With-hold pay rises and bonuses....well that happens across the board anyway to existing employees...so keep your final salary pension....that's the only way to win here
Former EDS employees at DXC Technologies that look set to lose the final salary pension plan will need to funnel 40 per cent of monthly earnings into the replacement scheme to maintain their current retirement pot. This was one of the areas covered by an FAQ document DXC sent to the more than 1,200 employees in the UK and …
Final salary pensions are an unsustainable joke.
You spend your life from age 20 getting to a figure, slowly raising and raising from minimum-wage (or better) to the highest you're ever likely to earn. Then you retire at 65. That's 45 years of salary earned. And at that point you expect that probably-maximum salary to continue for free until you're... what... 90?
That's 25 years of full-salary paid back to you.
Then you need to pug away AT LEAST 56% of your earnings from 20-65 to sustain you in that amount from 65-90. And probably a whole lot more, if you ever earned less than the final salary at any point.
Even if you assume you'll only get to 75, that's 22%.
22% of EVERYTHING YOU EVER EARNED EVER (not even counting tax, interest rate rises, depreciation, etc.). Likely 30-40% by the time you take that into account, even for someone who is expected to die at 75. By the time you work out the odds, profit for the insurance company, sustaining those who live into their 100's on salaries much higher than yours but paid for out of the same pot... 40% seems positively generous.
40% of every you ever earned, from the time you started work / left uni. If you reach even the bare bottom of life expectancy. Hint: Those likely to be offering final salary pensions probably have good jobs, and therefore will have lived better and therefore for longer.
It's not sustainable. And it's being funded by screwing over the generation below (by the companies going bust, the pension offers being made worse, etc.).
There's a reason that state pensions are a pittance, aren't final-salary, and yet represent huge percentages of the total money paid out by government - more than healthcare or education and FOUR TIMES that of defence:
Final salary pensions are entirely unsustainable. And yet we offer them to VAST TRACTS of industry and civil servants.
And yet we offer them to VAST TRACTS of
industry and civil servants.
FTFY. There's very few people now in final salary industrial schemes, and many of not most of those are formerly nationalised industries. But otherwise, spot on in every other respect and the underlying maths.
Personally, though, the pensions I'd go after before the civil service scheme would be those of MPs - unearned, undeserved, and outrageously generous.
And yet we offer them to VAST TRACTS of
industry and civil servants.
Local government staff have seen pensions adjusted three times over the last decade-or-so. No longer final salary but career average for many. Of course, depends on your definition for civil servants... some say this and mean all public sector workers.
And other restrictions and reductions as well, including amount paid to dependents for death in service, etc. However, exact details vary from council to council. This on the 2013 changes - https://www.theguardian.com/money/2013/may/17/public-sector-pensions-reduced-third
So far, only MP's and the like have really escaped any form of axe on these issues. Turkeys and Christmas comes to mind.
Personally, though, the pensions I'd go after before the civil service scheme would be those of MPs
Good PR, futile materially. MPs are a rounding error in public sector pensions budget (as are Congressmen for colonials). Once you're done virtue signalling, you're left with exactly the same arithmetic problem as when you started. Going after the private sector C suite (and assorted Bankers) is a different kettle of fish. The total annual cost of MP pensions (£15-20M) is close to the annual salary of DXC's CEO (£18M+).
Thats not how final salary pensions work, and they are sustainable. A final salary pension scheme works on the basis of you obtaining (usually) 1/80th of the value of your final annual salary for every year worked for the pensionable organisation. So, if you work for 25 years at Acme Co and end with a £50,000 salary you will get a pension of 25/80 of £50K or £15,625 p.a less tax. To achieve this you are like to have paid in approximately 18% of your cumulative salary over the 25 years. Assuming you started on £25K and increased linearly to £50K you will have paid in £175K which would then take approximately 12 years to get back, assuming you live that long. So, in short, a final salary pension is simply paying back to you what you already put into it for the first 12 years, and if you live longer than that you are getting some of the actual investment income as well as the capital you put in.Entirely fair and proper. Anyone who thinks FS scheme are unfair has been duped by corporations who want to effectively steal your money.
