Look before you leave
The furore over the recent changes to the funding of teachers' early retirement is just one aspect of a revolution that is taking place in pensions, not just in this country, but across the world.
At the heart of the new thinking is the notion that individuals will have to take more responsibility for providing for their retirement. The state will provide less and individuals, or perhaps employers, will pay more.
The decline in the relative value of the basic state pension, the costs involved in increasing it, and the responses of the main political parties, illustrate the shift that has taken place.
The intention in the late 1970s was that the state pension should be increased each year in line with the rise in prices or earnings, whichever was the greater. That quickly fell by the wayside, however, and increases have been based on prices.
Consequently, the single person's basic state pension has fallen from 23 per cent of male average earnings in 1979 to 15 per cent today. The married couple's basic state pension has fallen from 37 per cent to 25 per cent.
The effect upon teachers can be seen by comparing a teacher retiring at the top of the scale in 1979 with a teacher retiring now on point nine of the spine. That teacher's total retirement income, as a proportion of income in employment, has fallen from 75 per cent to 65 per cent. The cost of bringing the basic pension up to the level it would have been at had it been increased in line with the greater of earnings or prices would be about Pounds 8 billion, or nearly 9 per cent of the social security budget.
None of the party election manifestos supported such a rise. If increases continue to be based only on prices the relative value of the basic pension will decline still further.
It is, however, significant for teachers given the proposals recently put forward by the Department for Education and Employment that have been generally supported by all the main political parties. The DFEE announced that local authorities would from April 1, 1997 be able to make severance payments of up to 66 weeks' pay (the first Pounds 30,000 of which is tax free), as opposed to the previous limit of 30 weeks, as an alternative to early retirement. It coupled this change with a ban on teachers who take early retirement from rejoining the Teachers' Superannuation Scheme (TSS) if they secure another teaching job.
The longer-term implications of those changes, together with the overall trend referred to earlier, will need to be considered carefully by teachers. For example, many teachers aged around 50 may have only 15 to 20 years of pension rights in the TSS because of career breaks, or because they were late entrants to teaching. Even before the recent changes, early retirement without enhancement in those circumstances would at best have yielded a pension of less than 25 per cent of salary. It would, however, have been possible if the teacher secured another post to have added considerably to the pension with another 10 or more years' service in the TSS.
That option is no longer available. Indeed, even if the teacher now had the option of early retirement in those circumstances, the longer-term consequences and severance option would need to be considered very carefully indeed. The ban on re-entry to the TSS would mean that any further provision for retirement would have to be met by alternative means, such as SERPS, a personal pension or a PEP.
None of those options brings anything like the same contribution that employers make to a teacher's TSS pension. Indeed, a PEP has no employer's contribution at all, whereas the employer contributes between 12 and 14 per cent of salary towards the teacher's TSS pension. That's a lot of money over 10 or more years, and it will be reflected in the value of the TSS pension provision as compared with the other retirement vehicles.
In addition, there will be administrative charges for the other products which further reduce their value compared with the TSS benefits.
The purpose of pointing this out is not to defend the Government's attempts to limit early retirement, but rather to draw attention to the implications of the changes and to assist teachers in safeguarding their interests within the new provisions.
The other proposed options, notably an actuarially reduced pension and improved stepping-down arrangements, would have to be considered just as carefully.
Pensions are a long-term business; decisions made with a short-term perspective can prove very costly in the long term.
The National Union of Teachers and the other teachers' organisations will be seeking to maintain effective and affordable early retirement provisions. In the meantime, however, regrettably, teachers will need to make sure that they make the right individual decision.
Barry Fawcett is assistant secretary (salaries and superannuation) of the National Union of Teachers