John’s Blog 54 – Pensions New Year 2012

This is the time when we look forward to the New Year and our needs and aspirations for 2012; it is a positive time, one of new resolutions, but also a fairy tale time, when one looks at what could and should be.

It is one in which the powers that be, should reflect on what they do and plan, a Jacob Marley time; whether they be Politicians, High Executives, media or anyone that controls what we do.

Self interest should be put aside and the common good and interest of the population of the UK, established and followed. We need to regain internal strength and prosperity.

Pride in work and achievement is a major priority, we take for granted and complain about our basic services and requirements, until we lose them for an occasional day, the blame game dominates.

Public Sector services are a good and recent example, we should take pride in our Doctors, Nurses, Teachers, Police, Fire and all that back them up; also in our Postmen, Local Government and all the numerous charities who work to make life easier.

One of the despicable acts of our present Government is the attempt to divide by envy; the resurrection of the never had it so good mentality, when in fact they should concentrate on the never had it so bad majority.

These are the working population who pay high taxes for very poor returns and little credit and the new generation, who now have to pay to study and then are thrown on the scrap heap whether they qualify or not.

We are in difficult economic times and accept the economies that are needed, applaud the 20% cut in Public spending to balance the Budget, but do they have to be carried out in such a haphazard and ill thought out manner.

It is the easy way out cut services and labour, delay investment and scrap years of existing assets to save labour costs, whether they be fighter aircraft (snapped up by the Americans), schools and hospital buildings, libraries or social buildings, etc.

It is strange that the odd billion can be found to change course or meet a sudden popular demand in public opinion, stated as savings made in Departments, which was the whole object of making cuts, not to spend it again.

We need to assess our basic position,  priorities, aims and objectives, if we need to cut defence expenditure, are we really a world power and can we afford it. We need a little more self interest and let the rest of the world, including Europe, look after itself. Not isolation but preservation!

Should our poor be better off than those in work; do we need to travel faster and faster in high speed trains and cars or should our commuters travel in comfort, preserve our resources for our use, buy British where possible, create jobs for full employment and become more self- sufficient. The list is endless.

Nowhere is this more apparent than in out treatment and attitude to the elderly and retirement and in pension provision. The State takes NI contributions and spends it as part of taxation, without any thought to the future, it is even worse in the Public Services, where it is straight embezzlement.

They pay substantial contributions, which are steadily being increased to swell the Treasury coffers and spent on subsidising other pensions or the general budget for a very meagre return and treated as a charitable benefit. Not as a right as in the Private Sector schemes, which give three times the benefit.

Yet basic reform of all State pensions could give the savings required in the spending review, yield three to four times the final benefits, eliminate the need for present changes, and provide the money needed for the investment required for our infrastructure, future work and prosperity.

All it needs for 2012 is a little vision, good management and change of attitude, plus of course some hard work, which we are all prepared to do if given the opportunity.

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John’s Blog 53 – Pensions – Simplified 7 – Increased Life Expectancy

Never a day goes by without some reference to this, it is used as an excuse to impose hardship and misery and of course save money. It appears to be accepted blindly by all, particularly those who have major control over our lives; Major Institutions; Ministers, MPs and even the CBI and Trade Unions.

Yet there appears to be little study or investigation on the validity of the forward projections of increased Life Expectancy, just the conclusion we will live longer and therefore work longer, pay more and receive less.

The term life expectancy is vague, it is generally taken as the time we have to live from a certain age, usually 65, but this is not true, it is the time half of us may live and is derived from Statistical projections based on Mortality rates, which represent less than 1% of the population.

Over the next 28 years by 2036, the over 65 population is projected to increase from the current 10 million to 17.4 million, some 74%; however over the past 28 years it has only increased by some 18%, from 8.4 million to 9.9 million. This lower rate would only give a projected population of 11.8milion in 2036; the latest estimated 2008 to 2009 figures only show a 1.27% increase per year.

It is only sensible to ask what has changed so dramatically by over a factor four, there has been no anti-ageing drug developed and current major medical advance will take 10 to 20 years in proving trials.

There is no question that people are living longer and the over 65 population increasing, but the main effect arises from increasing numbers reaching 65 and the main question is at what rate over what timescale. We are currently in a peak transfer rate due to the historical effect of increased birth rate after WW2 combined with high immigration figures from Commonwealth Countries at independence. We also have a baby boom.