But why should it be linked to your final salary? It was well known in the public sector that long term middle management employees were given a new role a few years before retirement that put them into a higher pay grade so that it would bump up their final salary pension.
In reality every pension should be self funding, using pensions as a pyramid scheme is ridiculous. Thi should be for state pensions, private pensions and public pensions. All locked away from being access by the company and run independently. They should not have any guaranteed final sum, just a forecast.
For state pension, this would come from a relevant portion of national insurance and for the others form employer and employee contributions.
In that way there would never be the requirement for the current workforce to pay for the retired workforce (no more baby boomer issues)- the retired workforce would have paid their own pensions, it would be a guaranteed pot and would vary by market value.
The whole thing about pensions needs looking at. America runs in 401K where people make their own provisions, although they do have final salary schemes and these are starting to follow the UK in closing down (picked that up on Nightly Business Report) ... but the other side of the equation is what you can actually buy with your pension pot. - https://www.youtube.com/watch?v=dCKBCu5tzVI
As long as I don't have to worry about putting food on the table, and can take the occasional trip somewhere in the country to enjoy a bit of a change of four walls, watch a film in the cinema, etc. I'm happy.
The danger as I see it, is the current way that investments are happening. It only takes a problem in the investment markets and all funds and functions that are fed from the stock market/etc. are at risk... along with the social functions that rely on them.
I read of an increasing number of companies going private, etc. and under control of private equity companies, and the consequences are clear...
How we face and fund retirement needs a more in-depth look, than tweaking and arguing over pension pot percentages, IMHO. - and I've just noticed that I lost my silver badge. Meh !
"As long as I don't have to worry about putting food on the table, and can take the occasional trip somewhere in the country to enjoy a bit of a change of four walls, watch a film in the cinema, etc. I'm happy."
@msknight: Likewise. My aspirations are not excessive. I'd add a bit of engagement with people - family, volunteering and in my case some part time adult education teaching.
Teaching pension for my age cohort had a 10 year averaging period before retirement. The highest three years contiguous salary was taken as the 'final salary'. This was to stop people getting shoved up grades to boost the pension.
It was financially beneficial to me to take my pension a year early so as to gain the maximum benefit of my highest salary years having been made redundo in the dying days of the Gordon Brown government. You may remember they sort of lost track of how much they were spending on new Further Education colleges, coupled with the prime mortgages meltdown. This lead to a sudden unplanned budget reduction in already agreed funding for FE Colleges, hence my departure along with many colleagues.
I've been working (from choice by the way) fractional posts since then, so huge salary drop, hence taking a 4% actuarial reduction for one year as opposed to a ~20% cut.
I'm a Maths teacher. There is an artificially produced chronic shortage of Maths teachers in FE Colleges. I could have worked a couple of more years easily. Tough Bananas Bub.
Actionable content: get pensions advice early on. Make some kind of plan to preserve basics as well said by msknight.
Political thought: what happened to the social contract? Work hard for 30 to 40 years then we will sort you out with the basics? Not hard is it. Thatcher and her dodgy economists really screwed things up. Younger ones finally waking up to that... interesting times ahead
Coat: Das Capital in left pocket and Der Weg zur Knechtschaft in the right pocket thus covering all bases.
Good luck to the floggers-of-computers in original article.
No, its pretty dumb for government pensions to be self funding. The government isn't going to go away, and isn't going to be spending much less money. If the government puts say 5 billion a year aside for self funding pensions, all that happens is the government puts another 5 billion on public sector debt, and the finance industry has another 5 billion to gamble with whilst paying themselves huge salaries and bonuses for"looking after the investment". If they don't borrow the 5 billion then they still pay out the same money in pensions, but they don't pay the interest on borrowing the 5 billion in the meantime.
Always follow the money. If government pensions are made self funding we tax payers are no better off, but the finance industry executives are. The reason for private sector pensions to be self funding is simply to guarantee the money is still there when the company is gone (Maxwell's permitting). It has no advantage for government pensions.
"No, its pretty dumb for government pensions to be self funding."
