The cost of the welfare state - challenges posed and solutions

[Tester]

As an aside, during my career on the railways I worked with people who had left school at 16 with no qualifications and who were quick thinkers and excellent problem-solvers. BR of old seemed to be good at spotting talent without regard to paper qualifications.

In all modesty, that's me

BR's training and development was really good, and I am forever grateful to individuals who gave me opportunities.

 

[JonathanH]

Final salary pension funds have always been unsustainable. Obviously for the retiring employee they're amazing, but they're so amazing precisely because they're absurd.

Unsustainable in a time of low gilt yields. Latterly they have become a somewhat better investment for their sponsoring companies as they can leverage the surpluses which have emerged. They are, however, not a risk that most companies would want to embark on again.

The principle of targetting 2/3rds of income in retirement was a little generous in hindsight.

But younger people joining the workforce are the ones who are having to put in extra to pay out these gold-plated policies of people who entered the game 50 years ago.

Yes, although that is just one aspect of modern surpression of remuneration.

 

[Broucek]

A senior conductor on the railway? Surely not.

Yeah, it would be more understandable for the Berlin Philharmonic

== Doublepost prevention - post automatically merged: 22 Aug 2026 ==

Final salary pension funds have always been unsustainable. Obviously for the retiring employee they're amazing, but they're so amazing precisely because they're absurd.

I'm actually of the opinion that all defined benefit pensions are unreasonable and have been based on poor predictions of longevity and a particular confidence in the stock markets. I know the unions will fight against any removal of them because they're insanely generous. But younger people joining the workforce are the ones who are having to put in extra to pay out these gold-plated policies of people who entered the game 50 years ago. It's another example of the younger generation propping up an older generation who got free university tuition and houses at half the salary multiplier as is now required.

For what it's worth, I say this as somebody who has a final salary DB pension scheme (albeit a small one).

Me too

I'm a qualified pensions actuary (although I now do something else). DB kind of worked when life expectancy was lower and increases to pensions in payment were discretionary and could therefore be limited if the scheme were underfunded.

Well-meaning governments made increases compulsory, made it hard for schemes to maintain a funding surplus and effectively forced more conservative investment strategies. These things plus increased longevity killed DB schemes in the private sector - Brown's dividend tax didn't help but the writing was already on the wall. Of course public and para public sector organisations still have DB plans and it's a disgrace that the people who make pensions tax policy have no clue of the relative insecurity that applies to a DC scheme where 100% of the investment, inflation and longevity risks fall on the employee

 

[Bald Rick]

The principle of targetting 2/3rds of income in retirement was a little generous in hindsight.

Well, I’ve thought about that. In my pension scheme which is DB ‘Kind of’, between me and my employer we pay about 18% of my pensionable salary (hereinafter referred to as salary) into the scheme. Previously it was rather higher, but the scheme is well funded at present so contributions reduced a few years ago. To get a two thirds ‘final’ salary pension, I would have to put in for 40 years, and retire after 60. Given that life expectancy for the average male employee is around 79-80 (full service retirees being overwhelmingly male - I have no doubt that the old BR scheme was calculated on the basis of male life expectancy), that means you would get out 20 years of 66% for putting in 40 years of 18%. To a first order approximation, your total contributions need to have grown by around 80% in real terms over the 40 years. That’s decent, but not exactly a stunning investment return for that length of time.

Of course there’s all sorts of other things in the mix: increased salaries through promotions etc., lump sums, and so on. So it’s not thst simple.

Anyone who joined BR or it’s successors from before the day the Railways Act 1993 entered the Statute Book has different (protected) Pension rights from those who joined afterwards, with rather more generous terms. There’s not many of these people left.

For clarity, the railway pension scheme is fully funded from your own contributions, and not those of future members.

 

[Egg Centric]

If you died tomorrow, how would your wife continue to survive? What if you became unable to work through illness or injury? How long could she last on the payouts from any insurance policies you may have?

If a couple really wants to have someone stay home each day, it's safer that they share this by both dropping hours. When a person (let's face it, usually a woman) drops out of a career to raise a family, it's very difficult to return later.

Re: us personally - these are not valid objections as they are very much covered, I've loads of critical illness and life insurance cover. What I don't have though - and it's a very valid point - is something where I lose my job. I need to be slightly careful what I say here cause I'm fairly jigsaw identifiable to anyone sad enough (or in fact literally known irl to plenty of members) but my longer term career plans are extremely likely to involve that and then oh well it is what it is.

Re: the general situation - maybe for a hypothetically perfectly balanced couple but there are so many permutations I dunno if it's that useful. Furthermore we seem to be conflating two different things - whether it's desirable for both partners to work for career reasons and whether it ought to be possible for just one to. And weirdly atm we encourage different answers to the latter at "squeezed middle" than at either side. It is incoherent.

