I've heard a number of people recently claiming that teachers' pensions are
Does anyone know if this is true, and if it is, how is it possible to
finance an undefined cost with a pre-defined contribution?
They aren't, although they should be.
Teachers pay into a defined contribution scheme. The payments should
go into a properly administered fund, as final salary pension schemes
used to. Teachers pension contributions actually go to the government
and pensions are paid from government funds, just like the state
A properly funded final salary scheme should calculate the cost of
providing future pensions based on life expectancy, investment yields,
etc. The requisite contributions from employee and employer are then
set at a level that will build up a suitable fund.
This can work reasonably well, but the attractions of a very large pot
of money apparently doing nothing for many years was too much for
employers and the government, who sarted putting their sticky fingers
in the pot, with the result that schemes that were perfectly viable
are so no longer.
In which case, the question becomes: are the contributions made by current
working teachers sufficient to fund the pensions of current retired
It seems to me that you face two major problems in trying to finance final
salary pensions. Either the date at which the pension is to be drawn is too
distant to reliably predict its cost, or is too close to allow sufficient
funds to be built up to fund it. This was certainly the problem that I faced
in trying to fund my own pension. It wouldn't be so bad if things changed
gradually - you could then make affordable and timely changes. In reality
though, rates of inflation, investment returns and annuity costs change
quite abrubtly making it almost impossible to keep pace. As far as I can
see, all you can really do is save as much as you can and hope for the
best - unless you're fortunate to have a copper bottomed final salary scheme
I wouldn't be so resentful of state final salary schemes if they were truly
self-financing, but in reality I suspect they will add a significant burden
to my taxation both before and (more significantly) after I retire.
They aren't but I think this comes from the claim that up until about
the early 1990s the net contributions to the teachers pension fund had
exceeded the net pensions being drawn by retired teachers.
It was around this time that early retirement for teachers was
abolished. I seem to recall that it was claimed that had the teachers
pension contributions been paid into a fund then at the point early
retirement was "unaffordable" then the fund would have been about 500bn
in surplus not counting investment growth.
I have no idea if these claims were actually true, I can just remember
them being made at the time.
No. Teachers don't pay into a defined contribution scheme. They pay into a
defined benefit scheme. If it were the former, they would only get whatever
their fund and annuity rate provides when they retire. But as it's the lat
ter, they know that they will get a given percentage of their salary when t
hey retire, dependent on years of service.