Guarantee included

3rd June 2005 at 01:00
Teachers have been angered by the Government's proposals to change their pension scheme. Many protest that teaching is not a job for the over-60s and that raising the age at which a full pension can be drawn effectively to 62.5 is not on. They dislike the idea of changing the Teachers' Pensions Scheme, long regarded as a major benefit, an index-linked reward for years of stress in the classroom.

So what is it about the TPS that makes it so good? One key aspect is that its benefits are guaranteed. Any teacher able to make an intelligent guess about the length of their career and their final salary can calculate what their pension will be. Dennis Bradnick of the Wesleyan for Teachers financial advisory service explains: "The greatest benefit of the TPS, at the end of the day, is a guaranteed pension. You will get 180th of final salary for each year worked plus 380ths as a lump sum. These are guaranteed benefits."

John Robinson, pensions officer with the NASUWT union, agrees: "With the TPS there is no risk. It is a final-salary scheme which gives you a guaranteed pension linked to your years of service and your final pay. This can mean a pension of up to half your salary plus a lump sum of up to three times your salary."

A final-salary scheme is better than one based on wages averaged out over a career, as many employees in the private sector are currently discovering.

The Pensions Policy Institute reported in March that even if the proposed changes go ahead, public-sector pensions would typically be worth an extra 3 to 18 per cent of salary, compared with those in the private sector.

Final-salary schemes are also very different from the "money purchase" pensions available on the high street for individuals without an occupational scheme. "With money purchase, it is in the lap of the gods how the fund performs," says Mr Bradnick.

People have to put their faith in a pension provider to invest their money, often in the stock market. Annuities, or annual payments during retirement, can also be susceptible to the financial world's ups and downs.

Another strength of the TPS is the option to purchase "added years" where a teacher who maybe joined the profession late or took time out to have children can, essentially, catch up on missed contributions. They can be expensive, but as Barry Fawcett, head of pensions at the National Union of Teachers, points out: "Past added years are the Rolls-Royce solution, and that is reflected in the cost."

The TPS, like most schemes for the seven million public-sector workers, is a "notional fund". This means it is paid directly out of the public purse.

Monthly contributions from teachers and local authorities are not going into a pot of money which has to be invested to pay out enough when the member retires. And, says Mr Bradnick, "if there are any shortfalls, the Government picks up the tab".

While this is good for teachers, the size of the tab is worrying. Last year, actuaries Watson Wyatt estimated that the Government would have to spend Pounds 580 billion over the next 60 to 70 years to cover all the public-sector pension costs. This huge bill, largely the result of people living longer, is behind moves to change the TPS and other similar schemes.

A government report last year estimated that the public sector employs 18 per cent of the population, is paid 17 per cent of the nation's total earnings, but has 36 per cent of the pension rights.

Many would say this is only fair exchange for long hours in the classroom, or on the hospital ward. As Mr Robinson puts it: "The TPS compares well with most pension schemes in the UK, which compare well with most pension schemes elsewhere. It's good, which is why we are most concerned about keeping it."

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