The public sector needs a low cost pension alternative

This blog is about public sector pensions and the problems that they will face with Auto-Enrolment. It will be of interest to people concerned with pension reform, fairness, inclusivity and with bringing DC up to the standards of DB.

The question I’m asking is not whether we can afford public pensions (the graph demonstrates that this is a diminishing problem), it’s whether those in those pension schemes can afford to be members.

I’ll start with this from Mark Porter, Chairman of the British Medical Association;

How can it be right that someone working for the NHS pays twice as much for  their pension as a civil servant on the same salary? Why should higher earning  NHS staff pay disproportionately more for their pensions than lower paid staff  when they are in a career average scheme?

Sympathy for the highly paid Doctors is limited, certainly in my household. They may pay higher contributions but they receive full tax relief which for many of them means a 50% discount. Lower paid NHS employees pay 80% of their contributions and only get 20% discount from the taxman.

For the Doctors to argue that they are paying more for less may have some justification but that is the nature of a progressive society, there is some cross subsidy from rich to poor and many doctors are very rich indeed as a result of handsome salary awards with linked pension increases (see blogs passim).

There is a different angle which the BMA have not yet used but which has wider implications for our pension reform program than it does to the higher echelons of the medical professions.

There is an issue surrounding auto-enrolment.

This from the NHS website

The NHS Pensions Scheme (NHSPS) is a qualifying pension scheme and all NHS employees must be automatically enrolled into it.

However, some employees are restricted from active membership of NHSPS i.e. because they already have maximum service under the scheme, or are already receiving an NHSPS pension. Employers will need to take action including:

  • identify restricted employees
  • choose an Alternative Qualifying Pension Scheme (AQPS)
  • automatically enrol eligible jobholders (restricted from NHSPS) into an AQPS
  • pay minimum statutory contributions into AQPS

These bullets may seem pretty obscure, but there is a much wider group of people who may need an AQPS.

What of doctors who say they cannot afford the 10%  (and rising) contributions they need to pay to be a part of the Scheme?

What of the increasing number of public sector employees in local Government and Civil Service schemes. The teachers and university staff, the  firemen, policemen – even (heaven forbid) politicians and judges who are unwilling or unable to cough up the spondoolees to qualify for their “gold-plated ” pensions?

Might not high contribution rates be seen as an incentive to opt-out?

There is a power in section 16(3)(b) for the Secretary of State to issue regulations stating that

a scheme is not a qualifying scheme if “the contributions that must be paid to the scheme by , or on behalf or in respect of the Jobholder exceed a prescribed amount, or will do so in particular circumstances”.

This from a lawyer friend commenting on the issue

At present there are no regulations prescribing an upper limit.  What would be appropriate/inappropriate for drawing the line?  Perhaps if the jobholder contribution is, say, 4x the employer contribution?

Perhaps the unacceptable limit has already been breached by the contribution scales proposed for the Doctors.

Now there the BMA would have an interesting point.

Would there not be an alternative argument that the Alternative Qualifying Pension Scheme should be made available not just to the oddballs listed in the quote from the NHS website.

Could there not be an argument that the AQPS might be NEST, funded using a contribution structure typically found within the private sector (4 % (ee)+ 5% (er) of the AE band?).

That might not be the gold-plated solution that public sector unions would advocate for staff but it is a lot better than nothing and we are in danger of having a two-tier public sector workforce precisely because there is no low-cost alternative to a full on defined benefit plan.

Be in no doubt – the two tiers are “gold-plated” and “nothing at all”.

The present auto-enrolment alternative is that public sector workers who genuinely don’t want the gold-plated plan or genuinely can’t afford membership (remember the low-paid don’t get the same tax-relief), do the auto-enrolment hokey-cokey…. in-out, in-out etc.

The fluidity of employment within the public sector may mean that the hokey-cokey happens not just every three years (the re-enrolment point) but every time there is a significant change of employment contract.

I know there are alternatives, lower accrual for lower contributions being the obvious one, but is there not now a chance to put NEST to work in a meaningful way?

Giving a DC alternative may not be palatable to Employee Representatives but if we really made NEST a Scheme of excellence (and it can be), if we properly educated staff of the advantages of being in something rather than nothing and if we made it absolutely clear that the defined benefit “gold-plated” alternative is considerably superior….

then why not?

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in auto-enrolment, doctors, Financial Education, mallowstreet, NEST, pensions and tagged , , , , , , , . Bookmark the permalink.

9 Responses to The public sector needs a low cost pension alternative

  1. Pingback: Is there future for defined benefit pensions? | The Vision of the Pension Plowman

  2. Pingback: L&G’s AE membership self-serving with hand helds! | The Vision of the Pension Plowman

  3. Pingback: Opt-outs triggered by smartphones say Legal and General! | The Vision of the Pension Plowman

  4. Pingback: A defined ambition scheme that would work | The Vision of the Pension Plowman

  5. Pingback: It worked for Wendy- how Morrisons staged auto-enrolment | The Vision of the Pension Plowman

  6. Pingback: We won’t reinvigorate workplace savings like this | The Vision of the Pension Plowman

  7. Pingback: Right direction – wrong speed! Defining a “good” workplace pension. | The Vision of the Pension Plowman

  8. Interesting. I am an employer in the health sector, but deeply distrstfull of pension schemes. Personally I’m buiulding a residual income via multiple methods. May not be as easy as just funding a pension, but I’m more incontrol

  9. henry tapper says:

    Chris , you are absoutely right to diverrsify your sources of retirement income. Your distrust of pensions is understandable and pretty well shared by everyone (except pension people!).

    It’s our job to rebuild bridges to employers like you! Thanks for reading!

Leave a Reply