No it isn't. It isn't just to safeguard a pension it is for a number of reasons. If a million people are currently retiring each year but only 750,000 enter the workforce each year then the million retirees will have paid less tax for their pension while the current workers will have to pay more (or the government gets into more debt). Therefore there is a constant need to increase immigration to ensure that there is sufficient workforce to pay the pensions of the retirees.
It also means that you can't as an employee vote to pay more money in to get a better pension scheme as it will be up to the government of the day when you retire to define your pension benefits.
Then there are issues with raising life expectancy etc etc. If a government pension was ring fenced you could get continuous forecasts of your state pension and wouldn't rely on the requirement of others to hopefully fund it or the political situation of the day etc.
Even if a pension company was guaranteed to be around forever it's still not a good idea to be told your final pension will depend on how many new recruits they can attract each year or what they choose to pay you when you retire - it's not just about ensuring the provider is still around.
Finally the government doesn't need to deal with the finance industry paying itself big salaries etc. They can invest in safe investments which are publically run. There's many public sector pensions that are self funding and run this way.
"If the government puts say 5 billion a year aside for self funding pensions, all that happens is the government puts another 5 billion on public sector debt,"
And also that is not necessarily as bad thing. It is better for the current government to have to show the true liabilities of their policies now than just pass stuff off into the future where some other government will have to deal with it.
A bit like adding things onto a credit card - you can see your liabilities rather than buy now pay in 24 months where you are hit with the big payment at a later date when you may have forgotten about it.
There is a lot wrong with the calculations shown: omits the impact of inflation; linear increases don't work; people live more than 12 years beyond retirement age; and so on. But most important is that people do get pay rises and promotions over the longer term meaning their early payments in to the system are small from their lower salaries, and their final salary defining their pension is usually considerably higher as they get promoted.
That's why my wife's gold-plated UK teacher's pension even though it has been hauled back to a career average calculation will still provide as much as my personal money-purchase pension can buy in annuities (although I probably wouldn't buy a big annuity now). I'm considerably better paid than she is, have contributed considerably more money to it, and it's been invested well.
Our children and grandchildren, the future taxpayers, will pick up her financial slack. Sorry but them's the facts.
"Our children and grandchildren, the future taxpayers, will pick up her financial slack. Sorry but them's the facts."
And that's always been the case. Do you think that your current NI payments are being put in a bank account to pay for your state pension when you retire? No it will be the NI contributions of your children and grandchildren who pay.
Re the comment about teacher's life expectancy following retirement. Lots of private pensions have dependency benefits built into them so if the pensionee dies their family still receives the pension. Teacher's pensions die with the teacher so you'd better hope you die befiore your wife because if she dies first, her money goes with her. Plus your wife is working probably a damn sight harder than you do so she probably deserves the pension by the time she retires.
@AC, Exactly - future generations pay the public sector pensions and yes, they pay the state pensions as well. My wife gets a great pension at a cheap price because the implicit financial slack of her not paying for it now is covered by future taxpayers (and NI payers). Not sure why you'd interpret the original comment differently but apologies if it was too confusing.
If my wife dies first, then her teacher's pension will pay her family (i.e me) a shade under 50% annual benefit. You will need to check your information about teacher's pensions as it is currently inaccurate. (I will have to take about a 10% annuity hit to get 50% joint life added when I retire.)
Not sure how the assessment of who works harder than who was done based on the comments, but definitely intrigued about the analysis method used.
"So, if you work for 25 years at Acme Co and end with a £50,000 salary you will get a pension of 25/80 of £50K or £15,625 p.a less tax. To achieve this you are like to have paid in approximately 18% of your cumulative salary over the 25 years. Assuming you started on £25K and increased linearly to £50K you will have paid in £175K which would then take approximately 12 years to get back, assuming you live that long."
Comparing that with the scheme I am on (not in the UK):
It's calculated from the total you have accumulated. Interest does accrue over the years on that sum.
You get 6.8% p.a. of the final value as income, so that £175K would result in a yearly pension of £11,900. Because interest does accrue while you are building it up, £175K of contributions will turn out to be a decent bit more by the end, even at quite low interest rates.