This illustrates the time scale we are dealing with, not 25 years but 65 or over and this is shown by actual population figures, which give much lower rates than projections for both increases and life expectancy. The population decline for males show life expectancy at 9 years as opposed to the projected 18 year figure.

This is because projections are based on life tables derived from birth, mortality rates and migration. Birth rates are currently 1.2%, which means that the UK population is replaced once every 80 years unless massive migration influx or disaster occurs. This sets the timescale for change.

The lower rates allow more time to adjust and the 2011 Census figures should give a better indication of change rates and I am surprised that they are not yet available, perhaps they undermine current estimates.

There is good reason to question the validity of forward population projections for the elderly, if they do not occur they give more time to act, but they are generally accepted. We need to act now on the basis that they will occur and will lose nothing if they are lower.

This worst case population scenario has been studied by the author and shown to be manageable, if tackled correctly, but not by short term panic measures.

Effectively they are a wake up call to act, State and Public Sector pensions cannot survive this population onslaught in the present unfunded form, particularly as they are currently badly managed, if at all.

Contributions need to be stored, husbanded and made to work and grow to produce individual funds at the lowest cost and provide self sufficiency in retirement, at present levels they could also fund welfare pensions at a good level, provide increased care and care homes for the elderly plus other needs in retirement.

We need to treat pension provision in an efficient, sensible and Commercial manner, we work hard and save all our lives for the peace and tranquillity of retirement and deserve value for money and security. The State has failed if it does not do this and that failure is apparent, it needs to correct this mistake, it has adequate funds from contributions, it needs to return them to members in an independent efficient funded scheme.

There needs to be an urgent serious study of the over 65 population, why it should suddenly increase so rapidly, whilst the rest does not and the validity of the assumptions being made, which do not appear to be supported by the actual or estimated population count.

Major panic decisions are being made on what is no more than supposition, which affect all our lives and future, we need to know why?

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John’s Blog 52b – Pensions – Christmas Extra

Christmas is a period of Peace and Goodwill to all, it is also one of reflection before looking forward to the New Year.

It is a good time to assess our Society, lifestyles and overall living standards and traditions, whether they are Christian or any other faith, particularly in this period of recession and doom and gloom.

If one compares with life of 40 years ago or more, we have never been so well off, but needed the warning shot across our bows occasioned by the Bank collapse and subsequent recession to curb our excesses, greed and self indulgence.

The Bank crisis was more than speculation and greed, it was Money Made Easy with HP, credit cards, loans and mortgages and remortgages; which undermined our basic common sense, beliefs and lifestyle. It pushed up house and land prices well above their real and true replacement value, releasing further shoals of money. We have all been living beyond our means, spending more than we earn and failing to save for a rainy day.

Once upon a time, in the kingdom of reality, one counted the pennies and saved until there was enough money to buy what one wanted, anything extra available or saved was used to build a home or reduce the mortgage to ensure that one went into retirement free of debt.

Debt is an intricate and perceived part of everyday life, no one counts the cost or appears to take it seriously. I was amazed to hear senior Ministers justifying the iniquitous Student loans on the basis that such lifetime mortgages do not have to be repaid until earnings occur and that they were a debt to Society. All progressive Countries look on education as an investment by Society, ensuring their future, how misguided are we now?

This is just one aspect of our decadence, tied in with self-interest, greed, excesses and blame, whatever the incident or accident, someone has to be blamed, justified in a criminal offence, but this should not be so when due to some form of unintended negligence or mishap.

My mathematical studies involved looking at things logically, searching and setting out the facts, checking there is a solution, thinking through the problem, questioning the answers and applying common sense. A basic mind training, which has served well when faced with new disciplines and modern technology.

Yet this general thorough approach does not appear to be used to solve the challenges facing Society today, we do not assess the cost and what we can afford, especially the State, but live short term.

Universal Funded Pensions offer a solution and the way forward, they are a long term commitment like education, work, building a home and bringing up children to a better standard and social sense. My parents worked long, hard and sacrificed much to ensure that we had better opportunities than they did and we profited by it, both in work and attitude to life.

In addition to ensuring a stable retirement future, the long term savings generated, if invested wisely, offer the means to meet 21^st Century needs in Homes, Education, Health, Infrastructure and Employment.

The New Year of 2012 should be used to ensure that such pension changes occur, that we start thinking long term and forget the quick fix solution, which cause upset and strife without solving anything!!

