's pension scheme is incredibly generous (it is, and that supports the argument that it is the employee that should be stumping up extra) and, naturally, whatever the employer pays in comes from public funds.. but, still, the government has a right to make contributions at a level it deems appropriate - and that level is not something anyone is currently proposing to reduce.
Yes, I accept the challenge. The difficulty is that, apart from actuaries and a few sad accountants, virtually no-one understands the level of contribution required to support DB pensions, and it's different even to the national employer contribution for PS DB schemes. And, in a sense, it's irrelevant because whatever the employer doesn't fund adequately today, the taxpayer will fund tomorrow.
But we can see the humongous amounts of money being poured into DC schemes, and they don't even touch the sides of a "modest" DB scheme.
You think newly qualified teachers earn £25,000 a year? Dream on! No NQT outside of Central London can even dream of earning that much if they are in the state sector. At least get your facts right before you comment.
No, Sam, you need to get your facts right.
The NQT rates for inner and outer London are £27,000 and £25,117 respectively. Outside London, teachers will reach £25,000 in their third year of teaching unless they're a complete dunderhead. Sources here. In any case, my blog post is about a teacher who gets £25,000 in her first year (as any London NQT would), not the blanket claim that all newly qualified teachers get £25,000.
God only hopes you don't teach logic for a living.