Uncivil servants

[Nimrod103]

Well I'd be much obliged if you point me in the direction of a risk free investment guaranteed to increase fully at the rate of inflation, after tax.

Well arguably low coupon index linked gilts held to maturity.

So why are private sector pensions not invested entirely in that asset class? In fact why have pension companies at all, if people can buy their own?

[mc2fool]

Well arguably low coupon index linked gilts held to maturity.

So why are private sector pensions not invested entirely in that asset class? In fact why have pension companies at all, if people can buy their own?

a) Because while it's true at the moment it isn't and hasn't always been true, and (b) actuarial risk.

[dealtn]

Well I'd be much obliged if you point me in the direction of a risk free investment guaranteed to increase fully at the rate of inflation, after tax.

Well arguably low coupon index linked gilts held to maturity.

Only if you don't consider the risk of default of the issuer (or that they are £ based and your future expenditure might not be £ determined - eg. imports) but most importantly they need to be bought at par (or even better below).

Assuming that index linked gilts bought and held to maturity provide inflation protection of capital is a huge error - as those that bought above par over the last decade and subsequently held to maturity would have discovered.

[mc2fool]

Well arguably low coupon index linked gilts held to maturity.

Only if you don't consider the risk of default of the issuer (or that they are £ based and your future expenditure might not be £ determined - eg. imports) but most importantly they need to be bought at par (or even better below).

Assuming that index linked gilts bought and held to maturity provide inflation protection of capital is a huge error - as those that bought above par over the last decade and subsequently held to maturity would have discovered.

Please see my reply immediately preceding your post.

[scotia]

Since 2012, a civil service employee has paid a contribution, which has increased over the years.

As someone who worked in the Civil Service for 3 years between 2002-2005, I paid a contribution to the pension I have in respect of those years.

The contribution might have been small but it would be misleading to say the employees didn't contribute anything - assuming I have interpreted your point correctly.

I think contributions in central govt (Civil Service) schemes were maybe 1.5% whereas local govt schemes were more like 3.5% at the time. Small fry in the overall scheme of things but still an employee contribution.

Civil Service Pension contributions - both employee and employer are listed at
https://www.civilservicepensionscheme.org.uk/your-pension/managing-your-pension/contribution-rates/

[Nimrod103]

Only if you don't consider the risk of default of the issuer (or that they are £ based and your future expenditure might not be £ determined - eg. imports) but most importantly they need to be bought at par (or even better below).

Assuming that index linked gilts bought and held to maturity provide inflation protection of capital is a huge error - as those that bought above par over the last decade and subsequently held to maturity would have discovered.

Please see my reply immediately preceding your post.

Sorry for being slow on the uptake, this is not my area of expertise at all.
The Govt could (if they were so minded) issue (at par) index linked gilts to everybody, as and when they invested their pension contributions.
Then everyone gets an index linked private pension and everyone enjoys the same sort of pensions as they have in the state sector.
So why are private sector workers expected to dick around with dodgy pension companies investing in dodgy shares to provide them with a didgy pension in old age? All seems much cleaner and easier to administer without risk.

[Lootman]

I'd be much obliged if you point me in the direction of a risk free investment guaranteed to increase fully at the rate of inflation, after tax.

Well arguably low coupon index linked gilts held to maturity.

Personally I would not regard the preservation of the real value of cash as an "investment" at all.

But you did say "arguably" so fair enough. But to me the idea of investing is to grow wealth, and not merely maintain it.

[mc2fool]

Please see my reply immediately preceding your post.

Sorry for being slow on the uptake, this is not my area of expertise at all.
The Govt could (if they were so minded) issue (at par) index linked gilts to everybody, as and when they invested their pension contributions.
Then everyone gets an index linked private pension and everyone enjoys the same sort of pensions as they have in the state sector.
So why are private sector workers expected to dick around with dodgy pension companies investing in dodgy shares to provide them with a didgy pension in old age? All seems much cleaner and easier to administer without risk.

