Don't panic. It's only your pension
Pensions" have become almost synonymous with the word "crisis" as pension funds scramble to keep up with the demands of increased longevity. This week the Turner report underlines the extent of the pensions shortfall.
Teachers, in particular, are dismayed at the idea that many of them will have to work until at least 63 to qualify for benefits, which they expected to have at 60. But should they be protesting so vociferously when, according to pensions' analysts, the Teachers' Pension Scheme (TPS) is still one of the best on offer?
"Teachers are losing sight of the fact that that, despite all the suggested changes, the Government is still maintaining the best type of scheme - one based on their final salary," insists John White, a partner with the actuarial firm RSM Robson Rhodes, which specialises in public-sector pensions.
He thinks that teachers are well off compared with many other workers.
"Over the past five years, the number of schemes in the private sector offering final salary schemes has fallen from 59 to 38 per cent," Mr White explains.
The most recent survey of occupational pension schemes, by the National Association of Pension Funds, shows that, in the past 12 months, a third of private final salary schemes have introduced less favourable early retirement terms, and 15 per cent have reduced accrual rates, using a less generous formula to calculate pensions.
Almost half of private schemes have increased members' contributions.
Included in the current review of the teachers' scheme is the idea of an exchange for improved death grants and dependants' benefits. The latest pensions document asks if teachers would be prepared to pay an extra 0.10 per cent of their salary for a higher death-in-service grant, for example.
Despite the heavy pruning, final salary schemes remain the pension gold standard because they provide guaranteed benefits based on someone's length of service and salary before they retire.
The alternative, which many of the country's biggest employers have now introduced, is a money purchase scheme in which the employee takes the risk. The pension received depends on investment performance and on annuity rates, as the cash must be used to buy an annuity.
Other benefits included in the TPS, such as death-in-service grants and pensions for surviving spouses, would cost employees hundreds of pounds a year to provide on the open market.
"When I meet people in the public sector, it's always the case that they don't appreciate their pensions," says June Easden, an independent financial adviser who specialises in pensions.
"They don't seem to realise that very few other people have fully index-linked pensions, for instance, guaranteed to keep pace with inflation rates."
A further tightening of the rules on ill-health retirement, included in the latest Department for Education and Skills pension proposals, has caused consternation among teachers, yet the suggested system is already standard in nearly half of the final salary schemes offered by private companies.
The new rules would mean that someone who is too ill to teach but could take on other work would no longer have their pension boosted or "enhanced". Instead, extra benefits would be targeted towards the teacher who is unfit to work at all. They would receive a more generous pension than under the current scheme.
As one union pensions official admits, many people will also find it hard to understand why teachers are complaining about the prospect of working until 65, which is the normal pension age for 70 per cent of private schemes and 78 per cent of public schemes.
Most teachers in the European Union already fare much worse, with Portuguese colleagues soldiering on until 70 and those in Denmark working until 67.
Teachers are also better off than local government employees, whose pension age has already been increased to 65 for new workers. Employees' contributions could also rise sharply, according to proposals for a new local government pension scheme.
These suggest that those earning between pound;7,000 and pound;38,000 should pay 7 per cent, while workers with salaries of between pound;38,000 and Pounds 80,000 should contribute 9 per cent.
Actuaries like Mr White believe that change is inevitable because increased life-expectancy means that pension costs are soaring. According to the government actuary, male pensioners can expect to live six years longer and retired women four and a half years longer than in 1981. Mr White estimates that the Government could face a bill of several billion pounds if it does not reform the expensive public-sector schemes.
The unions agree that change is long overdue, but they argue that the old-fashioned TPS should be improved to bring it into line with other final salary schemes such as the civil service pension. Civil servants have also been warned that their pension age will rise to 65, but those on the final salary scheme pay just 3.5 per cent in contributions for better benefits than the TPS.
Unlike teachers, who are paying 6 per cent towards their pensions, civil servants are entitled to a more generous accrual rate of 160 (teachers get 180 of their final salary for each year of service) and pensions for unmarried partners. The civil service scheme has also abolished the archaic rule which says that employees' widows and widowers who re-marry must forfeit their pensions.
Another advantage is the option to swap pensions for a larger lump sum.
Civil servants are allowed to give up pound;1 of pension for every pound;12 they take in cash.
Thanks to tough negotiating by the unions, the new TPS is also likely to include these improvements, but this will be a trade-off against a higher pension age.
"Clearly, we have moved the Government from its original position, and these improvements go quite a way to ameliorating the raising of the pension age," says Barry Fawcett, head of pensions at the National Union of Teachers.
But the Government is still suggesting that teachers will have to pay higher contributions for other improvements which civil servants have already enjoyed for two years, such as a death grant of three times their average salary.
Countering the notion that teachers have far better pension arrangements than many other white-collar workers, the teaching unions point out that public servants traditionally have superior pensions to compensate for lack of fringe benefits. Teachers, for instance, do not get private health insurance or car allowances.
A good pension is also seen as a trade-off for a relatively poor salary. As a BBC news commentator put it: "Many people view a secure pension as deferred pay. So if an employer reduces pension benefits, it is seen as a pay cut."
The Association of Teachers and Lecturers says the higher pension age will act as a disincentive to people coming into the profession, and will encourage serving teachers to jump ship in their 30s or 40s so that they can build up an alternative pension.
The ATL says the new proposals will also do nothing for existing teachers as they will not be introduced for serving staff until 2013, unless the DfES decides to allow those who want the improved benefits to swap to the reformed scheme earlier.
Meanwhile, the Government continues to assert that a more flexible TPS, with chances to work part-time while drawing some pension, will encourage new entrants and persuade existing teachers to stay on.
When the results of the current pensions consultation are revealed, it will be interesting to see if teachers agree.
The Twenty-ninth Annual Survey of Occupational Pension Schemes 2003 is published by NAPF tel 020 7808 1300. Teachers' Pension Scheme Modernisation Review - you can find the consultation document and express views at: www.dfes.gov.ukconsultations. The teaching unions are about to issue joint guidance on the consultation issues
A SPECIAL CASE
The teaching unions insist that the strenuous nature of the job means that teachers have a special case to retire earlier.
The figures speak for themselves - while early retirement is virtually unknown in the civil service, 24 per cent of teachers find their jobs so demanding that they are prepared to take a permanent cut in their pension to retire before 60.
Another 14 per cent take premature retirement with an enhanced pension.