I'm all in favour of stricter controls to ensure that absent fathers do not duck their financial responsibilities to the children they procreate.

I don't know the details of what exists but from what I do know, I agree. I strongly feel though that's very different to supporting an estranged partner - commitment and its legal mechanisms are no secret. Not relevant at all to this thread really but I'd also like some kind of easier way for poly situations although the number who are both poly AND with unequal breadwinner expectations is probably pretty small excluding shariah stuff which can presumably be handled through that already

== Doublepost prevention - post automatically merged: 22 Aug 2026 ==

For clarity, the railway pension scheme is fully funded from your own contributions, and not those of future members.

Assume it didn't exist. Would the TOCs be able to offer more or less generous terms to new employees?

Genuine question btw cause I don't know. My ASSUMPTION is they could offer more generous terms to new employees because they wouldn't have to be offering those terms to those on the old scheme (which presumably the unions would make them do if they were offering exciting new terms to new employees). But I could be completely wrong.

 

[Bald Rick]

Assume it didn't exist. Would the TOCs be able to offer more or less generous terms to new employees?

They have been offering less generous terms for some time. The terms offered now are self sustaining. Same with NR, where those on the more generous terms have higher contributions. (And also encouraged to eat lots of pizza and ice cream*)

*this bit is made up.

 

[Egg Centric]

They have been offering less generous terms for some time. The terms offered now are self sustaining. Same with NR, where those on the more generous terms have higher contributions. (And also encouraged to eat lots of pizza and ice cream*)

*this bit is made up.

So it's acceptable to the unions to give someone (at the same grade) on the new pension scheme a higher headline wage than someone on the old pension scheme?

If so then fair enough.

 

[Bald Rick]

So it's acceptable to the unions to give someone (at the same grade) on the new pension scheme a higher headline wage than someone on the old pension scheme?

If so then fair enough.

Headline wage is the same. Take home is different.

 

[Egg Centric]

Headline wage is the same. Take home is different.

What I'm getting is that is that to put a "newbie" on a comparable pacakage they surely ought to be paid a higher headline wage. My intuition is that this would not be acceptable to the unions but I could be completely wrong - do you see the question I'm asking yet?

(And if I'm right about this it is another case of the young subsidising the old in practice - but I don't want to declare it to be the case if I'm wrong and either is very much possible)

 

[Broucek]

What I'm getting is that is that to put a "newbie" on a comparable pacakage they surely ought to be paid a higher headline wage. My intuition is that this would not be acceptable to the unions but I could be completely wrong - do you see the question I'm asking yet?

(And if I'm right about this it is another case of the young subsidising the old in practice - but I don't want to declare it to be the case if I'm wrong and either is very much possible)

Pensions were not affordable and therefore made less expensive. The unions would not accept changes for existing workers and so their entitlements were "grandfathered".

It's varnishingly rare to adjust salaries to compensate for lower pensions (although employee pension contributions my differ) not least due to discrimination laws which look at each part of pay in insolation.

But ANY rail scheme is better than 90%+ of private sector schemes

 

[Bald Rick]

What I'm getting is that is that to put a "newbie" on a comparable pacakage they surely ought to be paid a higher headline wage. My intuition is that this would not be acceptable to the unions but I could be completely wrong - do you see the question I'm asking yet?

Yes I completely understand, but no - for example if you are an NR signaller of Grade “x” you will be paid the same, but depending which flavour of the NR DB pension you are in*, your contibutions will vary between 5.6% and 8.52% (and in some circumstances 10.3%).

So you are paid the same, but take home is different, all else being equal. There is no ‘cross subsidy’ as such.

* there’s at least 4 versions, essentially related to when whether you started before November 1993, betwen November 1993 and 2012, or since 2012, and whether you can take your full benefit at 60 or 65 and/or whether you have chosen to make extra contributions (not AVCs) in order to retain some potential additional future beenfit in some circumstances.

It’s all quite complicated.

 

[styles]

Yes I completely understand, but no - for example if you are an NR signaller of Grade “x” you will be paid the same, but depending which flavour of the NR DB pension you are in*, your contibutions will vary between 5.6% and 8.52% (and in some circumstances 10.3%).

So you are paid the same, but take home is different, all else being equal. There is no ‘cross subsidy’ as such.

* there’s at least 4 versions, essentially related to when whether you started before November 1993, betwen November 1993 and 2012, or since 2012, and whether you can take your full benefit at 60 or 65 and/or whether you have chosen to make extra contributions (not AVCs) in order to retain some potential additional future beenfit in some circumstances.

It’s all quite complicated.

NHS and central civil service is the same.

