John’s Blog No. 128 Pensions

I downloaded the latest State pension figures for December 2012 from the DWP website, which made interesting, but not exciting reading and illustrated how far out of hand State pensions have become.

The total cost for pensions alone, before any welfare costs is now £79 billion for some 12.84 million pensioners; of these 1.29 million are females between 60 to 64 and 1.21 million are Britons living abroad, which also includes their dependent relatives.

Some of these are non UK Nationals and even include persons who draw dependent pensions from the UK and a second pension from their own Country; it is a nonsense state of affairs, particularly if they never lived here.

The UK resident remainder over 65, appears to equal the last total population count for the UK, in other words every pensioner in the UK is drawing State pension. This is contrary to the impression given by the NI contributory pension, where members have to meet a contributory number of years or pay extra NI contributions to qualify.

We are living in an imaginary never-never pension land, where what you believe you see is not actually there, it is already a universal State pension and the single tier proposals just reduce it to a single grey level for all; a Tory Government meeting full Socialist principles.

One can also realise the full cost saving penny pinching motives behind the change, when fully implemented the large rise in basic pension will result in real terms in a reduction in cost to £63bn, a saving of £16bn, which is a trick worthy of thee best magicians.

Such a saving, with the expected additional drop in welfare Pension Credit and other costs could fund the transition to a true defined benefit contributory pension scheme using NI contributions in the manner in which they were originally intended.

Over 20 years, this would create real savings to the State and meet the stated intention of rewarding those who work and save to ensure their own pension future. Your NI contributions would build up your pension fund to secure your retirement and even your potential care needs.

The benefits do not stop there, the effects of population increases would be met by such self sufficiency, without any dependency on those in work, who would not need to support you. Large investment funds would be generated to meet all our infrastructure needs and even the State would save money.

When combined with the new automatic workers pension scheme, which is necessary because the State has misused NI contributions, reducing State pensions to below the poverty level, all contributory members would receive a pension of at least half the average wage, the aim of most DB schemes.

Of course such a scheme would have to be expertly well managed and there are many examples of private schemes here and elsewhere who do just that, giving good returns at low costs. This is been discussed in previous blogs and over forty years pensions of four times annual contributions are possible in real terms.

This means that a saving spend of £20bn per year over forty years would meet pension costs of £80bn per year, much greater and real State savings than those presently envisaged, of course you could just halve present spend and double pensions to even £288 per week.

Everyone would be a winner!

John’s Blog No. 127 Pensions

The Queen’s speech held nothing new, what I found interesting was the Government’s attempt to sell the new State Pension with the emphasis on supporting those who work hard and support themselves.

The impression was given that the single tier pension was designed for those who make contributions, giving a fair return on such savings. I wonder if they have even read the proposals or even understand them or perhaps they think we are too stupid to bother or realise.

The facts are that these changes introduce a universal welfare benefit pension scheme at poverty level, regardless of whether you make contributions or not and you will be better off all round if you are one of the nots, as pension credit will make you better off.

No matter what you pay in or for how long, you will be no better off than the eligible welfare itinerant; you will lose out on the second pension and any pension for your wife, who will no longer inherit your pension if anything happens to you.

It therefore does not give a fair return or even any on the substantial NI contributions made by you or your employer, if you are one of the hard working people the Government claims to support. The eligible number of contributions years is meaningless, you get the same anyway!.

What we need is a proper pension scheme in which the NI contributions work hard for the benefit of the members, not someone who is already retired or about to, or even worse someone who has not paid in at all.

Yet changing the system to a more sensible rewarding scheme could benefit all, including the State, the present cost of £75bn, properly managed and invested, could halve the cost and double the payment benefit over a transition period to allow present liabilities to be met.

This is a theme which returns frequently in my blogs, but you don’t have to take my word, for a simple calculation on your computer, mobile phone or even old fashioned scrap of paper can confirm the results.

If you save £1,000 per year for 40 years, you will accumulate a fund of £40,000, if this money earns 5% per year over 40 years on the average amount of £20,000 it will grow by 100%, doubling the Fund to £80,000 when you retire.

This fund will support a payment of 6% per year, which is the drawdown level allowed by the revenue and also a level which can be sustained with even the highest life expectancy figures, that is survive as long as you do, giving an income of £4,800 per year, some £98 per week.

The single tier pension is at £144 per week, some £7,500 per year (currently £5,600), which would therefore require savings of £1,600 per year. On the average wage, the total NI contributions paid by you and your Employer are over three times this amount!!

So even if only a half of total NI contributions, just your part is put away, then you could expect an income of over £10,000 per year, 40% of the average wage, which would be in real current living costs if wages keep pace with inflation over the 40 years, which they have done in the past.