100 / 6.8 is 14.7 years, so more years to get it back than the Final Salary scheme you describe.
Swings and roundabouts between the two flavours. The final salary scheme probably comes out better in times of high inflation, but only if salaries keep up.
P.S. That 6.8% figure was undoubtedly calculated by actuaries, based on life expectancy of pensioners.
That's how it might work with some companies, if you work your entire life for the one company.
I was told by one former employer that I needed to have worked for the company for 5 continuous years to receive any benefit.
Another former employer told me that the money paid in on my behalf was frozen at the time I left (1977) and was not invested in any way.
In your ideal FS world, not only does the employer work for the same company but the same company still exists. If it goes bust and the funds were invested heavily in the company itself, you lose. If it gets bought by another company, the existing fund will likely be frozen and a new one started or you pay into the new company's scheme.
In another scenario, which I avoided but other colleagues fell into, the company insisted that people had signed that this pension was discretionary. Later, the company quoted that clause and paid nothing. We were told that if it was non-discretionary, it would be regarded as payment-in-kind and subject to income tax. I avoided that by refusing to switch to the new scheme, certainly until I could read the new Terms and Conditions. That hadn't arrived by the 6-month time time limit where a choice had to be made. A year later, I was let go. I actually rejoined the company 10 years later but made sure that the company paid into my personal pension on my behalf. No income tax and no National Insurance Tax. That has worked very well for me.
Maybe. But in money purchase schemes, the (entire) risk of poor performance is dumped on the employees without comment or comeback. At least with final salary (or career-average) schemes, the provider cannot escape some responsibility for poor performance (even if their failure is then passed on to scheme members, it nevertheless tends to cause some sort of stink).
Sorry AC, but it's worse than that. In money purchase schemes, you pay an excessive amount to the fund managers - in some cases, if you've left a company after only a few years, these fees can actually wipe out your entire fund in short order ...
> Final salary pensions are entirely unsustainable. And yet we offer them to VAST TRACTS of industry and civil servants.
My partner is a teacher and her pension was arbitrarily changed from final salary to career average several years back. No meaningful consultation, no right of appeal. It might have been the case once, but industry hasn't offered FS schemes since the 1980's. And civil servants (in the UK at least) stopped getting FS for new recruits long ago.
My main gripe is that the Government (both Conservative & Labour) have refused to introduce rules that would actually benefit real people. After Robert Maxwell there was a big hoo-har about pensions but the Government refused to (a) force companies to make their company contributions to private pensions (that are portable between employers without incurring large 'administrative' costs) and (b) limiting fees. Why on earth should converting a pension into an annuity cost so much, except pure greed from the insurance companies?
There's two groups that make up these 'drop dead after working myself to death' claims.
Teachers + Police.
The life expectancy for both at retirement is well into 20 years.
Thats why there's so much panic about paying their pensions.
If 1/3 dropped dead ~2 years after retiring there would be no issue at all.
No. A pension is achievable.
The final salary bit is something that can be gamed so its best to move to a career average i.e. proportional to money paid over 45 years.
However, pensions *must* be fully funded according to some roughly right estimate of how long a pensioner will live.
The problem with public sector pensions is they are effectively a ponzi scheme. You *can* operate a PAYG scheme but you *cannot* guarantee the payout. In the case of teachers PAYG the pension payout must never exceed the money currently being paid in.
The probkem with private sector pension is that 45 years is about 40 years longer than the life span of the average company.
"You spend your life from age 20 getting to a figure, slowly raising and raising from minimum-wage (or better) to the highest you're ever likely to earn. Then you retire at 65. That's 45 years of salary earned. And at that point you expect that probably-maximum salary to continue for free until you're... what... 90?"
Yes - although in my case the payments from the pension started when I turned 50, the payment is adjusted for inflation every year and the taxpayer backs the fund, although the fund managers are fairly good in their investment choices.
Oh, and in addition, 13 years later I'm still in the same job as I was when I turned 50 and still earning the salary from that as well, part of which has been put into a second pension scheme - when I do finally retire I'm looking forward to enjoying the benefits of three separate pensions, even though there were times when I was younger when I could have really used the extra money in the bank..