My mother in law "retired" for 6 months to cash in one NHS pension scheme then rejoined to join another, infeior, scheme.

My anecdotal experience is also that most people, DC or DB, do not understand how their pension works, so DB providing employers can easily get away with changing terms because most of their members don't have a clue.

 

[Broucek]

And politicians don't understand DC. A pot of £500k sounds huge but equates to £20k per annum

 

[Bald Rick]

And politicians don't understand DC. A pot of £500k sounds huge but equates to £20k per annum

They do.

Besides annuity rates vary with market conditions. £20k may have been the outcome several years ago when interest rates were low, but not now; annuity rates are the best they have been for nearly 2 decades. With a £500k pot at 65 you would take a £125k lump sum tax free, and the rest will buy you an annual level pension of over £29k, according to current market annuity rates (non smoker, London postcode). State Pension on top.

 

[Broucek]

They do.

Besides annuity rates vary with market conditions. £20k may have been the outcome several years ago when interest rates were low, but not now; annuity rates are the best they have been for nearly 2 decades. With a £500k pot at 65 you would take a £125k lump sum tax free, and the rest will buy you an annual level pension of over £29k, according to current market annuity rates (non smoker, London postcode). State Pension on top.

I'm an actuary.

It's incredibly sensitive to the interest rate environment and the rate of increase chosen. Interest rates are higher than for a while which makes annuities cheaper. But interest rates are high in part because inflation is high and inflation is the enemy of flat annuities.

My 4% figure remains a decent rule of thumb if you balance interest rates and inflation, albeit one that ignores the tax free lump sum

If politicians undertand DC plans, they are good at hiding it

 

[Merle Haggard]

They do.

Besides annuity rates vary with market conditions. £20k may have been the outcome several years ago when interest rates were low, but not now; annuity rates are the best they have been for nearly 2 decades. With a £500k pot at 65 you would take a £125k lump sum tax free, and the rest will buy you an annual level pension of over £29k, according to current market annuity rates (non smoker, London postcode). State Pension on top.

Just out of idle curiosity; if you started smoking immediately before 65 would the pension you obtain be higher?

 

[Broucek]

Just out of idle curiosity; if you started smoking immediately before 65 would the pension you obtain be higher?

I think you are underestimating the sophistication of the pensions industry....

 

[Bald Rick]

But interest rates are high in part because inflation is high and inflation is the enemy of flat annuities.

Current inflation isn’t high though, albeit it has been. Interest rates are high partly because of high levels of Governement borrowing (especially in the US), the risk of inflationary pressure, and general uncertainty. Almost all of which can be laid at the door of the White House.

I'm an actuary.

I should have been! (It’s what my Dad wanted me to do.)

 

[Merle Haggard]

I think you are underestimating the sophistication of the pensions industry....

Sounds like it's harder to game than state welfare then.

 

[Egg Centric]

Yes I completely understand, but no - for example if you are an NR signaller of Grade “x” you will be paid the same, but depending which flavour of the NR DB pension you are in*, your contibutions will vary between 5.6% and 8.52% (and in some circumstances 10.3%).

So you are paid the same, but take home is different, all else being equal. There is no ‘cross subsidy’ as such.

* there’s at least 4 versions, essentially related to when whether you started before November 1993, betwen November 1993 and 2012, or since 2012, and whether you can take your full benefit at 60 or 65 and/or whether you have chosen to make extra contributions (not AVCs) in order to retain some potential additional future beenfit in some circumstances.

It’s all quite complicated.

I'm still not sure that I've made my question clear - is the employer subsidy for the "older" pension greater and is differential pay based upon pension permitted by the inion?

If that's the case, then the newer workers are to an extent subsidising the older ones because they are getting less attractive headline future rises because the employers have to take into consideration their enhanced contributions to the legacy scheme so have less headspace to maneouver.

If it's not the case then I can't understand why the old scheme would even be shut off.

Is that and my point clearer?

== Doublepost prevention - post automatically merged: Sunday at 23:14 ==

Just out of idle curiosity; if you started smoking immediately before 65 would the pension you obtain be higher?

AIUI the standards for "smoker" for life insurance* and annuity** are incredibly different. Funny that...

*something like had a fag once in last decade
**something like had a fag every day for last decade

 

[Merle Haggard]

/snip/

AIUI the standards for "smoker" for life insurance* and annuity** are incredibly different. Funny that...

*something like had a fag once in last decade
**something like had a fag every day for last decade

I recollect many years ago that my (sadly now late - but not due to smoking) best mate discovered that the parameter for 'smoker' - for mortgage life insurance - was defined as 'of cigarettes'.

As a result he changed to Hamlet and was, for the purposes of the Act, as they say, a 'non-smoker'.

