Pensions – Are We Being Misled?
Last Updated on March 14, 2019 by RetiredAndAngry
Well, I couldn’t say ‘lied to’ could I?
Mrs Theresa May, Home Secretary Extraordinaire, said to you all “In common with the reforms that are being developed across public service pension schemes, the Government is committed to ensuring that police pensions are affordable and sustainable for the future. Let me reinforce that police officers should, and will continue to, have access to pension arrangements that are among the very best available.” Well I’m a cynical old so-and-so who doesn’t always believe what I’m told.
I’m going to start this blog with a confession:- I am no expert on pensions, Police or otherwise. I think that I am of average intelligence but some of the material that is published around pensions blows my mind and I can’t always be certain that I’ve understood. I have not seen any illustrations of how Pension Scheme A compares against B, C and D for example. They may exist but I haven’t seen them. Maybe I should just believe what Mrs May says, she’s honourable, she wouldn’t speak an untruth, would she?
So I sat down and had a chat with my old mate Google to have a look at what is available out there in other public sector pension schemes, to see how they compare, and do you really have one ofg the very best pensions available.
The first thing I discovered is that I really don’t understand the new Police Pension Scheme, or at least I defy anyone who doesn’t have access to their payroll computer, or kept every single payslip for their entire career, to calculate what their pension will be. I will have to quote from the Q&A document recently issued by the Federation:-
20. How does the career average work in practice?
Take a member earning £29,000 in year 1, £30,000 in year 2 and £31,000 in year 3 with CPI at 2%, the pension being earned would be as follows:
In Year 1 1/55.3 x £29,000 = £524.42
In Year 2 1/55.3 x £30,000 = £542.50
In Year 3 1/55.3 x £31,000 = £560.58
By the end of year 3 the pension entitlement would be:
£524.42 x 1.0325 x 1.0325 = £559.07
£542.50 x 1.0325 = £560.14
£560.58 = £560.58
Total = £1670.79
The figure of 1.0325 is used to increase the slice by CPI (in this case assumed to be 2%) + 1.25%, which gives a total of 3.25%.
That process continues throughout pensionable service. The final pension is the total of all the slices added together, that amount is payable as the annual pension (subject to an option to commute for a lump sum).
I can just about keep up and follow that, but I’m damned if I could work out my likely pension from it.
Anyway, I chose to compare the Civil Service Pension Scheme, Local Government Pension Scheme and MPs Pension Scheme.
Most new entrants to the Civil Service Pension Scheme are enrolled into the Nuvos scheme. Nuvos is a Career Average Scheme. Contributions for someone earning £30k – £50k p.a. are 5.1%, due to rise by 3.2% over the next 3 years. If I have interpreted it correctly the accrual rate is 2.3% , or 1/43.5th Applying this accrual rate to the Federation’s calculations above should give us something like this.
In Year 1 1/43.5 x £29,000 = £667
In Year 2 1/43.5 x £30,000 = £690
In Year 3 1/43.5 x £31,000 = £713
The next part of their calculation completely blows my mind so I’m not even going to attempt it, but it seems to me that the Civil Service Nuvos Scheme provides a better return on your (lower) contributions over the same period of time, although I do accept that there are other features of that scheme which are different and maybe not as favourable.
Next, the Local Government Pension Scheme.
In 2014 the Local Government Pension Scheme will change to a Career Average Scheme. Contributions for someone earning between £34k and £43k p.a. will be 6.3%, and for someone earning between £43,001 and £60k p.a. will be 8.5%. The accrual rate is 1/49th.
So, going back to the calculation above
In Year 1 1/49 x £29,000 = £591
In Year 2 1/49 x £30,000 = £690
In Year 3 1/49 x £31,000 = £632
Still slightly better than the Police Scheme when it comes to accrual of pension, still significantly cheaper contributions, but again, I must warn that the Police Scheme may well have other benefits that these two schemes don’t have.
Now, if you’re sitting comfortably, I’ll move on to MPs Pensions, recently subject of a reform by Francis Maude MP. From 2012 onwards their pensions will be thus:-
A Final Salary Scheme
Three levels of Contributions and accrual rates; these are
7.75% with an accrual rate of 1/60th
9.75% with an accrual rate of 1/50th
13.75% with an accrual rate of 1/40th
To be fair these are the figures for a basic MP, Cabinet Ministers etc have slightly raised contribution rates. Full details of the MPs’ Pensions 2012 Onwards can be found here.
So, in conclusion, it seems that the best pension scheme to be signed up to is the recently reformed MPs Pension Scheme, with its Final Salary benefits. A Constable retiring now who had ‘joined’ the top tier of the MPs’ Pension Scheme would realise a pension of just over £27k p.a. after 30 years service before commutation if my little old calculator is working well.
Finally, I have one more comment to make on Police Pension Reform. We know from documents we’ve already seen that Winsor’s brief was to come up with something that looked like the Hutton Recommendations.
Contained within Annexe A is Recommendation 4 which I reproduce in full:- Recommendation 4: The Government must honour in full the pension promises that have been accrued by scheme members: their accrued rights. In doing so, the Commission recommends maintaining the final salary link for past service for current members.
What does this mean? Has it been carried over into the reform of Police Pensions? I need someone with a better knowledge of pensions and gobbledygook to help me out with that one. As I am retired I have no direct access to the Federation and rely totally on published documents, so if I have missed something along the way please forgive me. So do we still think that the new Police Pensions Scheme is amongst the best available?