Ex pensions actuary here ... Lee is spot on. His figures, while based on a couple of naive assumptions, are very close to the more sophisticated actuarial figures. Final salary pensions are completely unsustainable, as younger employees are starting to find (government cuts, pay cuts if you're employed by the government, etc. in large part to finance final salary obligations).
However, what are we going to do about it? Either we carry on paying generous entitlements and the country goes bust - or we go to money purchase pensions, which most non-government employers have already done, and our pensioners can't afford to survive. (This gets even worse when you consider the housing crisis, and the number of future pensioners who will be renting at exhorbitant prices.)
We need an entirely different solution, and I for one haven't heard a good one that seems likely to work. Although I do think Basic Income has a chance.
The £10 Billion a year tax raid on private pension pots since 1997 killed the final salary schemes. Those that lasted this long are rare indeed.
"DXC is looking to slash operating expenses by $1bn in this fiscal year that ends March, and is using a mixture of redundancies, offshoring, real estate closures including office space and data centres, automation, squeezing suppliers and cutting back on staff expenses to help it do so."
Obviously the pension decision can't be related to the fact the comany is heading down this well-worn route can it?..............
For my twopennorth, why would you spend your entire IT career working at a company like this? I've got about 3 years worth of contributions into a final salary scheme at one ex-emloyer that will theoretially pay a few quid a month when (if?) I get to retire, but most IT careers are far too mobile in terms of switching jobs in order to make significant career progress that I don't think this is a massive issue for the industry in general.
why would you spend your entire IT career working at a company like this? [...] most IT careers are far too mobile in terms of switching jobs in order to make significant career progress that I don't think this is a massive issue for the industry in general.
That is probably true now but it wasn't then. A bloke in our company has been here 50 years and there is a lot of it about.
Next time someone from the public sector claims their salary is lower than those in the private sector, point them at this.
Yes, on the headline "salary" private sector does seem to be ahead. But once you remove this 40% pension contribution, suddenly the Public Sector looks like a vastly better deal. And the Public Sector pension scheme can't go bust like many private schemes have.
Would you be prepared to accept a lower salary today on the basis of jam tomorrow? I'm sure there are several public sector roles you could apply for for which you are qualified for if you looked into it, so ask your self why you didn't / wouldn't apply for a public sector role? If you are honest, salary will probably come very high up the list.
Remember some public sector worker salaries are so low that those workers need to use food banks at times (for example nurses) and it is of little consolation that you have the prospect of a generous pension in many years time, if your struggling to cope financially at the current moment in time.
I don't understand why so many people working in the private sector (as I do) seem to be keen of a race to the bottom? (Unless of course you are the owner of a private firm who employes people at minimum wage and then expect my taxes to prop up your defective business model (unable to pay its staff a decent wage and make a profit) through tax credits and in work benefits?)
If you actually look at the pension scheme that *all* Public Sector employees were *forced* to accept (with no consultation whatsoever) recently, I think you will find that many Private Sector Pension Schemes actually compare pretty well!
I am one of the lucky Dinosaurs who were close enough to my Scheme Retirement age to retain my final salary pension, but my contributions were forcibly increased by 50%. (The maximum I can get out of my scheme is 45/80 of 'average of last 3 years').
The newest scheme (which all Principal Civil Service Pension Scheme members have been on since April 2015) requires a minimum of 4.6% of salary to be paid in per month (rising to a max of 8.05% for those earning £150K +), In return, you get back a 'whopping' 2.32% of you salary that year, a 'massive' "cost of living increase" (currently a stunning 1%) is then added to your total pension. You can get the whole of this princely sum at the State Pension Age (Rapidly vanishing into the distance for the 20-somethings I work with).
When you consider that Civil Service salaries have traditionally been pegged at below Market Rates by reason of the (reasonably) generous pension, you will see why most now consider themselves underpaid. Currently, my role would attract roughly 35-50% more annual salary in the Private Sector.
