In the debates over public sector pensions, it has been very common to have figures quoted that are supposed to show how low public sector pensions are on average. In better coverage this sometimes results in some juggling about of means and medians so that the ‘average’ quoted is more meaningful. What is usually lacking, however, is the answer to the obvious question: how many years work has someone put in to get that apparently low average pension?
Talking about how much pension someone gets without talking about how many years they work is odd, to put it mildly. For example, I built up a fairly small public sector pension entitlement, but then I spent several years rather than several decades working in the public sector. Factor in the number of years and rather than having got a dreadfully tiny pension, I got a decent pension.
Here then are the answers to the obvious question, showing the average (mean) pension in 2009-10 along with the average number of years people work to get that average pension:
Local government (England) – £4,052 / 7-8 years
Civil Service (UK) – £6,199 / 13 years
NHS (England & Wales) – £7,234 / 11 years
Armed forces – £7,722 / 10 years
Teachers (England & Wales) – £9,806 / 23 years
That context makes the figures look rather different. The local government pension figure is indeed small, but it also reflects people spending a small proportion of their working life in local government on average. At the other end, it makes the teacher figures look somewhat less generous, especially when you consider the amount of time it takes to get the necessary qualifications and when you compare teachers with the armed forces or NHS – a decade more adds only a couple of thousand in round terms.
Source: Hutton interim report Table 1.B and final report paragraph 5.11. Thank you to Thomas Gault for helping me locate these figures.
UPDATE: As has been pointed out in the comments thread, there are some problems with these figures. I took them from information provided by the House of Commons Library but on querying them based on the comments made, they now say that the years of service figures quoted above include people currently in work and are not just for those currently in receipt of a pension. Apologies for that.
The ‘correct’ figures look to be available for only one of the areas of public service quoted above, namely local government where the average number of years of service that goes with the £4,052 figure is 16 years.
* Mark Pack is Party President and is the editor of Liberal Democrat Newswire.
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27 Comments
Hi Mark
but surely even splitting/comparing figures this way can also be misleading? As a for instance the Armed Forces figure, you are actually including what are basically 2 schemes (although covered by the same body). An officer can receive a pension after 16 years, those in the ranks have to serve at least 22 years – would that distort the picture?
By the same token, comparing the length of time to gain the qualifications probably doesn’t help to much, the AF have many different trades and a large assortment of training, on top of any qualifications that are required for entry. So a pilot would need a degree before even joining the forces, where as a lowly airman may join at 16 and do a few months initial training.
A good approach, but the answers don’t look right.
I recollect that all of these except armed forces are “retire on half salary if you do 40 years” pensions. If so, that implies that the average LG workers earns £43k (43k/2 * 7.5/40, or “average pension * 80 / years of service = average final salary” ). Can that be right, especially as it is for current pensioners, some of whom retired years ago, when everyone was earning much less? It doesn’t look right to me.
(Other answers are: CS = £38k, NHS = £53k, teachers = £34k – all look high, esp NHS. There are a lot more nurses than doctors in the scheme)
Chris/Tim,
I think you are missing/by-passing Mark’s important high level point and instead are diving straight into the detail. The key point is that when Unison et al say look how low average pensions are in the public sector and quote their figures, we need to be aware that their figures do not mean ” a pension for someone who has worked all his/her life.” but include all pensioners down to those who only stayed for two years.
The detail Mark has provided is doubtless insufficient for the points you would like to make, but is fine for his point, which is crucial in evaluating what we are being told in the media. I would urge you to major on what this adds to the total of our awareness of the subject, rather than major on why it doesn’t provide you with what you would like.
@David Evans
Hi David
that is true enough and I did agree and have always thought along those lines anyway. My main point though regarding the AF was that 2 pension schemes were being lumped together so can be as misleading as the Unison figures.
But it was also Mark that started to draw comparisons between the different levels of training required for teachers compared to others, then stated that it made teachers pensions look less generous. It would probably have been better to leave that bit out.
David – yes, which is why I said it was a good approach! Now back to writing about pensions for CentreForum…
Tim: Given the source of the figures, I’d be very surprised if they are wrong as they’re from top flight credible / authoritative sources. But by all means let me know if you spot something deep in the detail of them.
David: That’s right. What I’m giving is a top-line figure that puts into content another top-line figure. If you want a full understanding of a complex issue, there’s plenty of detail to get stuck into, but years of service provides a short and easy to understand response to why average pension figures aren’t a sensible basis alone on which to pass judgement on pension schemes.
