Think your financial future is safe? Think again

2nd October 2009 at 01:00
Teachers have long taken comfort in the fact that their pension scheme is one of the best on offer. But experts believe it can't be sustained at its current level for much longer

So what are you planning when you retire? A dream trip around the world? Those home improvements you put off for years because you didn't have the time or energy?

As the Teachers' Pension Scheme (TPS) stands, you should have a tidy nest egg saved. Currently, it is considered to be one of the best pensions around. Teachers contribute approximately 7 per cent of their earnings and this is supplemented with a further 14 per cent or so from their employers. It's a final salary scheme, so a teacher finishing their career on pound;50,000 could expect to receive pound;16,667 a year in real terms (not taking into account inflation), while a head on pound;90,000 could expect pound;30,000 a year when they retire.

But all this could be set to change. Like other public sector schemes, teachers' pensions are coming under fire from economists and pensions experts who believe that they cost too much and cannot be sustained in their current form in the long term. As public sector spending comes under increasing scrutiny, teachers could find they can't retire when they originally planned or may even end up working until 65, when they had hoped they might retire early.

"If we have a change of administration after the next election then I believe there will be changes," says Ros Altmann, a former government adviser on pensions. Sharp falls in investments and a collapse in equity markets mean pensions are no longer as affordable as they were. "People are also living longer, so we will virtually need a bottomless pit of money to pay for it all," she says.

But are teachers even aware that their pension could be in danger? Not all are. "I don't have a clue what I am paying, how much I will get when I retire, or even when I can retire," says Emma McConville, a 27-year-old Year 3 teacher at Woodfall Primary School in Neston, Cheshire. "I would be concerned about having to work until 65. Perhaps I'm biased because I know how much work is involved in this job, but we never really switch off. I'm not sure anyone can work in such a high-pressure environment for that long."

Others, on the other hand, have come to view their pension with as much fondness as their 13 weeks' annual holiday. Joanna Postlethwaite, 36, who works at Hanham High School in south Gloucestershire, had not considered the importance of the pension scheme until she spoke to financial advisers.

"When you start in teaching you're not that aware of the pension scheme, but you realise later that it really is one of the perks of the job," she says. "As soon as you tell a financial adviser that you are a teacher they don't bother to try to sell you other products because they know it is such a good scheme."

Both of Ms Postlethwaite's parents were teachers and her father retired at 50 and her mother at 55. "They have enjoyed a good standard of living on their retirement and I am concerned that changes to the system might mean I have to work for longer. Much as I love my job, I wouldn't want to be doing it for another 30 years," she says.

According to a comparison by PricewaterhouseCoopers this summer, of a state employee who worked from age 21 to retirement, and someone on the same pay in the private sector, the public sector worker would receive a pension of pound;28,900 compared with just pound;11,600 for the private sector employee. Cue cries from angry private sector workers who resented paying out taxes to fund public schemes, while their own final salary pensions were being scrapped.

According to David Blake, pensions specialist with the Association of Schools and College Leaders, a four-yearly review of the TPS is imminent and will reveal the state of its accounts and its long-term sustainability.

He says that it's possible that teachers and employers will have to split between them the cost of any future rises in contributions.

"If you look at the history of the pension scheme there have been many reforms implemented to reflect the economic situation. As things currently stand, the likelihood is that changes will have to be made."

The TPS provides members with a lump sum and regular income on retirement, and provides family and dependents with financial protection if the member dies. Teachers are automatically in the scheme unless they choose to opt out, but in reality few do so.

The TPS also contains provisions for early retirement in cases of ill health and members can top up their contributions with additional payments if they choose. Not only that, but teachers are also entitled to draw the basic state pension on reaching the statutory age of retirement.

But just how healthy is the teacher pension pot? Figures from the TPS resource accounts for 2008-09 show the scheme is in deficit. Income for the year was more than pound;4.63 billion, while the cost of pay-outs topped pound;5.8 billion, leaving a shortfall of about pound;1.2 billion.

However, as Glyn Jenkins, head of pensions at Unison, points out, the management of pensions is a complicated business. As the NHS pension is pound;2 billion in the black, this helps to level out the perception of public service pensions across the board. "In cases where there is a shortfall, the Government steps in and makes it up," he says. "These sums fluctuate from one year to the next, and actually the teachers' pension deficit has come down by pound;800 million in a year."

Mr Jenkins also thinks the debate over the future of public sector pensions has been fuelled by "envy and bigotry" among jealous private sector workers. "There have been numerous inaccurate reports and scare- mongering and as far as any black hole in the schemes is concerned, we believe it to be manageable," he says.

