I suppose that being in the private sector and mainly involved in DC pension provision, I’ve had a blind spot to public sector pensions. That changed a little over the past two weeks when I started thinking about the problems doctors have in getting good quality pensions advice.
People do watch out for the doctors – they have unions, tax and financial advisers, most can afford to get help and many have the capacity to learn the ropes on their own.
Not so the lowest earners in the great public service pension schemes. Over the weekend I received an email from a peer of the realm which included this statement
The bottom line, which I find so distressing, is that these low earners just don’t seem important enough to anyone. They don’t know and the employer often won’t know either, while providers and trustees have no legal obligation to look after their interests and are turning a blind eye to the issue because it is difficult or may incur costs.
The conversation related to the newly auto-enrolled and the employers referred to were SMEs. But the issue is precisely the same in the public sector where low-earners are automatically enrolled into Government DB plans in the same way as the private sector.
If you earn under £15,432 pa , you are already contributing 5% of gross pay into the NHS pension. Provided you are paying tax – typically if you are earning £12k pa or more , you should be getting tax relief that brings the true cost of contributing down to 4%.
But if you are earning less than the lower earnings threshold for income tax (£11,850pa but about to go up) then you get no tax relief and have to pay the full 5%.
Low earners have their own marginal tax problem on earnings between £11,850 and £12,400 as they will only get tax-relief on pension contributions at their marginal rate and having to contribute 5% of £11,850 means most NHS low earners have to earn over £12,500 to get their full tax relief.
We wonder why the Treasury estimate that 1.2m of our population is not getting tax-relief on all their pension contributions. The answer is that a high proportion of low earners missing out – are Government employees. They are paying up to 25% more in pension contributions than if they paid tax.
What’s more, the majority of those denied the promised incentive are women.
What is more, the contributions into the NHS pension scheme, start at £0 and are not calculated on the band of earnings prescribed for AE minimum contributions. So the amount that low earners pay is higher and the amount of incentive foregone is also higher.
Who is looking out for low-earners?
Who’s on the side of the army of part-timers on or close to minimum wage in Government pension schemes?
Looking at Unison’s Pension Literature for the NHS pension scheme, I can see no mention of the net-pay anomaly or any warnings to low-earners that they will not get any form of Government incentive to ease the pain of their contributions (As they would do in NEST for instance).
The amount you pay into your pension is dependent on how much you earn and the current contribution rates are between 5% and 14.5%. Your rate is determined on your full-time equivalent pensionable pay.
Your contributions are deducted from your gross pay which means less of your income is taxable. This in effect means that your actual contribution taking into account tax relief is between 4% and 8.7%. Your employer on the other hand (from 1 April 2015) contributes 14.3%.
This is simply not the case for people earning less than£12,500 and in the NHS Pension Scheme. Tax relief is not available to these people – they pay 5%.
The Net Pay pension scandal is more than a private sector issue.
To date , the issues around the net-pay pension anomaly have focussed on master trusts and the few remaining sole employer sponsored occupational DC pensions. But the issues are the same for DB as DC and the same for the private sector and the public sector.
What I fear is happening, is that Government financial projections on the cost of public sector pensions are now baking in the fact that hundreds of thousands of low paid employees auto-enrolled into public sector pensions (with contributions of 5% of earnings from £0) are subsidising the cost of providing tax-relief to the rest of the membership.
While we have heard plenty from doctors about the AA, LTA and the Taper, we have heard nothing about the fate of the low-earners, who by mischance are paying 25% more for pensions than those who pay a little tax.
Who is paying attention to their pension?
I suspect that the low earning public service worker is the least well-represented of all pension savers. They need a voice.
The private sector is involved in public sector pension schemes but only peripherally (it does some of the administration).
Because most public sector pensions are unfunded, it is a part of the pension genome of little interest to fund managers and investment consultants.
The discussions on benefits are a matter for the Government Actuary, NHS employers and ultimately the Treasury.
I do not see an obvious reason for any group (other than the unions), to pay attention to the net pay pension anomaly and its impact on low-earners.
But low-earners have already been hard hit by the public sector pay cap and many of those impacted by the net-pay pension scandal would be paying tax, if their wages had not been held back as part of the Government’s austerity measures.
It simply is not right that the low earners in the public sector are getting no attention paid to the contribution hurdles that are making participation in public sector schemes so expensive to them.
Which is why I’m writing this. Thanks very much for reading this.