Mark, first declaration of interest I have recently retired (six months ago) with a full NHS pension after forty years in the pre- 2008 scheme. My pension no way comes in the “gold plated” strata
When I looked at your figures for the NHS I was a bit surprised as they do not look right. I looked at Hutton and I’m afraid I think you might be comparing the proverbial apples and pears here. I have just had a quick look at my NHS Pension ready reckoner (supplied by the scheme ). In order to receive a pension of £7,234 or thereabouts after 11 years in the pension scheme (either pre 2008 or post 2008) you would have to earn north of 50 grand a year at retirement which translates to the pay band halfway up the 8b scale. (there are 12 bands of which 8b is 9th). This is not the usual career grade for the majority of NHS workers!. Bearing in mind that this would be someone retiring at 60 or 65 (depending on which bit of the scheme) so they would have begun their NHS career at 49 years of age at the earliest if not 54 for someone on the post 2008 scheme. Not unknown but not a usual event for that pay grade. The vast majority of people claiming a pension after 11 years would be claiming for a period of time years in the past and would get much less and even less likely to have been earning 50 grand when they left the scheme.
I think your calculations are rather removed from the “real life” experience of the vast majority of NHS workers at least. Whilst Hutton’s mean number of years in the NHS scheme is undoubtedly real. Your derived financial calculations are somewhat disconnected from the actualitie and somewhat less useful.
The pensions debate is complicated and generates a lot of heat. In the NHS at least, the general feeling is; (or at least amongst those of my former colleagues I speak to)
1. The scheme is not in deficit and is a net “earner” for the Treasury. That is a surplus is returned from contributions of around 2 billion a year
2. The NHS scheme was reformed in 2008 to take account of future actuarial drift and there are already agreed mechanisms in place for necessary increases in employee contributions if/when necessary. To tear up that agreement is bad faith at the very least.
3. The implications of an ageing population is a general financial problem and is not just one of public sector pensions
4. Just because private sector pensions have been destroyed by contribution holidays by employers, Gordon Brown or any of the other popular dog whistle reasons, does not mean it is sensible to destroy Public Sector pensions as well.
This one I fear is going to run and run. I don’t think your contribution to the debate in this LDV post has not been one of your most useful, to say the least.
Dave Eastham – “3. The implications of an ageing population is a general financial problem and is not just one of public sector pensions”
True. But there is also the problem of relative equity.
The ageing population problem means that as a whole, people will have to work longer, make higher contributions, and receive less in the way of benefits.
But – there is also the issue of how one class of pensioners fares compared to another, and, typically, whether its fair that the 75% or so of private sector workers should be expected to fund public sector pensions that will be, on average, higher, taken earlier, and with lower contributions, than they will receive.
Dave: As we’re talking averages here, or more specifically the mean (rather than mode or medium), it’s possible for a clear majority of people to be on one side of it. So for example, I’m not surprised if a big majority of NHS staff are on less than the mean salary, as the higher salaries at the top end push up the mean. If I understand your point correctly, I think that’s why the averages are different from your experience of lots of people’s circumstances.
Mark: Tim’s instinct is right – the numbers do indeed look wrong, because they ARE wrong. You have misunderstood those “length of service” figures you quote and this has led you to a false conclusion.
I knew something must be wrong as soon as I looked at it because my wife and I are both members of one or other of these schemes and our benefits have accumulated nowhere near as speedily as you suggest. If only!!!
To explain…
The average pension numbers you give are actual average pensions paid out to pensioners – i.e. these numbers are based on retired workers, who have finished their careers and reached pension age. That’s clear enough.
But the length of service numbers you give are NOT based on retiring workers. They are based on scheme members, which of course includes people who are still working, some of whom will be at a very early stage in their careers. Obviously this skews the length of service average down massively.
The two sets of data are therefore completely different and based on totally different sets of people; making a direct comparison between them, as you have done, is meaningless and totally misleading.
For instance, the average LGPS retiree (average pension: £4,052) has NOT clocked up 7-8 years service as you claim. He has actually clocked up an average 16 years service (see footnote 6 on p.107 of the final Hutton report). I can tell you, as an LGPS member myself, that 16 years to earn £4,052 benefits is much closer to reality than the 7-8 years you suggest. However, even this figure should be treated with extreme caution, because as Hutton points out repeatedly, these averages are very broad and hide a great deal of detail and variability.
The only way this kind of benefits vs service comparison could be anywhere near accurate would be if both sets of figures were based on the same groups of people, i.e. either scheme members OR pensioners, but not a random mix of the two.
I’m sorry to be so critical, but this article should really be edited because its entire premise is factually wrong.
@Dave Eastham
It was interesting to read the 4 observations from former NHS colleagues that you highlighted.