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John’s Blog 52 – Pensions – Simplified 6 – Retirement

If one stands back and looks at pensions from a sensible, logical and fulfilment of purpose point of view, then State unfunded pensions are at the bottom followed closely by the myriad of defined contribution schemes, then the larger ones and then funded defined benefit, none meet the requirements.

For payment methods, none meet the objectives, purely for the reason that all assume a sudden end to years of savings and the final accumulated fund, this money still has a value and there is no sensible reason that it should not continue to work hard after its owner has stopped. It should have a life after retirement.

The larger DB schemes do make their own payments, but fail to separate retired funds from active ones, although some American schemes do. All DC schemes and smaller DB select annuities as the payment method although Private schemes are adopting drawdown for larger funds.

Annuities are based on the co-operative principle of pooled resources, with the death of one member benefitting the survivors, provision can be made for surviving dependents to receive the payments, often on a two thirds basis and guaranteed payment periods of 5 to 10 years are also available as are contract periods.

Such schemes are run mainly by Insurance Companies and payment levels supposedly based on Actuarial tables, but current results suggest otherwise. They appear increasingly affected by short term considerations, dependent on the markets and Commercial gain and like debts even the funds are being traded, sought after by venture capitalists. As usual the State turns a blind eye and when failures occur will introduce a levy.

Historically in 1982 they were an unsustainable 16% and are currently 5 to 6% but fluctuating wildly, over the past year by a third and can even drop whilst being set up. This is a nonsense and unstable, you set a level of savings for 40 years and when it is too late, find that what you have to live on has dropped by a third

It is also unnecessary, large funds have stability and can absorb such fluctuations and should be alive.

Inflation is another problem, if you wish to protect against rising living costs then annuity payment levels drop to a meagre 4%, and longer life expectation is being used to reduce benefits in all form of payments.

It can be shown quite readily that even with the worst forward over 65 population projections, a fund earning a modest 4% can support payments of 6% with annual increases of 2.5%, the average inflation rate over past years. This is a third higher than currently available thus requiring lower contributions.

 One therefore arrives at the best Pension scheme, which was outlined in previous blogs  as a Universal scheme:-

·         Funded defined contribution buying units from 25 to 64, with price defined by performance and age.

·         Super Trusts, associated with occupation, with active funds separated from retired funds.

·         Payments on an annuity style basis at 6%, increasing by 2.5% and guaranteed for 10 years.

·         Flexibility of larger contributions to allow earlier retirement, larger benefits, tax free lump sums etc.

The performance objectives were outlined earlier together with a simple yield factor, the scheme target should be the easy factor 5 based on 6% growth less costs. This means that savings of £1,000 per year should give an inflation proofed pension of £5,000 and matched to increased savings.

If the State were to replace the unfunded basic State pension by a NI rebate of 8% matched to similar contributions in a DB scheme (details in a later blog), then based on the Nest scheme due next year, someone earning £10,000 pa would pay contributions of £400pa to receive a pension of £8,000pa at 65 at current living cost (real terms). At the average female wage of £20,000 this would be £800 contribution and pension of £16,000pa.

Such a scheme is possible requiring a 4% contribution matched by 3% employers, 1% tax relief and 8% NI rebate from the State. This would stabilise pensions, giving a guaranteed outcome fixed in real terms, effect large savings for the Treasury and taxation with costs fixed at 50% NI income, and release large sums for investment of some £100bn per year to create jobs and growth.

This is the obvious and sensible way forward to secure retirement.

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John’s Blog 51b – Pensions – Europe Extra

Christmas 2011 is looking to be a doom and gloom event, a Scrooge Festival, with dire financial misery predictions leaving little to celebrate. Yet is it all real or just a fairy story?

One gets the impression that we are talking ourselves into another recession and the Euro fiasco does not help, with the Euro position not advancing one jot. Central Bank intervention would pacify the markets but Germany is opposed, either through dithering or design. Neither bodes well for Europe’s future and Britain stays on the sidelines, perhaps the best place to be.

A single currency requires true democratic Political Union, which is unlikely to occur this Century whilst self interest dominates the scene, the alternative is a Dictatorship, which works well in a crisis, but outdated in this modern age. Yet that is what seems to be occurring.

After the week’s events, Britain appears to be isolated, divorced from the rest of Europe, of course this is not the first time this has happened and the historical similarities are too close for comfort.

