Average LGPS pension is about 5k p.a – wouldn’t say that is particularly gold plated. If the Government were to move to DC it’d be reasonable to expect it would match larger employers – which often are 15% plus….

— Joe Dabrowski (@JoeDabrowski1) December 26, 2024

Many people will be at work today, I am off work and sick but I am fascinated by my 2025 challenge. My view, like that of friends in Australia is that the success of pensions is measured by their capacity to offer people the chance to wind down.

Many people will not wind down because they don’t want to or because they cannot afford to. Many people will have to work beyond their capacity and many people will miss out on the Government’s benefits despite being eligible. The assumption of the DWP is that everyone should have the basis of a proper “AgeWage”.

In more than 40 years working in the financial services industry, I have seen the state’s commitment to providing a proper wage in later age improve and the numbers of those in their later years unable to meet their bills fall.  Nowadays. most people look to their retirement with the expectation of a better state pension and some additional income from their work.

But now to Tom McPhail and Joe Dabrowski

Tom and Joe are people that I like a lot as people, as thinkers and as articulators of their thoughts. I’d like to join their conversation via my blog (no obligation to read!)

Tom offers a free view of his contribution to the Times. The article says that we we would be paying an extra 1p in income tax if we were’t (per household) paying £230 pa to help members of the country’s local authorities get over-generous pensions.

Tom points us to data showing that some local authorities are paying ridiculously high proportions of revenues to their funded pension schemes.

Now I am sure Tom is feeling a little embarrassed by this data which is being printed  without the wider research offered by the Times’ Andrew Ellson. There might be another article about how successful the Local Government has been at avoiding the need for LDI in the past twenty years.

Nevertheless he is right to point to funded local authorities – (and unfunded Government pensions) as providing people with better pensions at the expense of those of us who pay a large proportion of the pensions.

Joe suggests that Local Governance pensions average £5,000. He has good sources via the PLSA and I trust this number. But it should not be taken as a mark of failure. An extra £400 + in your bank account is worth having. For a 60 year old , a unisex, healthy annuity of £5,000 will cost around £100,000 (depending on a number of factors most people don’t think about), If on average, people in Local Authority pensions are getting a £100,000 pension then good.

Joe is smart in saying that large companies can get 15% of your salary into a pension pot. They can do so by having been required to do so by organised staff requiring a proper alternative to the old DB plan. But the reality is that very few DC plans have £100,000 in the hands of those retiring (say at 60). What Joe cleverly ducks is the issue of the millions of people who are building pension pots up on 8% of a slice of their earnings.

Regular readers of recent blogs of mine will know that I regard the value of a DC pension as its capacity to meet the pension offered to an equivalent worker with a pension accrued in DB plans (typically Government but also schemes like USS and parts of Rail Pen, union schemes and the Church of England – by way of example). We should not be comparing these schemes by the money going in , but the money coming out.

The trouble with CDC is that only Royal Mail has been bold enough to create a value of income being targeted and to do so, they have had to build an expensive scheme to protect people’s expectation and Royal Mail’s capacity to deliver.

Our solution

Tom is digging away at the DB system and its cost to society as a whole. Joe is pointing at the lack of priority to revise upwards the contributions required of companies who don’t pay 15% into DC schemes. Both are worrying about the amount going in , neither are thinking about how pension schemes can be managed more efficiently.

I am operating at lower efficiency than is usual (and usual isn’t high!) but I think that we need to offer better ways for those with pension pots but no pension to improve their wage for later life (AgeWage). I think that underlying investments should assume pensions will be paid for ever, with the pensions of the young taking over the funds of those dying.

I was taught by great people. Hilary Salt, Derek Benstead, Con Keating, Andrew Young and many other great people who understand this from an actuarial and academic point of view. But I have spent the past 40 days (35 in hospital) in the company of people who rely on state and Government pensions and they have taught me something about the future. They have taught me a lesson that I missed, as I fear Joe and Tom are missing.

Let’s focus on the outcomes not the inputs and let’s focus on a better private pension system that can aspire to give the pensions of Government schemes. Let’s not look to lopping Government employee’s pensions or simply taking on the risk of contribution. I hope this is what Emma Reynolds, the Chancellor and Government as a whole are thinking about.

Tom

Joe