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The scandal of the public sector's 'pensions aristocrats'
For most of us, defined-benefits pension schemes have been closed for good. But not for the public sector 'aristocrats' that we're still expected to pay for.
A headline in the Daily Mail: 'Fury as BBC pensions bill soars to £2bn'. Very often, when the Mail claims national "fury", it is hard to join in. Not in this case. The piece gives a few examples that really do produce fury. Let's just look at one.
There is John Smith, who has just retired as head of BBC Worldwide (the commercial arm which is nonetheless 100% owned by the BBC) aged 55. Imagine retiring at 55! How fantastic. Then imagine doing so, as Smith did, with a lump sum of over £1m, and an annual pension of £197,000. The pension pot, we are told by the Mail and by the Telegraph, had a total value of £5.8m. The source details are here.
Smith had been at the BBC for 24 years, and his final salary was £337,000. When I looked at these numbers I was mildly interested in figuring out whether Smith will earn more from the BBC for not working (ie, during his retirement) than he did before he retired. So I looked at his final salary and worked backwards, assuming that his salary rose faster in the last part of his career than the earlier part. I assumed that it rose 20% a year in the last 5 years, 10% a year in the 5 before that and 5% in the 14 years before that. This is pretty generous in that it ends up assuming that his starting salary at the BBC was around £40,000 (rather higher than I suspect they ever really were). Add it all up and it gives him lifetime pre-bonus earnings of £2,435,017*.
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Smith also got bonuses and benefits, but again they will have probably been concentrated in the later part of his career. Let's chuck in another £2.5m for them. Even with that doubling trick we only get up to £5m tops. So yes, it appears that there is a reasonable chance that, assuming Smith lives a normal life span, BBC Worldwide will pay him more during the period he is not working for them than they did for the period in which he was. Nice work if you can get it.
I may well be underestimating Smith's bonuses and the like (although that's another whole area for anger) and I also think that his case is pretty extreme it seems that he was part of an old pension scheme at the BBC which no longer exists (join the BBC today and you get a defined contribution plan). He may also have made additional voluntary contributions of some kind. But nonetheless, the sums on pension arrangements such as this pretty much lay bare the difference between what pensions expert Ros Altman calls the "pensions aristocrats" and the rest of us.
Jeff Prestridge looked at this in his column this week, and chucked out a few numbers showing just how much better off those in defined benefits pension schemes (mostly public sector workers).
Let's say you make £26,500 and you have a defined benefits scheme accruing on a one sixtieth basis (this was how the old benefits scheme worked at the BBC). You'll get a pension of £15,458 (inflation linked) when you retire, having paid in around 4.9% of your salary over the years.
Now, let's say you have a defined contribution plan as most people in the private sector do. You earn the same amount, and you pay in 9.4% of your salary. You make returns of 7% a year, your contributions rise 2.5% a year, and you pay 1% in charges. You will get a pension of £6,938. Pay more; get much, much, much less, while knowing that your taxes are paying for the guarantees that allows someone else to get the £15,458. Miserable, isn't it?
* I'm not bothering with present valuing his salary as we are looking back 24 years and forward another 24 or 25 years, so as long as we imagine total inflation in the next 25 years to be much the same as in the last 25, there is no need to bother with time value. That said, I'm being very kind to Smith/the BBC here as my guess is that his pension is inflation linked.
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