This time it is on the Commercial battlefield, Industrious Germany has good commercial strength, with a positive balance of payments, the rest are weak and riddled with debt including Britain, which again is the only strong political opponent. The European Commission has been steadily chipping at Sovereignty.

The new Treaty will remove the final barriers, approval of Financial Budgets will be needed before individual States can consider them, completing the Central control and the Federal States of Europe will be born. The imposition of fines on offenders is like stealing money from a beggar’s cap.

However Public opinion in Europe will be ignored, as any referendum would be lost and such a step must be taken in peril in this modern communication age. Meanwhile the major problem of the Financial system’s excess and the indulgence in Political activity will not be curbed.

As in previous times, Britain needs to stand back and assess its own position with self interest at the front; the only sensible part of European Union the Common market will continue. We depend on 40% of our exports, but what of our imports and balance of Trade with Europe, which is larger.

We import £4bn per month more goods from Europe than we export, the same as the rest of the world who take 60% of our exports. The total deficiency of £8bn pm is halved by the export of services, now under attack.

However can we afford a rift with Europe, w e are too dependent and need to exert a stabilising influence against excesses, on the other hand can they?  We need to return to the basic trading treaty and forget the Political Union we have never been asked to agree to. Increasingly every day we are being controlled by faceless bureaucrats from Europe, told what to do and fined if we don’t obey, with idealistic, petty and pointless rules and regulations, which cost us dear and are not democratic.

 Can we afford our world role and do we need it, Germany spends virtually nothing on world affairs and is the stronger for it; we need to temper idealism with realism and to separate internal and external economics. We spend a quarter of our GDP abroad and build up international debts of £45bn per year which needs to be curbed; there is no need to break trade agreements, just to make the population aware of the true cost of French apples, Dutch flowers, German trains, American arms  and Far East toys on a £4 to £1 basis.

We need to earn what we spend, as a Nation, a Government and as individuals; self sufficiency is a good ideal and needs to be practised more in our homes and Society. We downgrade ourselves perpetually, yet as a Nation we have many strengths, often hidden and have much to be proud of in tradition, lifestyle and expertise, which needs to be developed and built on.

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John’s Blog 51 – Pensions – Simplified 5 – Retirement

We need first of all to look at the overall picture and current position. The object of any pension scheme is to make provision for an adequate income in retirement with sufficient flexibility to choose when and where and ensure security and guarantees.

Recent developments in longevity and market returns have put that objective at risk, in fact there is:-

            Panic over Population and Pensions and nowhere is this more apparent than with the Government.

The over 65 population is projected to double over the next 30 years, this appears to be accepted without question and yet little work or detailed study has been carried out in preparation for this with logic and common sense applied to the problem.

In fact the approach is similar to driving a modern car at 70 mph on the cart tracks used by the Model T Ford, doomed to fail. The cart track is the unfunded nature of State schemes and the dependence on an unstable Financial market by Private schemes. Both need modernisation.

State schemes are in the worst position, they are based on a “pay as you go” system which uses current income from contributions to pay current pensions. This defies the fundamental principle of pension provision, to put savings aside for one’s future needs, but they are the key to solving the problem.

Over the years the State has squandered these savings on current expenditure, instead of investing this money in Capital projects which could earn income and grow, but it is not too late to reverse this folly.

At present there are 29 million in work paying NI contributions to support the 10 million over 65’s, roughly 3 to1 ratio, which is projected to rise to 20 million and 3 to 2; the Public Sector is already at 3 to2 and will change to 2 to3, hence the panic measure on working longer, paying more and receiving less.

These 29 million assumed that their NI contributions would support their old age pension, however the State has reduced this to poverty level, refers to it as a benefit and insisting that they should now contribute towards their pension future in a new scheme “Nest” starting next year.

This opt out by the State is not fair or logical, when is a pension contribution not a pension contribution, when it is paid through National Insurance. Contributions are high with each paying 11% from wages and Employers contribution a further 13%, a massive 24 %, which in a normal funded scheme should yield a final pension of 120%. Public sector pensions are even worse with even extra contributions of 19%.

However the panic, doom and gloom is not justified, if one takes the worst over 65 population projections and compares the population with the pension fund survival, one finds that a Fund income of 4% will sustain inflation proofed payments of 6%.

If one now applies this to the current State pension, then transfer of capital assets yielding 4% could be used to meet the current pension liability, (or a State pension Bond created); effectively one is creating a pension Fund to meet liabilities. New money, from say the new contributory scheme, would be needed to make up the third shortfall in payments, buying these assets as part of its fund build up.

