‘Why is there no outcry?’ Public pensions may cost taxpayers more than the national debt
Martin Lewis explains benefits of of workplace pension
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Pension plans for public sector workers are often awarded through final salary schemes (also known as defined benefit) which provide guaranteed benefits based on one’s salary and service levels. The private sector has largely moved away from final salary schemes due to their costs and according to new analysis, taxpayers are likely to end up footing a very large bill.
John Ralfe, a pensions consultant, said retirement packages for public sector workers have left UK taxpayers with a £2.4trillion liability. This is now higher than the UK’s national debt, which sits at around £2.2trillion.
These public pension debts will need to be paid by British taxpayers and they cover a range of workers, which includes MPs, civil servants, NHS doctors and other bodies.
According to Mr Ralfe’s research, the real annual cost to the taxpayer has doubled to £95billion in the past five years. These costs are also likely to rise as final salary pensions are guaranteed to rise with inflation.
Mr Ralfe accused the Government of “fiddling” with official pension costs to keep the public in the dark over their true costs.
“Why is there no outcry at the spiralling cost of public sector pensions?” he said.
“The Treasury should make the real economic costs of public sector pensions clear to taxpayers. We could then have a proper debate about whether the cost was justified,” he told the Daily Mail.
Mr Ralfe’s research showed taxpayers will have to cover the costs of pension benefits which are now worth more than 50 percent of a public sector worker’s salary. For comparison, private sector workers saving through automatic enrolment can only rely on their employer paying three percent of their salary into their retirement funds.
This means public sector employees earning £30,000 actually get total pay and benefits of £45,000 a year, whereas workers with the same salary in the private sector can get just £30,900 under auto-enrolment.
In response to Mr Ralfe’s analysis, a Treasury spokesman said: “(The) £95billion is the theoretical cost if all pension promises that have been made had to be paid at once.
“In reality, this could never happen. We have always been open and transparent about this.”
The Treasury also “did not recognise” the figures which showed pension liabilities in the public sector reached £2.4trillion.
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While final salary pensions have largely disappeared from the private sector, there may still be many older workers who have these “gold plated” pensions. While final salary pensions are generous they are not entirely risk-free, as some employers sponsoring these schemes have gone bust and in comparison to defined contributions plans, final salary schemes offer limited flexibility.
As such, many workers have elected to transfer out of their final salary schemes for a cash payment. It should be noted that before this can be done, holders must seek regulated financial advice.
Transferring out of final salary schemes, even if done for the right reasons, may prove to be very costly. According to research from XPS Pensions Group, savers who chose to transfer out of their defined benefit pension scheme in the past year faced record fees after transferring.
XPS Pensions Group’s fourth annual Member Outcomes survey found members who transferred in the year to March 31, 2021 faced average total fees of 1.9 percent p.a., a 10 percent increase on the previous year and the highest level since XPS’s survey began four years ago. These fees include charges associated with the financial products that members transfer into, as well as for ongoing financial advice.
This increase in fees came as average transfer values rose considerably. Fewer members transferred over the year to March 31, 2021, down 23 percent on the previous year. However, the average transfer value paid increased by 29 percent to £375,000, significantly more than the average UK house price. This rise was driven by the members with the largest values choosing to transfer their pension.
XPS Pensions Group continued: “In the context of higher average transfer values, the increase in fees may also be driven by members choosing more sophisticated options. The survey revealed that 99 percent of members transferred to a Self-Invested Personal Pension (SIPP).
“These range in sophistication and complexity, with fees ranging from as low as 0.7 percent pa to over three percent pa (including ongoing financial advice). Some vehicles that can also be lower cost, such as workplace pension schemes or master trusts, are not routinely considered by members. If schemes combine access to financial advice and lower cost options, this could help the average member’s funds last a full ten years longer in retirement.
“The gap between transfer values paid to male and female members reduced from 50 percent to 21 percent in the year to March 2021, with the average transfer value for men sitting at £394,000 and women at £326,000.”
Mark Barlow, Head of Member Options at XPS Pensions Group, commented: “The slowdown in transfer activity over the last 12 months is unsurprising since most of the year was spent in lockdown.
“Interestingly, it’s been those with the largest values who have continued to transfer. This, together with the reduction in choice for members transferring, may explain why average charges have increased by 10 percent since last year.
“We’ve been encouraged to see trustees and employers step up support, with 50 percent of members of schemes we work with now having access to enhanced support, up from 31 percent last year.
“However, the pent-up demand from fewer transfers and retirements means there’s likely to be an increase in members considering their options soon. As a result, it’s as important as ever that trustees and employers take steps to improve the support they provide and ensure the best outcome possible for their members.”
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