To deal with them in turn:
1. (The scheme is not in deficit) The NHS Scheme (like most Public Sector Schemes apart from the Local Government Pension Scheme) is unfounded, so it is misleading to talk of it being in deficit or not in deficit. If the NHS Scheme were funded then it would be massively in deficit.
2. (The NHS scheme was reformed in 2008) Unfortunately the Labour Government of the time didn’t go far enough in its reforms hence the need for further ones in the light of the Hutton Report.
3. (The implications of an ageing population is a general financial problem) Yes, but that isn’t a reason not to carry out much needed reforms.
4. (Just because private sector pensions have been destroyed by …..) Firstly, you have missed out the biggest problem affecting all pensions which is much increased longevity. Because of that pensions cost a lot more than they used to, and it is only right that public sector employees should pay their share of the extra cost. Secondly, the proposals come nowhere near “destroying Public Sector pensions”.
@ Tabman.
I think you might just have bought into the simplistic NHS pension is unfunded, non contributory and funded from the general taxation of everybody else myth.
The existing NHS pension fund is contribution based and has no defined fund. That is current pensions are effectively paid out from current contributions. Pension contributions, deducted from salary are between 5 to 8.5% with an employer contribution of 14.2%. (The proposed changes and increases are not agreed as yet, despite what Danny Alexander announces) The 2008 agreement said that if there was the demographic need then the employee contributions would rise.
Currently the last two actuarial 5 year reviews produced a constant surplus returned to the Treasury. In 2010/2011 it was 2.1 billion surplus. For 2011/12 it is projected to be 1.8 reducing to 0.2 in 2015/16, when there is an agreed review. The scheme is effectively designed that current pensions to be paid out of contributions. And it is. Though that isn’t it’s primary function.
What NHS staff get really angry about, is that on top of a three year pay freeze (yes I know there is scale drift but it is really quite minor and more and more staff are on scale maxima) it seems that they are now being asked to pay more for less. If the scheme was not in surplus, then the agreement already says they would pay more. They know that they can do the sums. What it feels like on the ground is a “Tax” (a not so stealthy version of the Tory’s beloved “Stealth Tax” of old) to fund a financial crisis not of their making. Simplistic, wrong even but Danny Alexander’s and others public pronouncements don’t help.
@ Mark 75% of NHS pensions are less than £9,000 per annum.. The majority of those after 40 years service. I still think you have misunderstood the data. Unusual for you it must be said
Stuart is right – the current average service of current employees will be much less than the accumulated average service of leavers – noting of course that many people’s pensions will be determined at much younger ages than retirement age, when they leave service and have their pension benefits calculated and deferred (and index linked). The figures he suggests – average service on leaving roughly double the average current service – look about right. That still means that the average pension figures quoted by the unions represent the amount accumulated (on average) over less than half of most people’s working lives, and also include a lot of people who aren’t (or haven’t been, for their whole careers) full-time.
More relevant to the public sector pensions debate is the equivalent figure for the private sector – which I remember seeing published during the recent strike but can’t remember so won’t risk a guess – but it was significantly lower than the average public sector pension, which brings home the significant benefit of having a salary-related index-linked pension that isn’t subject to the vaguaries of fluctuating stock markets and plunging annuity rates, as are most pensions in private sector companies.
@Stuart Mitchell
“For instance, the average LGPS retiree (average pension: £4,052) has NOT clocked up 7-8 years service as you claim. He has actually clocked up an average 16 years service (see footnote 6 on p.107 of the final Hutton report).”
On the basis that the Local Government Pension Scheme has an accrual rate of 1/60ths, a pension of £4,052 pa would be earned by 16 years service by someone with a final salary of £15,200.
If that same person had a full career of 40 years, then their LGPS pension would be £10,130. In addition from State Retirement Age they would receive a basic state pension of £5,590 (from April 2012).
So that person, who earned £15,200 pa in work, would have a total retirement income of over £15,700 pa – over £500 more each year than when they were working. And someone has got to pay for that.
Bizarre!
The accrual rate only changed to 1/60ths relatively recently so most people in receipt of an LGPS would have had (all or most of) their benefit calculated on the basis of 1/80ths plus 3x lump sum.
@Simon
Relax – I put your theoretical employee’s details into my pension fund’s on-line calculator and the pension amount it came up with was several thousand quid per annum less than what you calculated. I’m sure you’ll be pleased.
To be precise, an employee retiring now on £15,200 after 40 years service would get an LGPS pension between £6147 and £7853 (depending on lump sum). Try it yourself at http://www.gmpf.org.uk/calculators/whole_time_calc.htm
Dave Eastham – “I think you might just have bought into the simplistic NHS pension is unfunded, non contributory and funded from the general taxation of everybody else myth.