This is getting really OT for this thread, but the basic reasons are actuarial risk and cost, because the gilts will just maintain their (real) value, but that's all, they won't have any (real) growth.

So, briefly, to take some easy numbers and, to keep it simple, make the assumption that our guinea pig will get no real pay increases during their whole life, their pay will only be increased by inflation, and let's say they're 20 years old, expect to retire at 70, and expect to die at 95. So, 50 years of working and 25 years on their pension, and that they want to have 2/3rds of their (real) salary in retirement.

To achieve that with your suggestion they'd have to put 1/3rd of their salary into their pension each and every working year. Actually a little less 'cos the coupons will accumulate along the way, but coupons on index linked gilts are small, usually 0.125%-1%. And, of course, if they are unfortunate enough to live to 96 their pot will have run out. If you're interested, as it happens, someone has recently put together an index linked bond ladder spreadsheet for the same purpose (albeit over shorter timescales) over on the Gilts and Bonds board. viewtopic.php?p=621213#p621213

[Nimrod103]

Well arguably low coupon index linked gilts held to maturity.

Personally I would not regard the preservation of the real value of cash as an "investment" at all.

But you did say "arguably" so fair enough. But to me the idea of investing is to grow wealth, and not merely maintain it.

But if the investment is not providing returns which can keep up with inflation, so being able to give inflation linked increases to pensions in payment, then there is something wrong with the investment, or the tax treatment is too confiscatory.

OTOH one could conclude that maybe those pensions paid directly by the taxpyer which do keep up with inflation are fundamentally unsustainable.

[tjh290633]

Please see my reply immediately preceding your post.

Sorry for being slow on the uptake, this is not my area of expertise at all.
The Govt could (if they were so minded) issue (at par) index linked gilts to everybody, as and when they invested their pension contributions.
Then everyone gets an index linked private pension and everyone enjoys the same sort of pensions as they have in the state sector.
So why are private sector workers expected to dick around with dodgy pension companies investing in dodgy shares to provide them with a didgy pension in old age? All seems much cleaner and easier to administer without risk.

My recollection is that DB pension funds differentiated between pensions in payment and pensions still accruing. The funds associated with pensions in payment tended to be invested in fixed interest stocks, reflecting the anticipated cash flow. The remainder tended to be invested for growth, often by an investment manager(s) who were judged by results.

Receiving a bundle of low coupon I-L gilts which mature at the date of retirement might or might not prove beneficial.

TJH

[SimonS]

As someone who worked in the Civil Service for 3 years between 2002-2005, I paid a contribution to the pension I have in respect of those years.

The contribution might have been small but it would be misleading to say the employees didn't contribute anything - assuming I have interpreted your point correctly.

I think contributions in central govt (Civil Service) schemes were maybe 1.5% whereas local govt schemes were more like 3.5% at the time. Small fry in the overall scheme of things but still an employee contribution.

Civil Service Pension contributions - both employee and employer are listed at
https://www.civilservicepensionscheme.org.uk/your-pension/managing-your-pension/contribution-rates/

Perhaps one should consider what many MPs experience with their pensions. As I remember The MPs pension Fund at the turn of the century wasted valued every 3 years and if the ability to meet the defined benefit was not met, then public funds were accessed to make good the difference. This resulted in a couple of valuations that required additional funds to be injected, notoriously around £100 million then a second 3 years later of around £80 million, this for a fund that serviced 2000 people. The media had such fun with this that changes were made and contributions required.