As a flippant aside, on a joint train bash, he tried to replenish his supply in the shop on the Helsingor to Helsingborg train ferry. They didn't sell them -

 

[Broucek]

I should have been! (It’s what my Dad wanted me to do.)

There are pros and cons... I stopped doing proper actuarial work about a year after I qualified.

What do / did you do instead (if not too outing)?

 

[Yew]

Sounds like it's harder to game than state welfare then.

The understanding that I have is that gaming state welfare is inactuality a lot harder than the tabloids present it to be.

 

[styles]

The understanding that I have is that gaming state welfare is inactuality a lot harder than the tabloids present it to be.

I've known people to do it. Often your word is just taken. So you say you live at property X as a stay at home parent but you actually live at property Y and do cash in hand work. Unless somebody dobs you in, it usually doesn't get checked.

 

[BuhSnarf]

I've known people to do it. Often your word is just taken. So you say you live at property X as a stay at home parent but you actually live at property Y and do cash in hand work. Unless somebody dobs you in, it usually doesn't get checked.

I've known people do it, but equally I've also had people get caught a few years down the line. I guess for some it's worth the risk.

 

[Broucek]

I'm still not sure that I've made my question clear - is the employer subsidy for the "older" pension greater and is differential pay based upon pension permitted by the inion?

If that's the case, then the newer workers are to an extent subsidising the older ones because they are getting less attractive headline future rises because the employers have to take into consideration their enhanced contributions to the legacy scheme so have less headspace to maneouver.

If it's not the case then I can't understand why the old scheme would even be shut off.

Is that and my point clearer?

== Doublepost prevention - post automatically merged: Sunday at 23:14 ==

I think you are over-complicating things.

In any given employer, there may be different pension plans for different groups of employees. The differences may be related to things like: a) date of joining; b) legacy terms from a previous employer that the current employer has agreed to honour after acquiring a business; c) grade etc.

Generally gross salaries (before deductions) do not take into account pension differences. This is typical practice and, as I say upthread, anti-discrimination rules look at each part of remuneration seprately so paying (say) a woman more than a man because she's in a worse pension plan would not be legal. (There may, however, be differences to the level of pension contribution individuals pay depending on the type of plan.)

And in any DB pension there is always quite a bit of cross-subsidy even within one scheme. For example:

• Those who die early in retirement get less benefit than those who live to 100;
• In a final (as opposed to average) salary scheme, those who are promoted to higher grades do better than those who don't (because pension is based on *final* salary);
• It costs more to provide £1000 of pension to someone who is close to retirement than someone further away.

It's a bit like insurance - those who don't die prematurely/don't get burgled/don't crash their car subsidise those who are less fortunate.

 

[Harpo]

It's a bit like insurance - those who don't die prematurely/don't get burgled/don't crash their car subsidise those who are less fortunate.

……or, enable insurers to make a profit?

 

[Broucek]

……or, enable insurers to make a profit?

Yes, when insurers start losing money, it can be a sign that things have not been going well...

 

[brad465]

I've known people to do it. Often your word is just taken. So you say you live at property X as a stay at home parent but you actually live at property Y and do cash in hand work. Unless somebody dobs you in, it usually doesn't get checked.

Ironically the lack of investment in public services may well have allowed an increase in prevalence of "benefit cheats". Firstly there is a lack of enforcement, but also, because underfunded public services leads to increased reliance on welfare (e.g. sickness benefit because one can't be treated quickly), there is a larger pool of genuine claimants that fraudulent ones can hide amongst. This problem is not being fixed without upfront investment in various forms, which I'm willing to bet will also be opposed by those saying welfare spending needs cutting.

 

[Tetchytyke]

The understanding that I have is that gaming state welfare is inactuality a lot harder than the tabloids present it to be.

I've known people to do it. Often your word is just taken. So you say you live at property X as a stay at home parent but you actually live at property Y and do cash in hand work. Unless somebody dobs you in, it usually doesn't get checked.

As with any system, there are ways of gaming it.

The DWP only really go to the trouble of verifying where you live if it makes a noticeable difference to the benefits you receive. If you say you live at home with your mum and dad then they don't really care, it doesn't change what you get. But if your long-term partner says you don't live with them, you live at your mum and dad's, then suddenly the DWP do care a bit more. And yes, they do check, and not just from tip-offs.

But what counts as a live-in partner is quite clearly defined in law and so, if you're sensible about it, you can still defend your position.

The lack of checks opens up the possibilities of other types of fraud, though. The one I last dealt with involved DWP staff setting up fraudulent Universal Credit claims using the details of unsuspecting victims and embezzling the money: the first time people knew about it was when the DWP started recovering the money out of their wages.