The existing NHS pension fund is contribution based and has no defined fund. That is current pensions are effectively paid out from current contributions. Pension contributions, deducted from salary are between 5 to 8.5% with an employer contribution of 14.2%”
No, I haven’t bought into any myth. Unfunded means that contributions paid in by workers are paid out directly to current pensioners. Your own description of the scheme is such that there is a 5-8.5% levy on current NHS employees, and an employer contribution of 14.2%. Hint: who is the employer? And where does their funding come from? Correct – its the NHS and therefore the contribution comes from NHS funding, ie the taxpayer.
A funded scheme means that pensioners are paid from the proceeds of a fund built up over many years, and continually added to by current workers. Unfortunately the majority of public sector schemes (and the state pension) are not funded which means that future guaranteed payments to pensioners have to be met by increased taxation on future workers.
I suspect those future workers will be looking at pensioners who are retiring now on final salary schemes, at 60, having made massive windfall bonuses on their houses, and wondering about the equity of those past arrangements.
@Dave
“What it feels like on the ground is a “Tax”… to fund a financial crisis not of their making.”
Agree 100%. Public sector workers saving in pension schemes (people seem to forget that we do actually conribute to these schemes!) have taken some big hits already, with more to come next month when the government links the pensions to CPI rather than RPI, which will reduce the values of pensions massively in the years to come. Any further reforms need to be made with a MUCH more compelling financial case than the dodgy stats we have seen in this thread!
Stuart Mitchell – ” Public sector workers saving in pension schemes (people seem to forget that we do actually conribute to these schemes!) have taken some big hits already”
[Groan] – No!!!! You don’t belong to a scheme. You do not save. The Government takes money from your pay packet, and it pays it out to current pensioners. If there is a shortfall it has to be made up from taxation and/or borrowing. There is no fund.
The whole government pensions system is a huge ponzi scam perpetuated since 1948 when Labour introduced it. Beveridges proposals were for funded schemes, in other words, pensioners would pay into a scheme and their contributions would eventually come back to them from the earnings made by that scheme. This never happened.
Tabman: “[Groan] – No!!!! You don’t belong to a scheme. You do not save.”
You are dead wrong. I am a member of the Greater Manchester Pension Fund, which has assets of £11bn (some of which it bought with the money I have invested in the fund).
http://www.gmpf.org.uk/publications/annual_report_and_accounts/2011/investment_report.htm
Stuart Mitchell – well, good for you, but the majority of public sector pension schemes aren’t funded:
“All these savings and contributions are pocketed by the Treasury and used to reduce current Government expenditure. Pensions are then paid out of taxation when they fall due. This arrangement has a number of advantages, for example in avoiding the kind of investment risk faced by funded schemes, but Ministers and officials are all too aware of the long term liability that has been built up. (The Government Actuary estimated that the unfunded liabilities of the civil service, teachers, NHS & emergency services schemes totalled around £770 billion as at 31 March 2008.) It is also possible that past contributions (notional or real) were in practice set at levels which were – at least with the benefit of hindsight – far too low. The same phenomenon can of course be found in the funded sector, but it appears that the private sector did move more quickly to address the issue, in particular by closing ‘final salary schemes'”
http://www.civilservant.org.uk/pensions.shtml
If you contribute to a pension fund, then it is the fund managers making actuarial decisions on the strain that that fund can sustain going forward. You should be “blaming” the fund managers – but at the end of the day they have to work to very tight rules introduced after Capn Bob Maxwell waltzed off with his pensioners’ money. And, of course, to demographics.
And, really, you shouldn’t be whinging – your increased contribution and decreased benefit is the fallout from living longer.
“well, good for you, but the majority of public sector pension schemes aren’t funded”
Perhaps they should be, as mine seems to be performing absolutely brilliantly according to the annual reports it sends me every year. Unless something goes horribly wrong it represents no risk to the taxpayer whatsoever.
I know that other schemes like the NHS one are funded partly by taxpayers – of which I am one – but unlike you I don’t resent it.
“And, really, you shouldn’t be whinging – your increased contribution and decreased benefit is the fallout from living longer.”
I’m not whinging, I’m merely asking for the government to put forward a proper case. I have already mentioned how my pension fund is perfectly able to meet all its liabilities for many decades to come. If any increased contributions were to go to the fund, and this was needed to secure its viability, I would have no problem with that. But my understanding is that my increased contributions will in fact go straight to central government – in other words, it’s a tax. As Mario Balotelli might put it – why always me?
