Militant Manager's prescription for Public Sector Pensions

Readers of this blog (all the millions) will know of my general opinion on the recent dissatisfaction with the government's proposed changes to public sector pensions.  If you don't, then perhaps you should have a look at my earlier blog post.

I am, however, not merely a reactionary.  I am one of those people who spends time doing thought experiments.  And being a middling NHS manager, my thought experiments are on things like "What is the best form of public sector pensions?"

Intrinsically, I do agree with the idea of defined benefit pensions.  But the key question is: if that is so, what are reasonable rates of accrual?

To start with, I can tell you what is unreasonable.  Take the recent Daily Telegraph report by Laura Donnelly and James Clayton: this showed NHS managers with astronomical pension pots (in the same order as Fred Goodwin - with whom many share knighthoods).

So, I am very unconvinced that pension levels should be so critically driven by salaries - at the top end.  Take a senior employee on £240,000 salary and very close to retirement (do some consultant bodies support particular eminent doctors to become Medical Director shortly before retirement so that their final salaries can be boosted?).  Now each year of employment at that level will boost his annual pension by £4,000.  £4,000 inflation-linked, central government backed pension increase would be worth (easily) £100,000.  So the pension is equivalent to an additional £100,000 income to the employee.

Thinking of this another way - the whole point of high salaries is that if high pensions are important to you as a person, you have the means via the salary of buying such a high pension via your own means.  The in-employment reward should be transparent and shown in the salary (and a 40% supplement to your salary - as a £100,000 pension pot contribution would be - should not be a footnote.  If these people are worth £340,000, let us say it and publish it.  [Take it from me, they are not worth it].

That is where it breaks down the most - at the high end.

So my prescription is that there is a cap on pension contributions from the employer.  Either this is an annual pension contribution cap (e.g., £12,000) or the salary level on which defined benefits are calculated are capped (say at £48,000).  Under the first scenario, the employer could only contribute up to £12,000 per employee per year (whatever the other rules are), and the accruals would have to worked from there.  The second scenario applies say where each year's accrual is fixed with your salary up to a maximum.  Thus if an employee accrues at the rate of 1/60th of salary; if the salary is above the maximum (say £240,000), then the accrual is fixed with reference to the maximum of £48,000 - so the employee only accrues £800 rather than £4,000 as the defined annual benefit on retirement.

This would make public sector pensions more affordable.  And I commend it to the House.