The investment return, growth figure of 5% is a reasonable safe figure, most pension funds have achieved this over the recent recession, many report 8 to 9% over 25 years and latest Investment fund figures for the past year show values twice this.

The State is therefore not looking after your NI contribution savings wisely or even carefully, in fact they do not even recognise it as your money in the first place and there are doubts that the new automatic contributory scheme will fare any better.

The need for a proper pension reform policy is well overdue, not one to suit the politicians, but one that meets the needs of its contributing savers as its first priority and gives a fair risk free return on the pension savings they make, so that they can retire with peace of mind.

John’s Blog No. 126– Pensions

The art of husbandry appears to be dead, nothing of course to do with marriage, but more a matter of utilising our resources fully and putting something away for a rainy day, now also known as forward planning and consideration of future needs.

Our ancestors did it, even the Egyptians stored their good harvests away for when the inevitable poor ones occurred, but we lurch from crisis to crisis, never learn and blame anyone else for what happens in the bad times.

There is no better example than pensions, we all know we are growing old and will need income and care as we become frail, but expect the State to take responsibility for us at that time.

Some two thirds of the working population make no personal provision for their own retirement future; to be fair, most thought they were doing so with their National Insurance contributions, but no one queried what the State was doing with their precious savings.

Neither did the State, it went into the universal Exchequer melting pot  to be lost for all time, resulting in the present “pay as you go” system, which has become a free for all welfare scheme, dependent on the earnings of those in work.

Present demographic changes are undermining this system, the number of pensioners and those on welfare, together with their needs are steadily rising, whilst the number of providers that is those in work remain the same or dropping.

This ratio, known as the dependency factor is changing rapidly, currently around 3 to 1 it is expected to drop to 2 to 1 over the next forty years and even reach 1 to1, with every person in work supporting a pensioner.

Even the time advantage is disappearing, you once worked forty to fifty years to support a pensioner who was expected to last half or even a third of that time. The result is a system which cannot be sustained and is grossly unfair with the apparent solution of all working until they die.

There is another way, which is the old one of husbandry and self sufficiency, each puts away enough to meet their retirement demands and needs, Even if the State wanted to, they will find themselves unable to do so and are in many ways responsible for the problem.

However the State could do a lot to help the situation, but will only do so if pushed hard by the general public. They could return NI contributions to a true pension scheme saving for the future by rebating part of this income to work hard, accumulate and grow.

Nest could become a full Defined Benefit Pension Scheme instead of a Loch monster, utilising all the major advantages of a group scheme running continuously through work and retirement, instead of an individual risk scheme.

The onerous pressures of levies, taxation and unrealistic liability requirements causing the demise of DB schemes could be reversed to promote their recovery. There is a growing awareness in the US of the major economic benefits of such schemes over DC and individual private ones.

Contributions to all existing schemes including State NI are currently more than adequate to meet all the needs and the growing numbers of UK pensioners. Out-dated annuities throw valuable Funds away at their peak for a return which is at least half that possible if they were to remain alive.

Just because their owner stops working, there is no logical reason why their Funds should, they have an earning potential and would fare better in a well managed group scheme and be more able to meet the changing needs of their member owners.

John’s Blog No. 125– Pensions – nest 2

  There was a second successful attempt at a pension estimate from nest, I turned the clock back to age 25, with a wage of £25,000 pa and 8% contributions, £1,250 for myself and £750 Employer a total of £2,000 per year, with retirement at 65.

A final fund was given of £164,000, with breakdown for self, employer, tax relief and investment growth of £71,600, a cash lump sum of 41,000 with a pension of £6,330 after charges. These equalled growth at 5% and final annuity return of 5.1%, with a replacement yield factor of 3.2 or 4.1 without cash sum, when income would be £8,100.

This is a good performance, if it is met, particularly if it was guaranteed, but my own experience with defined contribution schemes is promises, promises with stagnation in the latter stages, when it is too late to correct.

The potential for a good pension scheme is large, with over two thirds of the population in work, some 20 million, having no pension provision outside of the State and automatic membership, the numbers are huge. If only 1%, that is 1 in a 100 are initially recruited, some 200,000 members, contribution income at £2,000 per head amounts to £400 million per year, with fund values reaching £16 to£33 billion.

 Contribution charges at 1.8% would amount to £7.2 million and fund charges to £48 million, with annual investment/ growth at £800 million. if you multiply these by 100 (for the full 20 million), the figures are mind boggling with investment returns at 80 billlion exceeding basic State Pension costs.