For the basic State pension this would release the current payments, allowing them to build up in a good funded scheme manner, giving retirement self sufficiency, the only solution to population changes. The advantages are large, besides enabling a stable and secure pension scheme, benefits increase substantially as would confidence and large amounts of investment money released to create economic growth and work.

Public Sector are simpler, at least as far as the unsubsidised NHS Teacher, Police and Fire are concerned, all are in contributory schemes and the NHS has sufficient surplus to become independent today. However the Government refuses illegally to treat the schemes in a proper funded manner. The approach via Hutton is blinkered without considering alternatives, it is a good deal only when compared with nothing.

The problems of the Private Sector schemes are not as great and arise from the dependence on the Financial Markets and Insurance Companies (annuities), historical generous pensions and the inequality of final salary schemes. The large salary increases, usually in later years, leaves no time to build up pension entitlement from contributions, resulting in subsidy by other members; frequent large market fluctuations lead to Fund instability, which also occurs with large annuity changes that many depend on.    

This will continue in the next blog, together with the viewing the population myth.

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John’s Blog 50 – Pensions – Simplified 4

Investment returns are the basis of any good pension fund management but like everything else in pensions have lost their way in the fast buck financial society and the gambling casino of the Stock and Futures market, speculative trading in Currency, debts, property and even pensions.

Pensions need stable and long term investments which increase in a steady and possibly modest manner, previous blogs showed that these can yield adequate and secure returns on present contribution levels meeting both population and inflation increases.

Even in the present recession, saving returns of 4% are still available over 1 or 2 year fixed after charges;  pension funds are still reporting returns o around 6%;  internet comparison sites report monthly saving investment fund returns over 10 and 20 years of 7% and American PS funds report 25year yields over 9%.

Commercial and Company investments aim for 15 to 20% which is often exceeded, PFI in Hospitals and Schools suggest even higher returns, mortgage and Equity release rates are over 6%; Banks and Credit cards charge 18 to 29%.

It is therefore not unreasonable to expect modest returns of 6%, after costs and charges, on long term pension savings and to plan forward on these; infrastructure projects should be able to readily pay such rates, as should rents on housing, hospitals, schools etc. Pension funds are already financing Shopping precincts, Supermarkets, Office blocks and Industrial Estates.

Higher risk can still play a part giving higher returns in large funds and the early year savings, the idea of Super Trusts in pensions has been put forward (NAPF) and large funds offer stability and security; they can absorb income fluctuations, reduce charges and often dictate terms to the benefit of members.

In the consideration of the pension mechanics of funded schemes, the concept of pension yield factors was introduced in order to simply predict and monitor pension saving performance, which was related to investment returns, inflation and number of years of contribution savings.

This showed how over-contributed and under-performed current pension schemes are, particularly the State who are tied up in the pernicious pay as you go trap, which needs to be broken. If the money was made to work properly, there would be none of the problems of affordability; State expenditure, life expectancy with its delayed retirement or reducing benefits and poverty in old age.

It may seem like Utopia but it is possible and the new universal pension contributions could allow a smooth transition to this Mecca over the next ten to twenty years. The benefits are enormous not just to pensioners but to the State and the whole population, creating a revolution equal to that in the 19^th Century which transformed the whole of Britain. It just needs similar faith and vision for the 21^st Century.

Unfortunately our Politicians do not appear to understand this and are too tied up in the status quo and unreceptive to any major change. Fortunately the new current communication technology allows everyone to research, think and use their voice, e-mail, text, chatter, etc. to force change, make the Academics, think tanks and eventually the Politicians to take off their blinkers, look around, take note and act.

Let us hope it happens soon before it is too late, we all need to make major changes in our attitudes, aspirations and living styles to create a future for our children and grandchildren, it is their right.

 Savings   Annuities        Public Sector   NHS         Teachers   Police   Local Government    Hutton   State Pensions

John’s Blog 50b – Pensions – Public Sector Strke – Aftermath

The one day strike is over, with its expected disruption, which hopefully will not re-occur, the overall impression was that the Government is not taking this matter seriously or responsibly. Cameron refers to a damp squib and his friend wants to shoot 2 million Public Sector workers, this is effectively what the Government is doing anyway with its changes although more like penal servitude in retirement.

