Warning, this blog involves lots of numbers. Don’t worry, I had a historian proof read it and he understood 🙂
For the purposes of these calculations, I’m going to ignore inflation and talk in 2018 pounds. The teachers’ pension automatically takes into account inflation, so that makes this a reasonable thing to do.
The average teacher earns, according to the government, £37,400. Each year under the current ‘career average’ scheme, my average teacher, Sarah will earn a pension of 1/57th of her salary: £656 per year.
How much would this pension cost if Sarah wasn’t a teacher? At the age of 68, a pension pot of £100,000 will buy an annuity, which grows with inflation as the teachers’ pension does, of £3,600 per year (see note 1). Therefore, it would cost £18,200 to pay for Sarah’s pension of £656 p.a.
Where does this £18,200 come from? As a member of the mysterious teachers’ pension, Sarah contributes 9.7% of her income, £3,600. This means that each year the government contributes an additional £14,600 (39% of her salary: see note 2) that she never sees and may not even know exists.
My sister is a lawyer and her employer contributes 3% of her salary to her pension pot. Let’s say the government adopted this approach: it takes the £14,600 it currently contributes to Sarah’s pension, pays her £13,100 extra, sending her salary to a healthy £50,500, a 35% increase. It contributes to remaining £1,500 (3% of her new income: see note 3) to her pension.
I’m using Sarah as an example but it doesn’t matter if you think she’s not representative, because we could equivalently increase all teachers’ salaries by this 35%. I’ll say it again, 35%! Starting salaries for teachers shoot up to £31k (£39k in inner London) and suddenly look a lot more competitive. On the other hand, teachers’ pensions are now terrible, along with the pensions of lawyers, accountants and most other professions. But who goes into a job because of the pension?
Could this change help solve the recruitment problem?
ps. I make no comment as to whether or not I think this is a good idea. My wise father-in-law pointed out that it’s a very Conservative suggestion: let people choose how to spend, or save, their money.
(1) I interpolated based on the figures given. This is actually a conservative estimate because I used the figures for a single pension: in fact, the teachers’ pension also pays 37.5% to a partner after the teachers’ death, so would be worth more than what I calculated. This all assumes that a private pension pot grows at the same rate at the teacher’s pension (CPI + 1.6%). I suspect that some pension schemes may do better than this, but they will be much more variable and may also go down significantly, for example in 2009.
(2) Officially, Sarah’s school contributes 16.5% (in the case of state schools, this is just the government shuffling numbers around on a page) but the £14,600 is actually 39% of Sarah’s salary of £37,400. I understand that the government doesn’t actually ‘save’ this money as teachers’ pensions are unfunded, but it does have to pay it eventually. In the short term, this policy would cost the government quite a lot of money, but in the long term, it wouldn’t make a difference.
(3) My wife thinks this paragraph is confusing, because she is eagle-eyed and noted that 3%+35% does not equal 39%. Why doesn’t it add up? These percentages are of different numbers (3% of the new salary, 35% of the old salary), a pretty classic tricky idea with percentages.