When I began my working life, my parents gave me the sage words of advice “never opt out of your pension” and warned that I would be setting myself up to fail long term. They are of course, absolutely correct.
However, what my parents, and potentially millions of people may not realise is that whilst I have rigidly followed their advice, there will be innumerable people who either didn’t receive that advice or find themselves in a cost-of-living crisis facing the difficult choice between their bills and their long-term financial security.
Pension planning is admittedly not a subject that sets pulses racing, except potentially in the actuarial world. It is something that we as a society have a duty of care to get particularly passionate about because by solving this, we can provide a long term shot in the arm for the UK economy. Both through an increase in the number of pensioners that are financially secure and a decrease in the need for pension credit.
It was therefore concerning that TES released an article this week showing an alarming trend – teachers opting out of their workplace pension schemes. In the article, unions raised concerns with this and the knock-on effect of causing pensioner poverty. This matches reporting from a range of sectors with the BBC reporting last year which showed that 50% of adults are opting out of their workplace pension schemes.
In essence we are sitting on a ticking time bomb of an aging population, mass underinvestment in pension and a lower tax base. Whilst it is not politically salient to talk about long term costs as many voters are focused on the here and now, government has a duty of care to ensure that people maximise their savings for retirement in order to not bankrupt the state in the long term.
Some proactive work on this has already occurred. The government rightly restoring access to the pension scheme for councillors was a welcome move in allowing public servants to plan for retirement.
Similarly, some multi-academy trusts such as United Learning have tried to follow the socially responsible path by offering alternative pension schemes with higher salaries up front and lower pension contributions. Whilst this might seem on the surface like a way to reduce pension costs, it wasn’t an inducement out of pensions, merely a genuine offer to raise salaries immediately whilst not damaging the ability of people to save for their retirement.
Sadly the National Education Union threatened strike action and ULT didn’t proceed with the new scheme that could have been a blueprint for a more sustainable savings model for thousands of teachers.
However, despite it not going ahead, the principles of getting teachers who were opting out, contributing to their long-term savings whilst also tackling the root causes of opting out (pay) remain utterly sound. In fact, when consulting with colleagues at the time, those who opted out of the teacher pension scheme were really intrigued by the proposal and they were more likely to join a scheme like this. – Making a tangible difference to the lives of workers in that profession.
As the public sector we have a moral responsibility to ensure that our workforces are setup well in their retirement. We also have a responsibility to ensure that public sector pensions are sustainable, which is simply not the reality as of present.
At the present time, the structure of public sector pensions means that they operate on an “all in or all out” model. This means that you are obliged to contribute a very high proportion of your pre-tax salary for access to the scheme, with the lowest paid still having to contribute 7.4% of their gross salary in order to access the scheme with zero flexibility to contribute a lower rate. The Local Government Pension Scheme starts at 5.5% for people on under £18,400 and the Civil Service Pension Scheme ranges from 4.6% to 8.05% depending on salary.
The inflexibility of these rates have the knock on impact of causing people to opt out and by offering pension flexibility we can move into a position where some people are able to begin contributing to their pensions. The consequence of this is that long-term issues with pension issues and the knock-on pensioner poverty are substantially reduced. This is because whilst the payout at retirement is lower, a lower payout of a pension that is smaller is infinitely higher than 100% of a pension that doesn’t exist.
It therefore seems obvious that building in flexibility to the public sector pension scheme is a reform that can reduce the strain of pensioner poverty long-term and give people an opportunity to meaningful save something for retirement rather than the 50% of people who are currently not doing this and will run into problems long-term.
* Callum Robertson is a teacher and member of the Federal Board. He is a Watford Borough Councillor.
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9 Comments
This post raises a public policy question which occurs repeatedly.
To what extent should the state protect people from making stupid decision by coercing them to behave differently. We could, for example, make participation in the teachers’ pension scheme mandatory.
I have no objection in principle to allowing partial optouts, provided (and that is a big proviso) if it can be done without creating significant additional administration costs for the scheme processing and keeping track of all those partial optouts.