That this was not as disruptive as it could have been was because those on strike were matched by more who wished to but put their duty first to provide emergency and essential services, many on strike had never taken action before in their lifetime.

Although they now be starting talks again, the basis appears unchanged and does not meet the long term needs, There is talk of generous terms and benefits and “gold plated” but pensions are nothing like; would you to pay £3,700 per year for 40 years to get a pension of £5,000 over possibly 20 years or less.

It is not even their money back, let alone inflation and with the changes proposed they will be lucky to get that; these changes are a taxation on the pension scheme, the NHS are already paying £2 to 4bn per year and this is set to double or treble over the next ten to fifteen years.

The State pension is as bad, NI contributions count for nothing and are treated as taxation revenue, there have already been successive rises and at 24% have probably reached the maximum possible, hence the transfer to increase PS income and the new Nest pension scheme next year.

All in work should be concerned and not be diverted by the envy red herring, having reduced State pensions down to below poverty level it is moving on to its next victims, be afraid, be very much afraid. It is their turn next year, when they will all face contributions for the new scheme of 4%, £8 per week for someone on a £200 wage, twice that or more for those on average wage.

In its accounts it treats State Pension as “benefit”, not a hard earned right, showing the attitude and the single tier pension proposals, not widely publicised, will abolish the State second pension and the SERPS NI rebate, leaving all on a pension below pension credit benefit level.

The Government should spend its energy getting everyone up to a gold plated standard and putting the hard earned savings into a Capital account to work and grow. It is getting the message to invest funds into infrastructure, but asking Private funds and the Chinese to find the money.

It currently collects and spends on pensions some £100bn per year from NI and PS contributions, if this money was spent on infrastructure and other National investments, even at a modest 4% return over the forty year work period it would grow into a £6,600 billion Fund yielding an annual income of £260bn and supporting individual pensions of £19,800pa for double the present over 65 population in today’s terms.

This is the advantage of the transfer to a funded scheme of both State and Public Sector Pensions and it could occur over the next ten years if the Government set its mind to it. The current pension liability would need to be met, but the State already owns more than adequate infrastructure assets in buildings, schools, hospitals,  and even Bank Investments to raise the 4% return needed.

The advantages to all concerned would be tremendous:-

·         Pensions levels would rise dramatically, by a factor 3 or 4

·         The State would save amounts greater than the spending review cuts in benefit and future expenditure

·         We would get the sorely needed infrastructure of Buildings, Transport, Energy and Social needs.

·         The Economy would grow, Unemployment fall; the Autumn Statement doom and gloom disappear.

·         New Life and Pride would be injected into the Nation to replace the moans, hardship and envy.

It just needs the Will and Vision to effect this change, and the People need to force its adoption.

 Savings   Annuities        Public Sector   NHS         Teachers   Police   Local Government    Hutton   State Pensions

John’s Blog 49 –Pensions Public Sector Strike

The Strike now seems inevitable, as a person I dislike strikes, they are disruptive and penalize the general public, but on this occasion the Teachers and NHS workers have a just cause, which has not been listened to.

It is as if the Government wished to provoke this action in order to bring the cause into disrepute, there appears to have been a policy of misinformation and a failure to disclose the facts on Public Sector pensions. There has been a firm intent to create envy and a distortion of the limited figures available, pensions for the majority are not gold plated and offer poor return on contributions made.

In Pensions overall the sums do not add up and the figures do not make sense, nowhere is this more apparent than in the State and Public Sector Pensions,  The Hutton report gave no real facts, figures or details on the different schemes, their viability and actual financial state and followed closely an earlier CBI report. In fact it is uncertain whether these even exist or anyone in the Government understands them.

All give conflicting and varied statistics and reports almost designed to confuse and older pre-election information has been archived and not readily available. Freedom of information has become misinformation

The solution to the present dispute is simple, return the unsubsidized pension system back to its members. They all pay good contributions in addition to the NI State pension and therefore have the right to run their own schemes without Government interference.

Total contributions are no different to those paid in private DB schemes, the conditions and benefits are much less and with the frequent reviews are diminishing steadily with less security. In a private scheme with the same contributions they would receive two to three times the pension, linked to what they paid in; choose when they retire; with annual information in an efficiently run and well managed scheme.

The average pension in the NHS is £6,000 (GAD report) for their contributions of 6.5%, SERPS contract out of S2P of 5.1% and employers contribution of 7.3%, which should give a pension of half their final salary or more. Yet they only get a further pension equal to the below poverty State pension, are expected to increase contributions by 3%; work longer with an uncertain pension which may not even keep up with inflation.

