'Unfunded' Pensions for Teachers

Lord Hutton has triggered a furious response from the unions in recommending the end of the final salary* pension schemes enjoyed by public sector workers. (* Also known as unfunded gold-plated pensions)

The pejorative term 'unfunded' when applied to public sector pensions suggests that the taxpayer picks up the entire bill, when in fact it just means that the pension contributions are spent by the government as a cheap loan, instead on being invested in a pension fund. Of course, when the employee eventually retires there is no pot of money, so the treasury must spend from government funds.

Teacher pensions were reformed some years ago, and do not need to be radically reworked in the current final salary pension witch-hunt. Teachers contribute 6.1% of salary, with employers putting in a further 14.4%, making a total of 20.5%. For a main scale teacher paying in for 40 years, this could produce a pension pot of £500 000 to £600 000, if it was invested and averaged returns of 3% above inflation, as the FTSE has managed routinely. A half million quid could easily buy an index linked annuity paying half the final salary - without needing a penny of taxpayer money to subsidise.

The problem comes from the higher earners - the senior management and others who get significant promotions near the ends of their careers. Since these people earn much more than their career average, each pound they pay in to a pension scheme pays out more that a pound from a classroom teacher whose salary is stable for the final 25 years of their career.

In the light of this, Lord Hutton's report, calling for pensions to be based on career average earnings and for the investment risk to be moved from taxpayers to the individuals, seems reasonable. The unions will make a great deal of fuss, but for most teachers, there is nothing to fear from a move away from an 'unfunded' or even 'final salary' pension model.