Defined contribution pensions for the Civil Service

Since most of the working population are now being forced in to defined contribution pensions schemes I think its about time the Civil Service also embraced such a scheme for its staff.

Naturally this approach should also apply to MP's, Local government staff, NHS staff, Teachers and other public workers.

It would work like this.

1) Each employee would have their own pension account (pot).

2) Both the employees and the employers contribution would be put in to the account each month.

3) At the end of the year, day to day interest would be added. Interest would be based on the consumer price index (CPI) plus say 2% to 3%. The plus % aspect would be the only gold plating the scheme enjoyed, by guaranteeing a return above inflation.

4) On retirement the employee would be offered the same choices as everyone else in the country, namely a level pension or an indexed linked pension with or without a lump sum. The pension would be based on life expectancy. The pension could be taken from the age of 55.

5) If an employee left before retirement the current pot value would form the transfer sum or alternatively the pot could be left where it is and grow at the CPI plus interest rate.

The pension pot would of course be notional, that is it would not really exist except on a computer. The employees contribution would be returned to the treasury to be spent on other things. A more enlightened government could hand those contributions over to trustees who could then lend the money to government to build schools, hospitals and other infrastructure projects, rather than use PFI.

On the annuity side the government would pay out of general taxation, like it does today. There is also scope for a guaranteed annuity rate so that pensioners are not subject to the ups and downs of economic cycles, most pensioners have little control over when they retire. Perhaps they might have more control in the future.

I would not, under any circumstances, support the idea of handing over large pension pots to the pension industry to provide annuities, they have offered such poor value for money over the years. Indeed, with the proposed pay as you go system, it is undesirable for the government to hand over large sums to anyone.

Overall this plan would be affordable for the nation and much more fair to the public at large. It would certainly reduce the long term pension burden on the countries finances.

29/10/2012