A nurse on the average female salary of £20,000pa has contributions of £1,300,SERPS rebate of £1,020 with employer contributions of £1,460, which even in a fund keeping up with inflation would yield a pension of £9,600 and double this in a good scheme. GAD figures indicate £5,000, almost half this figure.

It is not surprising, but lamentable that they are reluctantly reduced to strike action; the fault lies completely with the Government, who having completed and agreed a lengthy review in 2008 now want major drastic changes for the worst. They want further annual reviews; large increases in contributions, etc.etc.

The real problem is that the State has squandered the Pension Funds and is now forced to pay pensions from existing members contributions as they receive them, as an unfunded scheme, this is a clear abuse of savings and anyone else would be sent to prison for the criminal misuse of monies entrusted to them.

At present in the NHS total annual contribution income is £8bn and exceeds pension payments by £2.1bn (OBR), although earlier figures showed £3.6bn (GAD), even in a modest funded scheme over forty years, this should yield payments of some £20 to £28bn per year, four times the present pension levels. They could run as such a successful funded private scheme, free of State interference, if allowed and even meet existing pensions, which are clearly a State liability.

Police and Fire are in a similar position, although Teachers only break even due to more generous pensions, the Civil Service, Armed Forces, MP’s, etc. are subsidized with little or no contributions, whilst Local Government  have good Funded schemes. It is little surprise that dissatisfaction occurs.

The only sensible and long term solution is to change the unsubsidized Public Sector schemes into normal funded member schemes free of State interference and involvement, in the way any normal employer would do, as University and similar schemes. Existing pension payments are a State liability and should be paid by the Government, although the current pension liability could be afforded and met by the new schemes.

Even the projected population increases could also be met, without the major changes being proposed and with substantial cost savings to the State who would relinquish all liability for future pensions and large benefits to members with a secure retirement future.

I am one of the lucky older retired with no axe to grind.

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John’s Blog 48 – Pensions – Simplified 3

The main objective of saving for a pension is the end result of retirement and drawing of pension income and the Fund must be large enough to give adequate payments and survive the life expectancy of the pensioner. This is achieved for the majority of private pensions by means of an annuity.

An annuity is a form of co-operative in which funds are pooled and the survivors benefit from the earlier death of other members. Usually run by Insurance Companies, they are based on complex actuarial calculations derived from Life tables and mortality rates.

At retirement, funds still have an earning capability and the resultant income can extend the life of the fund, in some cases it can even meet the pension payments; in many ways it is not logical that funds should terminate at retirement and payment arrangements are therefore becoming more flexible.

The population decline from age 65 can be balanced against the fund decline for any given payment and investment income levels in a straightforward spreadsheet calculation to establish the sustainable payment in which the fund and population finish at the same time. This can be done for the existing or any future over 65 population decline distribution.

Such calculations show that a 4% investment income can sustain a payment level of 6%, inflation increasing by 2.5% per year, even with the latest 25 year projected population increases and has been used as the basis of pension yield factors.

Annuity returns have been dependent on the stable returns of State Gilts and Bonds, but these have been subject to increased speculation and market fluctuations making them unstable, in the 1980’s rates were at an unsustainable 16% and have dropped steadily to 6% and even 4% for an inflation proofed annuity.

This is another major factor in the poor returns available from annuities; a drop from 6 to 4% means that a given fund will only yield two thirds of what it could be and fluctuate wildly even whilst setting it up. Over the past six months the pension yield from a £50,000 Fund has dropped from £3,240 to £2,600 per year for an annuity which does not increase with inflation.

Furthermore it is not possible to delay taking this annuity; the lack of flexibility and cut off date make pensions unstable and unreliable, but why should this be; the money is still there and without earning a penny would last some 19 years, the life expectancy at 65.

There is good reasons why in a pooled fund, as suggested in previous blogs, that rate fluctuations should  be smoothed out and sustain a uniform pension regardless of retirement date and much higher, by a third on existing rates. The money can still earn income and in some schemes continue to grow after payments.

An alternative is Drawdown, which keeps the fund intact and earning whilst paying out a monthly income; this can also leave a residual sum for heirs. The money of course does not go as far and is subject to annual Revenue controls on withdrawal rate is costly to manage and only available for larger funds over £100,000.

