The 3rd option in more detail…

I stand by my first reaction this morning: the 3rd option evades the issue and offers us a worse career average scheme than the one currently on offer. The focus should remain on pressuring the BBC to keep the pension promise embodied in the pension scheme rules.

But let’s take a more detailed look at what’s on offer.

First of all, to recap… The new scheme would require us to leave the final salary scheme. The value of the pension we’ve earned so far in that scheme will then rise “broadly” in line with inflation.

The new career average scheme would define your pensionable salary as the average (technically the arithmetic mean) annual salary that you earn over the period you’re in the  new scheme. Furthermore, your pension would then be calculated on the basis of a 60th for each year of service. So if you were in the new scheme for 5 years before retirement and your annual salaries during that time were 50K, 51K, 52K, 53K and 54K, then the average would be 52K, and this would be your pensionable salary. Your pension would then be 5/60’s or 1/12 of 52K or £4333.33. And this would be added to the final salary pension that you’d already accrued in the old scheme.

The pensionable age would be 65 (as opposed to 60 in the final salary scheme). So potentially you’d be drawing one pension 5 years before the other.

Member contributions would be 7% a year (as opposed to 4% a year in the current career average scheme. But if memory serves me right this is about the level of our contributions into the final salary scheme).

There is no word yet on the BBC’s contributions to the new career average scheme

And the sting in the tail is… once you’re taking your pension it will only rise in line with inflation (as measured by the CPI or consumer prices index) or 2.5%, whichever is the lower. This means that your pension can NEVER rise by more than 2.5%, no matter what level inflation is at. This is guaranteed to lead to a continual erosion of the spending power of your pension. RPI inflation (which is generally regarded as a better measure of actual living costs) is currently 4.8% for example (and even CPI is 3.1%). So pegging pension rises at 2.5% means that when inflation is high you lose out, and if inflation falls below 2.5% you don’t recoup the loss because the rise in pension slides down below 2.5%.

Good things about the new scheme? It’s better than what was on offer before because:

– in most circumstances the career average scheme will be better for you than staying in the final salary scheme and accepting a 1% cap on rises in pensionable salary. (The assumptions behind this are that you are still some way off retirement, and expect your salary to rise by more than 1% a year. It particularly becomes true if you have a large salary hike between now and taking your pension. If on the other hand you don’t think your salary is going to rise much, and you think inflation is going to stay low until you retire, then staying in the existing scheme is still probably better for you.)

– it gives some predictability in calculating your likely retirement income (unlike the defined contribution scheme which was launched as “option 2” when the proposals were first announced).

– because the career average is calculated on the basis of the years you spend in the new scheme, your average won’t get dragged down by the early low earning days of your career at the BBC. Conversely, if you’re still at a relatively early stage in your career, then this is not a very attractive scheme (and you might be better off taking a gamble – which is what it is – on the defined contribution scheme/option 2.)

So where does all this leave us?

The fundamental truths have not changed. The new scheme only seems “good” if you compare it with the appalling options that the BBC first offered. The BBC is determined to renege on its pension promise because Mark Thompson believes it is inappropriate for the BBC to continue to offer a final salary scheme, and he wants to use the deficit as an opportunity to drastically reduce the BBC’s long term spend on pensions.

The fundamental choice is this: do the problems in the pension scheme get solved by destroying the final salary scheme, or by finding ways to put extra money in to plug the deficit? I believe the BBC should choose the latter. But we should be under no illusions. It is highly unlikely that Mark will be persuaded by the moral case for defending a final salary scheme. Only determined resistance can change the terms of the debate.

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