"The real pensions apartheid is happening not between the public and private sectors, but between the managements in some public sectors who are going to retain their final-salary pensions, compared with the blue- collar workers whose schemes will be subject to review. Some low-paid public sector workers are getting no more than pound;4,000 a year in pension. So any changes at this level could push a lot of people into poverty." He doesn't elaborate, however, as to whether any of these workers are teachers.

The private sector pensions deficit, meanwhile, stands at some pound;80 billion, according to Marcus Hurd, head of corporate solutions at financial advisory firm Aon Consulting. He tracks 200 of the nation's largest schemes, amounting to half of the total market.

"If this is the scale of the problem among private pensions, then it must run into hundreds of billions in the public sector, because it is not run to the same checks and stringent reporting requirements," he says. "Two years ago teachers could retire at 60, on one-sixtieth of their final salary. That just could not have happened in the private sector.

"When you have great financial movement such as what we have seen in the past five to 10 years, coupled with increased life expectancy, then the public sector is 10 years behind. Change is inevitable because the Government faces a very large bill and it has to recoup the money somehow."

One of the options being mooted to replace the final salary scheme is a career average scheme, which would be linked to inflation, rather than future salary growth. This would disadvantage those teachers who have aspirations of promotion or senior leadership roles, but would have less impact on staff who choose to remain in the classroom, receiving annual pay increments, rather than larger pay hikes in the course of their career.

Nat Parnell, 35, a married father-of-three, went into teaching 14 years ago and is now an assistant principal at South Dartmoor Community College in Devon. While the teachers' pension was not a major consideration in his career choice, the job security and what he describes as the "recession- proof" nature of the profession appealed hugely. Speculation that this might be replaced with an average salary scheme worries him.

"The onus will be on teachers to seek promotion sooner, and that isn't necessarily a good thing," he says. "I have a brother who is destined to be a headteacher by the age of 34, which would mean more than 30 years as a head. That is an extremely stressful job to do for that period of time without the benefit of being able to retire early.

"It seems unfair that the police, Armed Forces and firefighters can retire early on good pensions and pursue second careers, and that this is something that may be denied to teachers. I don't think they work any harder than we do. If the final salary scheme goes that will be a kick in the teeth."

But Mr Hurd is keen to reassure teachers who have been paying into the pension for a long time should not worry that they will lose everything overnight.

"Any reviews of the scheme will apply more to the future workforce, though everyone will be affected to some degree," Mr Hurd adds. "Teachers who are planning to retire in the next few years will find they may not receive as much as they had hoped or expected, so it would be wise of them to revisit their retirement plans and find out what they are entitled to."

Some teachers and unions argue that because of the long-term commitment staff give to the profession, and the high-pressure, high-stress nature of the role, that a good pension should form the very basis of how they're rewarded. "One of the advantages of the scheme is that it has enabled teachers to plan effectively for their future beyond teaching, with a view to a relatively comfortable retirement," says Usman Gbajabiamila, pensions officer at the Association of Teachers and Lecturers.

"For most, teaching is a vocation and not something they go into for the money. Arguably the pay could be better for the job they do. So the pension forms part of their remuneration and it is part of their reward for years of hard work."

Christine Blower, general secretary of the National Union of Teachers, agrees. "The teachers' pension is not a perk but deferred remuneration. A 30-year career in teaching is a perfectly reasonable period of time in which to remain in the profession," she says. Ms Blower adds that Brendan Barber, TUC general secretary, assured public sector unions at the recent TUC conference that the "honourable settlement" over public sector pensions, negotiated with the Government in 2005, would be maintained.

At the time, teachers agreed to a retirement age of 62 years, though they could continue to retire earlier subject to pay-out adjustments.

Julia Neal, 53, a history teacher and assistant director of sixth form at Torquay Girls' Grammar School in Devon, is considering retirement but doubts she will do so before the age of 60.

"The TPS is very good if you have many years of unbroken service, but many women will have taken career breaks to have a family," she says.

"I have been paying additional contributions as I've been worried about whether it will pay out enough and I know of some teachers who have left the scheme to join private ones, only to later return." Mrs Neal feels she has every right to her pension after having given her life to education.

"I consider the pension to be part of my remuneration. I would not want to work beyond 60 as by then I will already have done 38 years in the job. Enough is enough."

So if you're just joining teaching, now could be the time to seek some financial advice; if you've only got a few years until retirement, don't book that round-the-world cruise just yet.

When other professions retire

All ages stated apply to new entrants

  • Firefighter: 60
  • Police: 60
  • NHS worker: 65.

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