Test
If teachers aren’t being paid enough to both live reasonably comfortably and contribute to their pension scheme, then it seems like the government could address that by increasing their pay.
If someone in a nationally-critical role and shortage occupation can’t manage on ~7% less short-term salary, and has to sacrifice their retirement to survive now, then that’s the underlying problem here. Obviously *no-one* should ever be in that situation, but teachers are one group the government can very definitely directly and quickly do something about.
Might it help if the tax set up were made equitable and transparent and less markedly favourable to rentiers, as is demonstrated by their not having to pay N. I. Contributions?
Might it help if the L. D leadership were to attack Austerity/Neoliberalism, a prime aim of which is to transfer wealth from regular citizens to the increasingly wealthy, for the fraud it is?
As a retired teacher I voluntarily paid 13% of my salary in pension contributions to purchase additional years in the pension scheme because I wanted half pay when I retired. This was a good decision because when I retired I was already used to take home pay not much different from my pension, as I the paid no national insurance on my pension.
Maybe teacher’s pay hasn’t kept up with inflation since I retired, 15 years ago, in which case the answer is to correct the shortfall.
It is extremely foolish to opt out of TPS. I didn’t think that was even an option. I would always advise people to go with their works pension. In almost every case you end up with a decent pension. Yes, it costs, but poverty in old age is something devoutly to be avoided. Sometimes jam tomorrow IS better than more jam today.
Teachers outside London can earn between £32000 and £51000, more in London and there is additional pay for posts of responsibility and for leadership ship roles pay can be well over £100,000.
That’s a whole lot more than I ever earned, even allowing for inflation.
I have no doubt that some people feel they can’t afford to pay for a pension, but even a few moments thought should suggest that’s a foolish short term decision
Pleased you supported United Learnings offer – it was good and sensible, and I am saddened that they were defeated. It is also liberal to offer people choice.
@ Callum,
“government has a duty of care to ensure that people maximise their savings for retirement in order to not bankrupt the state..”
First of all the government can’t go bankrupt. It’s not possible.
Secondly, there’s no real benefit to the government, in encouraging everyone to save privately rather than through a government sponsored scheme like National insurance. If anyone saves privately they will add to the National debt either directly, if they buy government bonds, or indirectly, via their pension scheme.
The ability of any society to care for its elderly, whether it be capitalist, soclalist or whatever supposedly primitive society might still exist in the Amazon, doesn’t really depend on any economic decisions made when the elderly were younger. It entirely depends on a later generation to provide for them. If there are insufficient young people around to bake the bread or catch the fish etc etc they won’t do very well at all.
It might depend on other decisions such as leaving the next generation a damaged environment.
Warren Mosler explains it all, in an American context, but the principle is the same, in the link below. See p 53
“….giving the government your money now in the form of Social Security taxes and getting it back later, is functionally the same as buying a government bond, where you give the government money now, and it gives it back to you later.The only difference is the return that seniors will get.”
https://moslereconomics.com/wp-content/uploads/2020/11/Seven-Deadly-Innocent-Frauds-of-Warren-Mosler.pdf
If the Lib Dems were looking for something “radical” to do on pensions, in the spirit of the whole “no-one shall be enslaved by poverty” idea:
– bringing national minimum wage into line with real living wage so that more people have spare money to put into pensions (and addressing the cost of living crisis more generally, likewise)
– looking at the near-complete vanishing of Defined Benefit pensions from the private sector in favour of Defined Contribution (and the shift of risk from employer to employee) and whether there’s any way to reverse that or find alternative pension structures which don’t put the risk so heavily on individuals
– improving the state pension so that a private pension becomes a luxury rather than a necessity for a comfortable retirement
In the short term, rather than as things which might go in policies for a future manifesto, how about some vocal and direct criticism of those post-92 universities which are currently bringing out every dirty trick in the book (subsidiary companies, fire-and-rehire, pay freeze threats, etc.) to force their employees off the Teachers Pension Scheme onto inferior (sometimes vastly inferior) schemes … or have already successfully done so? Better late than never?