There is also a time delay before pension start to be paid, possibly up to 20 years, the minimum time it is reasonable to save for a pension, unless large sums are paid in, which allows funds to build up before pensions are paid.

This was the basis of the proposed transition of State pensions to fully funded schemes by rebating NI contributions, which is more affordable and sustainable than the present bodged single tier pension. This could be in nest, but would be better in sounder based schemes.

This week, I logged on to the University Superannuation Scheme site, I typed USS into Google and it was the first match and was a truly professional site, a complete difference to nest, with full details of the fund, members, contributions and benefits. I even downloaded the latest 2012 set of accounts

With 149,000 active members and funds of £34bn it is one of the larger private DB pension schemes; annual contributions amount to £1.5bn with pension paid of £1.4bn to 53 million members, 60% of which comes from investment income. Admin charges amount to 1.05% of contribution income and investment charges to 0.14% of Fund value, much better than nest.

Such well managed schemes could be the basis of Universal DB schemes, true National Employment Pension Savings Trusts, which could give members greater security and a better deal, plus ownership of their pension savings. It would also save the State money and be free of interference and policy changes.

It is time we all woke up, particularly the State, to the realities of Pensions and their adequate provision, we can no longer depend on those in work to support the increasing numbers and demands of the older population. We need to ensure self sufficiency, which can only be achieved in well managed DB pension schemes.

John’s Blog No. 124– Pensions – nest

The National Employment Savings Trust and the associated pension scheme is now operational, so I logged on to their web site this week to find out what is happening, information on member numbers, amounts being collected, saved and invested, etc, with absolutely no results.

You can get personal pension estimates, general assumptions and a lot of publicity PR statements, but little else. Growth rates of between 2 and 3% above inflation and charges are aimed for, with inflation taken at 2.5%; charges are given at 1.8% of contributions, with an annual charge of 0.3% of fund value.

This would suggest growth returns around 6% or more, but with no explanation of how this will be achieved, where invested and whether investment costs are included in charges. Pensions are based on annuities with interest of 3.7% for a level annuity dropping to 0.2% for inflation linked, somewhat confusing with no further explanation.

Although it is early days, barely six months, it all seems vague and superficial and more like an advertising website with little real data or information. I tried to use their pension estimate ready reckoner, filled it in to be told they were experiencing problems at present.

There is no indication to what extent the State is involved and how truly independent the Trust is, there were the usual waivers of subject to life expectancy, market and policy changes, which makes any estimates almost useless. This is the normal insecure Financial services approach. 

There was little sales drive or inertia, no exhortations to save for a pension to avoid destitution in old age and no simple worked examples on contributions, times and ages, but this could be construed as a commitment or possible pension guarantee.

If you are saving money over a 40 year period, you need some firm basis to decide how much to save to give a firm income when you retire not possible estimates subject to a lot of ifs!, which reduce as you approach retirement, when it is too late to correct.

The basic weakness of nest is the reliance on outdated annuities, whose returns fluctuate almost daily, making it impossible to plan ahead, even for one year. The other weakness is the defined contribution basis, where all the risk is passed back to the member, avoiding any guarantee or responsibility by scheme managers.

If you are handling someone’s savings, you must accept some responsibility for the way you manage and invest that money. Such risk is greatly reduced if managed in a group environment, which can absorb market fluctuations, making contributions subject less to direct age and more average related.

Changes in Life Expectancy can also be better managed in a group, where risk is shared and sustainable payment levels arrived at on a sound basis. The effects on pension payments are not as great as are currently being decided, with present annuity levels at least half of what they could be for a 2.5% inflation proofed pension.

The whole of pension provision is being decided on a running scared attitude, instead of a logical approach to the basic factors. Fund liabilities are exaggerated, leading to the collapse of defined benefit schemes, although there is the start of a revival in the USA, where they are being shown to be the best economic solution, with major side benefits to Employers. To be continued in the next blog.

John’s Blog No. 123– Pensions – State 2

State Pensions are the last of any return from the substantial National Insurance contributions made by the 30 million in work, over their whole working life. Once the single tier Pension is introduced at the proposed poverty level, these contributions become meaningless.

The matter becomes worse when this earned pension is viewed and treated as a welfare benefit and the large income received is ignored. This is the present position, with the introduction of the single tier pension being reminiscent of the best misinformation techniques of WWII.

The basic Sate pension will be increased by almost a third to £144 per week in 2016, but it will still be lagging behind the welfare pension credit, now at £142.70 per week, which is available to all. The hard earned second pension, which gave some additional return and living wage income, with SERPS is being abolished and the pension will not be transferable to dependents from an early death.

The majority of those in work are now faced with paying extra contributions, which they can ill afford or facing a retirement future in destitution, even those with such extra provision will find that the new welfare State pension will become means tested and be denied it.