Some of the blame must go back to Thatcher who needed to provide companies with the capital to invest (after decades of taxation in the 80% range and the debt of war) therefore introduced taxation of any pension fund with a 5% surplus above liability but tapered giving them the chance to take pension holidays etc. Naturally this resulted in companies with surplus pensions being bought by raiders who stripped out the funds then got rid of the company before the incumbents and pension trustees could do anything.
. ( I worked later for a small private company with a generous pension provision which was deliberately bankrupted to allow the trustees to pay themselves £1miilion for "management" a strictly legal way of doing this after pension protections were introduced following Maxwell and others playing fast and loose with company pensions)

Subsequent experience showed that this taxation model meant that pension funds were fundamentally unable to maintain their promises as the 5% cap did not meet the stock market and inflationary volatility, while Gordon Brown's insistence that pension funds had to show real assets to meet their benefits liability revealed or created the 'black holes that were a feature of his alleged raid on pensions (along with the taxation of the dividends etc which seriously the UK pensions system standing from 'one of the best' to 'one of the worst' in Europe.

Gordon Brown;s games, on top of Thatcher's manipulations led to the IDL crisis of today, which seems to have gone quiet in the thrill of Brexit.

The point being that a general failing among MPs seems to be the ability to create financial legislation that may be effective in giving them money to play with in the short term but doesn't have any benefit in the long-term but no serious mechanism for change due to ideological ownership of particular legislation and MPs need for populist approval by fundamentally ignorant (to the point of illiteracy and innumeracy) electorate.

[dealtn]

Please see my reply immediately preceding your post.

Sorry for being slow on the uptake, this is not my area of expertise at all.
The Govt could (if they were so minded) issue (at par) index linked gilts to everybody,...

Why? These are market instruments. Why should the government issue them at par if they are trading above par in the market? How could it justify subsidising a niche of the population at the expense of others? How would it work in practice when issuing at par when these could be bought legitimately in the market place at sub par?

[Nimrod103]

Sorry for being slow on the uptake, this is not my area of expertise at all.
The Govt could (if they were so minded) issue (at par) index linked gilts to everybody,...

Why? These are market instruments. Why should the government issue them at par if they are trading above par in the market? How could it justify subsidising a niche of the population at the expense of others? How would it work in practice when issuing at par when these could be bought legitimately in the market place at sub par?

I wasn't really seriously making the suggestion. I was trying to understand Mc2fool's answer to my question about whether private sector employees could find an investment which would give them a pension with inflation protection equivalent to that available in the public sector. If the Govt really believed in equity between the state and private sectors, then they could offer some sort of gilts which would provide that protection, but clearly they are not interested in such equity, and the Govt continues to restrict such protection to the public sector, at a cost to everyone else.

[the0ni0nking]

Civil Service Pension contributions - both employee and employer are listed at
https://www.civilservicepensionscheme.org.uk/your-pension/managing-your-pension/contribution-rates/

That appears to only go back to 2011 whereas you will see I was talking about the early 2000s.

https://www.civilservicepensionscheme.o ... n%20covers.

It appears that up to 2003, a civil servant used to make a 1.5% contribution but this was "towards the cost of providing benefits for your widow, widower or surviving civil partner after your death (the Widow(er)s’ Pension Scheme – WPS). These contributions were mandatory and applied to all members regardless of marital status so arguably your "own" pension was contribution free but you had to pay 1.5% irrespective of marital status for the WPS. What a bizarre scenario.

It looks like it then went up to 3.5% from 1st Oct 2002. I left Civil Service employment shortly after that - part way through my accountancy qualification - and never went back.

[Gersemi]

It appears that up to 2003, a civil servant used to make a 1.5% contribution but this was "towards the cost of providing benefits for your widow, widower or surviving civil partner after your death (the Widow(er)s’ Pension Scheme – WPS). These contributions were mandatory and applied to all members regardless of marital status so arguably your "own" pension was contribution free but you had to pay 1.5% irrespective of marital status for the WPS. What a bizarre scenario.

Ah, but if you are unmarried when you leave the Civil Service you can claim this back. Surprisingly a number of Civil Servant get married soon after leaving.

[Clitheroekid]

“While undoubtedly a step in the right direction, [the latest pay rise] does not undo the years of pay restraint that has meant that civil servants’ median salaries at each grade have reduced in real terms by between 12% and 23% since 2010,” the FDA report said.

