Teachers chalk up £7bn of pension benefits in 12 monthsUK - January 23, 2009 - New pension benefits accrued by teachers during the year to March 31, 2008 are valued at £6.7 billion in the 2007/08 resource accounts for the Teachers’ Pension Scheme (England and Wales), which have been published today.
John Ball, Head of Defined Benefit Consulting at Watson Wyatt, said: “The Government estimates that pension benefits chalked up by teachers between April 2007 and March 2008 were worth almost £7 billion. In other words, if it had paid teachers cash upfront rather than promising pensions to be paid in future, it would have handed over an average of £10,000 to each teacher.”
One reason why these pension benefits were so valuable was that most teachers continued to build up pensions that can be taken from the age of 60 without any reduction. John Ball said: “Paying a pension from 60 rather than 65 could increase its value by around a quarter but there is evidence that many teachers do not know they can get their full pension at 60. The taxpayer will not get value for money if public sector employees do not appreciate how much their pensions are worth. However, the Government may be too embarrassed by the discrepancy with the private sector to make much noise about this.”
Only teachers who started work from January 1, 2007 have a normal pension age of 65. Data published by the Government in November indicated that by March 2008 29,000 out of 649,000 members accruing new benefits (4.5 per cent) had joined since the scheme was reformed.
The resource accounts also reveal that 20,300 former teachers were overpaid following the administrative errors revealed in December. Former teachers received a total of £26.7 million in overpayments which will not be recovered.
The resource accounts show the number of teachers accruing new benefits rising from 602,000 in March 2006 to 628,000 in March 2007. Previously published data suggests that it rose to 649,000 by March 2008. As well as a change in the number of teachers, this may also reflect the fact that, in January 2007, the Government started automatically enrolling part-time teachers so they are members of the scheme unless they actively opt out. Previously, only full time teachers had been automatically enrolled. John Ball said: “Automatic enrolment is par for the course in the public sector but still relatively rare in the private sector. The Government expects to begin requiring employers to use automatic enrolment in October 2012, so companies should anticipate an increase in pension scheme membership.”
Despite the significant service cost, the liabilities disclosed in the 2007/08 resource accounts are lower than those disclosed in 2006/07. John Ball said: “Thanks to the credit crunch, corporate bond yields were higher at the start of 2008 than at the start of 2007. This reduces pension liabilities as measured in the Government’s accounts.”
Notes to editors
The resource accounts are available here:
www.official-documents.gov.uk/document/hc0809/hc00/0021/0021.pdf.
The £6.7 billion service cost number is on page 31. Details of overpayments to former teachers a rising from administrative errors are on page 34. The number of active members at March 2006 and March 2007 is recorded on page 5.
The Government has previously said that: “All new entrants to the Teachers’ Pension Scheme since 1 January 2007 accrue service with a normal pension age of 65. Based on annual service returns up to 31 March 2008, there are approximately 29,000 such active members and approximately 620,000 members accruing service with a normal pension age of 60.” (Hansard,12 November 2008, col. 1275W)
A report commissioned by the Department for Children, Schools and Families and published last year records that: “A local authority representative confirmed that she had dealt with several teachers who were under the impression that their age of retirement had been raised from 60 to 65.” Researchers interviewing teachers who thought their pension age had been increased said these teachers were “delighted to learn” that they were mistaken (Behavioural Impact of Changes in the Teachers’ Pension Scheme, Research Report DCFS-RR024, p86).
Members of public sector pension schemes are promised a stream of income that will be paid over many years. In estimating the cost of benefits promised last year, and in estimating the stock of liabilities, the Government needs to calculate the present value of these pensions. A key assumption is the interest rate used to discount future payments into today’s money. The Government chooses a discount rate based on AA corporate bond yields in January and its annual changes to this discount rate are effective from 31 March each year. The lower the discount rate, the higher the liability/service cost. In estimating the average service cost at £10,000 per teacher, we have left to one side arguments about whether the Government should use a lower discount rate than one based on AA bonds. Arguably, the cost per teacher should be higher still.
AA bond yields were lower in January 2007 than in January 2008. Accordingly, the interest rate used to calculate the cost of service in the year to 31 March 2008 is lower than the interest rate used to calculate the value of liabilities at 31 March 2008. This is why the resource accounts can show the value of liabilities falling from £181.3 billion at 31 March 2007 to £176.5 billion at 31 March 2008 and show the service cost rising from £5 billion in 2006/07 to £6.7 billion in 2007/08. It is likely that the service cost reported for 2008/09 will be lower than that reported for 2007/08.
For more information please contact:
David Robbins
+44 (0) 20 7227 2973
+44 (0) 7507 632653
david.robbins@watsonwyatt.com
Bruce Wraight
+44 (0) 1737 273370
+44 (0) 7771 765154
bruce.wraight@watsonwyatt.com
Visit Watson Wyatt's online press office: www.watsonwyatt.com/europe/news/journalists
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