Yet we are facing a demographic crisis, the older population is increasing rapidly but also becoming more dependent on a working population unable to meet the demand as the ratio of those in work to those retired reduces.

The latest DWP Budget figures clearly show this, which is the main reason for such drastic cuts in pension costs, delays in retirement age and the wrongful portraying of State pensions as welfare payments. The real reason for the crisis is however the unfunded nature of the system, contributions have not been saved to grow and meet the original insurance aims.

A person on the average wage, now at £500 per week, together with their employer, pay National Insurance contributions of £100 per week, some 20% of wage, if this money were put away and earned enough to keep pace with inflation, it would after 40 years give a pension of £240 per week.

Many in the maligned Defined Benefit Pension schemes put similar amounts away and receive pension levels up to twice this in a good scheme. If only half the NI income was put away in this manner it would give a final guaranteed pension of 48% of average wage in real spending terms.

Such a change is possible in a controlled manner over a period of 20 years, it is not easy in view of the existing pension burden, but it can be done. The present spend figures do not add up, on State Pension alone they amount to almost £200 per week per head, and overall pensioner spend is similar. This is already well over the full basic State pension of £110 per week.

This is where the effort to make budget savings should be made and directed into creating a fully funded sustainable pension scheme, in which each person in work is self sufficient with a pension pot adequate for the retirement needs of income and elderly care.

Of course, the present State administration would be, by nature, unable to manage such a scheme effectively, but it could be put into other capable hands that can and run on the basis of a NI refund or rebate paid into a sound DB scheme.

In any event, the whole Financial Industry, like the Banks, need a major refit, or overhaul. There appears to be no overall accounting liability and the present Annuity system is outdated with poor returns, at least half of what they could be or have previously been.

John’s Blog No. 122– Pensions

There have been major discussions in the past week on the welfare cuts, however I was appalled and dismayed  by the continuous reference across all parties and experts of State pensions being the major part of the welfare cost.

No reference is made to the large income generated by National Insurance contributions or its main purpose or intention, it is lost in the coffers of the Exchequer as a revenue source, and the same attitude has been applied to the recently aquired Post Office Pension Funds.

This is no different to the action being taken in Cyprus by the EU in the taxation on savings held by the Banks; it is straight forward theft of people’s hard earned savings and shows the same greed and lack of respect for other people’s money that occurred with the major Banks.

Yet the farce of a State contributory pension scheme continues, the high contributions are collected assiduously; recorded; applied to establish entitlement and then squandered or forgotten.

If you fail to meet the minimum contribution level, you can make extra contributions to entitle you to the full basic pension, now at the princely level of £110 per week or £5,600 per year, if you have paid more you could also be entitled to the State second pension.

Of course, if you do not meet these contribution limits or fail to make any payments at all, you will be forced on to the welfare Pension Credit, part of the true welfare cost. This will entitle you to a minimum income of £142.70 per week, some £7,500 per year, in addition you will be automatically entitled to free optical and dental treatment, free prescriptions, Housing and Council tax benefits.

The individual choice is an obvious one, you can work hard, pay your NI and be some £2,000 per year or more worse off or join the welfare mob, where you don’t even have to worry about retirement age as benefit comes from an early age, as soon as you leave school.

It is an upside down world, made even worse when those in charge cannot distinguish between benefits earned by a life time of contributions and true welfare benefits. If the State cannot put this money aside as individual personal savings and manage them to accumulate and grow, then they should pass it on to someone who can.

The same situation applies to the much maligned Public Sector pensions, which are only gold plated for a select few, whilst the majority pay even more contributions for a meagre and uncertain return.

It is time for a change, the increasing and changing nature of the retired population needs to be self sufficient, with their contributions, whether NI or private, put away and made to work. The next General election campaign has already begun, a strong lobby for a fair pension system could be a strong vote winner, even possibly see a return of common sense to politics.

The side benefits are large, present State pension costs could be halved, large investment funds released to secure jobs, create work and mend our failing infrastructure. Some 30 million in work would see their retirement future secured not as a benefit payment, but as a pension pot designed for their individual use.

Such a change is possible and the initial cost could be met by the discrepancies that already occur in State pension spending, which equals £10,000 per pensioner every year, with apparently no one knowing where the money goes as only half ends up in pension payments.

In 2016, we can all look forward to the big bonus of the single tier pension, when the basic State pension is brought close to the pension credit level, without of course the side benefits. The downside however is that this welfare payment will be it, with no second pension and no 5% SERPS rebate towards a private pension, which will therefore also reduce. Hurrah for creative accounting.