Maybe so, but many people in the private sector have incurred real pay cuts as well. And they don't have the consolation that at least they'll be comfortable once they retire.

Also, civil servants' salaries would have been set on the assumption that they would cover the costs incurred in attending an office 5 days a week. But as those costs are no longer being incurred it's arguable that civil servants (and others in WFH mode) are now actually being overpaid.

[scotia]

Also, civil servants' salaries would have been set on the assumption that they would cover the costs incurred in attending an office 5 days a week. But as those costs are no longer being incurred it's arguable that civil servants (and others in WFH mode) are now actually being overpaid.

Thinking this over- transport costs will vary with civil servants abode, and the office which they would attend. And it will also vary with the number of days they WFH - also taking into account the ticket reductions on full-working-week travel. I think we would need to employ a significant number of new civil servants to work this all out.
Do I remember an eccentric former cabinet minister checking the attendance of his civil servants then going back to lie sleeping in the house? Maybe we should get even more civil servants to work out deductions for MPs that are not attending or are not in a participating state

[didds]

Also, civil servants' salaries would have been set on the assumption that they would cover the costs incurred in attending an office 5 days a week. But as those costs are no longer being incurred it's arguable that civil servants (and others in WFH mode) are now actually being overpaid.

Or because their salaries haven't kept up with the increased costs of inflation and transport costs etc that WFH is a way their income can actually keep up with living on a par with where they were.

Whatever.

Less commuters on the road = fewer vehicles ==> less public money spent on further road expansion schemes etc
= less air pollution ==> less need for ULEZ etc schemes keeping costs down for those that have no option but to
commute.

I've WFH for a month short of 13 years (and I also WFH in various contracts before then). Why does my employer (and back then clients) permit that if its so unconstructive? Management fear of WFH seems to say far more about what management would do WFH themselves ... otherwise why think of it in the first place.

Whatever.

[servodude]

Also, civil servants' salaries would have been set on the assumption that they would cover the costs incurred in attending an office 5 days a week. But as those costs are no longer being incurred it's arguable that civil servants (and others in WFH mode) are now actually being overpaid.

Or because their salaries haven't kept up with the increased costs of inflation and transport costs etc that WFH is a way their income can actually keep up with living on a par with where they were.

Whatever.

Less commuters on the road = fewer vehicles ==> less public money spent on further road expansion schemes etc
= less air pollution ==> less need for ULEZ etc schemes keeping costs down for those that have no option but to
commute.

I've WFH for a month short of 13 years (and I also WFH in various contracts before then). Why does my employer (and back then clients) permit that if its so unconstructive? Management fear of WFH seems to say far more about what management would do WFH themselves ... otherwise why think of it in the first place.

Whatever.

It seems like such a contrived argument to suggest that the rate an employer will pay for an employee's normal work depends on what that employee does outside of their employment.
Otherwise you'd compensate folk for extra petrol if they travel further... or adjust if they use a season ticket rather than buying singles on the day?
If you've agreed remuneration and the job can be performed acceptably, fulfilling the contract, then surely that's all there is to it. If they are needed on site then that forms part of the contract and everyone is clear what's going on.
You're paying the employee for their work not their life.

[Lootman]

It seems like such a contrived argument to suggest that the rate an employer will pay for an employee's normal work depends on what that employee does outside of their employment.

Otherwise you'd compensate folk for extra petrol if they travel further... or adjust if they use a season ticket rather than buying singles on the day?
If you've agreed remuneration and the job can be performed acceptably, fulfilling the contract, then surely that's all there is to it. If they are needed on site then that forms part of the contract and everyone is clear what's going on.

You're paying the employee for their work not their life.

I agree, and yet I constantly here people arguing that workers should be paid a "living wage". As if what they need, or think they need, is a valid driver of compensation.