You really need to get over your resentment towards public sector workers who are saving for their pensions. Why does nobody hardly ever mention private sector workers, most of whose pensions have gone to the wall? Bashing public sector workers will do nothing to alleviate that situation, not unless you’re interested in the politics of schadenfreude. Do you think the government will use any of the money it saves from emaciating public pensions to help out private sector pensioners? As if! We need an all-party commission to start looking at the whole pension situation; to stop pitting public against private; and to make decisions based on real evidence, rather than some of the bogus figures we keep seeing.
Stuart Mitchell- I agree, it would be far better if all schemes were funded schemes.
“I know that other schemes like the NHS one are funded partly by taxpayers – of which I am one – but unlike you I don’t resent it.”
Well, leaving aside the fact that as a public sector employee, the balance of your salary after taxation is funded by private-sector taxpayers, I’m not saying that I resent it. I’m saying that its understandable that low-paid private sector workers might resent paying taxes to fund final salary pension schemes for public sector workers who’ve worked shorter periods, for more pension and with lesser contributions than they have.
“You really need to get over your resentment towards public sector workers who are saving for their pensions. Why does nobody hardly ever mention private sector workers, most of whose pensions have gone to the wall? Bashing public sector workers will do nothing to alleviate that situation, not unless you’re interested in the politics of schadenfreude. Do you think the government will use any of the money it saves from emaciating public pensions to help out private sector pensioners? As if! We need an all-party commission to start looking at the whole pension situation; to stop pitting public against private; and to make decisions based on real evidence, rather than some of the bogus figures we keep seeing.”
Once again, I don’t have resentment for public sector workers saving for pensions; I have resentment for public sector workers expecting preferential treatment at the expense of private sector workers with worse conditions – that are necessitated by demographics.
The issue boils down to the simple fact that as the population lives longer, if nothing is done to reduce pensions, increase contributions and push out the retirement age we will end up with a situation where every pensioner is being supported by only 2 workers. This is self-evidently not sustainable, and it is wrong for pblic sector workers to insist that their very favourable conditions are preserved when maintaining those conditions will fall disproportionately on those less well provided for than they are.
In reading through this article and the discussion, it would seem that we do need to move the discussion away from the meaningless monetary statistical figures that have enabled the unions to make the government look bad. However, I think that the discussion does need to go further into the fundamental parameters of the scheme(s).
To me the only figures that can be readily compared and contrasted are those based on one year’s contributions and service. ie. what does one year of service and contributions buy and what are the employee/employer contribution rates. These figures would permit direct comparison with private sector arrangements and hence permit taxpayers to get a better feel of the affordability of the arrangements.
Yes the fact that public sector pensions (including NHS pensions) are to a large extent a Ponzi scheme rather than a fund-based scheme doesn’t help matters and is a major cause for concern; particularly given the trends we are seeing in population demographics and ratio’s of taxpayers to pensioners. Perhaps the coalition should take the opportunity to start migrating the current Ponzi scheme to a fund-based scheme so as to provide a end date for the current scheme.
Tabman: “the balance of your salary after taxation is funded by private-sector taxpayers,”
That isn’t true either. The institution I work for provides services to the private sector and this forms a substantial part of our income.
We do actually agree (strange as it may seem) on one thing: the disparity between some private and some public pensions (some private sector workers do in fact still have very good pensions, and many public sector workers are not in the public schemes) is inequitable and something ought to be done about it. But your answer to this seems to be the race for the bottom, which is the weakest possible reason for reforming public sector pensions further. When I hear that private sector workers are suffering, my instinct is to want to do something to make their situation better. All you offer is public-sector bashing, as if this in itself will help private sector workers. It won’t.
You also throw around the coalition’s favourite one-word justification for everything bad they do – “unsustainable”. Actually, Hutton showed that the reforms already implemented mean that public sector pensions are forecast to become more sustainable year on year (and this was even before the CPI switch which will make them even more affordable). Which is why I maintain that we need a credible financial case for more reform, and I don’t see anybody here providing that.
Stuart Mitchell – I don’t advocate a “race to the bottom”, as you call it. What I advocate is that pension reform is equitable and does not favour one group of workers over another. I work for a company that has a large degree of pension strain – that depresses the share price, puts at risk the continued sustainability of the company and, ultimately, the jobs of all its workers.
What concerns me is that there are a group of people approaching retirement who will retire earlier, on higher incomes, having made lower contributions, and in many cases sitting on massive house-price windfall gains, than the generations coming through to support them. This is massively inequitable and something must be done about it.
Tabman – so what must be done exactly? Are you suggesting that people should lose pension benefits they have acquired?