Posted AC for obvious reasons
Presumably contributions before tax? 'Cost of living' increase is actually pegged to CPI? CPI after retirement as well?
Paying 4-8% contribution to get 2.32% of your salary added to a pension from State Pension Age for the Rest of Your Life sounds like a decent way to budget a fixed payment now to lock in reasonably well-defined future benefits. Each 2.32% is going to be paid for a decade or more, so the investment effect is that the 4-8% over a career appreciates pretty well independently of what any stock market is doing, and especially the 8% in later years (with the 2.32% of the higher salary being more certain).
Might not be as blindingly lucrative as it was (CPI vs RPI, increased contributions, etc) but still not much risk, just so long as there are enough taxpayers when you retire to pay you your pension. Sounds better than most private sector options.
Been there, done that calculation. My wife is a teacher; I'm in private sector employment. I earn a multiple of her salary and pay double that multiple in to a decently performing private pension. Even after her pension benefits were changed to career average, her pension on retirement will be about the same as mine.
There are some downsides - her pension dies with her with limited options to invest in other ways, while mine we can invest a bit more strategically and I can pass benefits to her on death. But on the whole, that teacher's pension is worth maybe another 25% on salary.
BTW, I'm aware of, for example, the impossibility of recruiting good, new teachers because the starting pay is a really bad joke, so this is just to illustrate the impact of the teacher's FS-style pension as a benefit, not to comment on teacher wages where there is genuinely a problem.
Some Civil Servants (me included) were happy to take lower salary on the promise of a decent pension. Then we were told we'd have to pay more, for longer to get less at the end all while enduring pay freeze that equates to a pay cut in real terms. Everyone is getting shafted over pensions and it's not good. You sign up for one thing, invest years of your life based on that promise and then get told you're not getting what you agreed to. It's outrageous really because there's enough wealth about to sustain decent pensions but it all ends up being funelled into the pockets of a tiny minority who couldn't hope to spend it all if they lived to be 150.
"Everyone is getting shafted over pensions "
*Almost* everyone, regardless of private sector/public sector divide and rule tactics from Daily Mail and friends.
"it's not good."
It's been *very* good for a few, frequently for those who promised jam tomorrow and then didn't deliver what they promised, and quite often basically stole from those to whom they made their promises.
"there's enough wealth about to sustain decent pensions"
Ain't that the truth.
"it all ends up being funelled into the pockets of a tiny minority who couldn't hope to spend it all if they lived to be 150."
We have a winner!
If someone buys a long term "investment" policy, such as a private pension, a very large part of the early payments has traditionally gone to fund large kickbacks (er, "commission") to the organisation selling the policy. A little bit of that might reach the salesperson, a lot more of it stays at corporate level and goes to the few at the top, who don't usually seem to have problems with their "directors compensation" or their pensions.
The concept of long term investment, long term reward, etc, in the UK financial sector at least, seems to mean maybe three years or so. Pensions take a little longer than that (as do mortgages etc). Fix *that* and a large part of the alleged pension problem (and the rest of the UK economy's other problems) might go away.
See also e.g. "endowment mortgages", "interest-only mortgages" and various other miracles of financial sleight of hand from those who Gordon Brown once called the Masters of the Universe.
Many final salary schemes are in fact fully sustainable - see here for example:
I see no reason to close the EDS scheme. After all, despite what they have said, there are many people whose pension arrangements cannot be changed (people transitioned in still working on certain contracts) and so it is not true that this move will harmonise all pensions.
My main gripe is that AVCs are dealt with in a different way in the new scheme and cannot be taken out independently from the main pension even with a drawdown mechanism....
"I see no reason to close the EDS scheme."
A bit of (not so light) reading:
From the second page of the first PDF:
The general form of the dissolution clause is:
(a) Provision for continuance of benefits at the existing level for a priority class (usually incumbent pensioners).
(b) The provision of deferred annuities calculated on actuarial advice for persons in the non-priority class of membership.
(c) A repayment to the Company of any moneys remaining after satisfying the purposes (a) and (b).
Simply put, if there are moneys left in the pension fund when there are no more members, the company can claim those moneys.
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