More flexible annuity schemes are becoming available which allows contracts to be renewed every five years or so, with rates dependent on market conditions at renewal and residual funds available

The real answer is large stable funds well managed and secured in stable investments and investments will be dealt with in the next blog.

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Johns Blog 47b – Lest We Forget

Another Armistice day has passed but the Spirit of Remembrance is still as strong. I, like many, have good reason to remember, my father fought throughout the war; my brothers served and my uncle fought in both World Wars. I spent my youth in WW2, was evacuated four times, returning to London for the main events of the Blitz, when we were bombed out and for the V1 and V2’s. We all thankfully survived.

We should also not forget the reasons for these wars, to prevent European domination by Germany. It is even more important at this time, when it is occurring by the back door of Commercial strength, many of us have forgotten the basic economic rule of balancing our Budget to pay our way in the Global economy.

Germany has not, aided by the large cheap and hard working labour force of Eastern Germany, it has maintained a strong manufacturing capability and self sufficiency with a good balance of payments.

One should not underestimate the Teutonic thoroughness or ability to plan ahead, which caught all by surprise in the past, although hopefully they may still not have the ability to think and carry things through.

Through the European Union, it has tightened its grip on Europe with the move for a United States of

Europe, which it aims to control. The delays in calming the Euro crisis in Europe, appear deliberate and

dangerous, they could be cleared and the markets pacified by Central Bank action.

The results are of course the replacement of democratically elected leaders by Euro-puppets in Greece and Italy, soon Spain and possibly France, although they are already most of the way there.

Britain is once again the main barrier, but we ourselves are commercially weak, with large World trade balances and indebtedness. We have taken our eye off the ball and lost the plot, embraced the global economy before it existed, lost our manufacturing base and self sufficiency and need to recover it.

The basics of economics also appears to have been forgotten; the internal economy can be allowed to grow, subject only to the need to balance the external economy, i.e. the balance of trade. The cost of goods and services is related only to their imported content; home produced labour, food and raw materials cost nothing in internal terms as long as the demand for imported goods are controlled to match exports.

I am not anti -Europe or anti- German but we need to keep things in perspective; the Common market was good and necessary; Total Union is a delusion except by a dominant Dictatorship, unacceptable in modern times. We are all individual countries and should value our tradition and culture and fight hard, as we did in the past for our independence and democracy.

“The path to hell is paved with good intentions” and the approach is devious; create dependency by benefits e.g. agricultural policy, then by debt; undermine T & C by regulations, migration, edicts and common currency, until full control is obtained.

Although National debts in Euro countries are large, no one gives the external debts to the Far and Middle East and America, if they are just internal within Europe, why should they be subject to punitive interest rates, is it just profiteering or political ? and not part of a single currency problem.

It is difficult these days to decide what is real; what is media and what is political misinformation; of course you cannot call a spade a spade without political connotations, being racist or against human rights.

What we need is some good old plain common sense, but of course that is out of fashion and breaches some edict or other, probably European.

We should still all plan for a strong future in Europe, but one based possibly on old fashioned democratic virtues of equality, liberty  and fraternity, in which individual countries retain their identity, culture and tradition, whilst working for common growth, prosperity and security. These were the original aims of the Common market, distorted by political ambitions.

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John’s Blog 47 – Pensions – Simplified 2

Pension schemes divide into two categories unfunded and funded; the State and Public Sector are unfunded, where contributions are spent as soon as they are collected and effectively the State issues an IOU promise to pay these when due. Of course it has to be able to afford it in 20 to 40 years time as it has no accumulated funds available to do so and increasingly it has found itself unable to meet its liability.

This is the underlying reason for the current dispute with the Public Sector workers, where the Government wants to increase contributions and reduce benefits to make ends meet, in spite of recent renegotiated terms.

In funded schemes the money is accumulated and invested to build up a pension fund, which should be there on demand to give a stable and secure pension provision, besides the guarantee advantage over unfunded schemes there is also the investment income which can equal or even exceed the contribution income.

This should therefore in practice halve the cost of providing a given pension income, which should also be boosted by the longer working life compared with that in retirement. One should therefore expect that saving a quarter of one’s income would yield a full wage on retirement in a funded scheme.

That this does not occur is one of the major failures of modern pensions and this will be considered more fully later, however one of the main reasons is that pension contributions are not treated as personal and individual savings, which in fact they are and therefore should be protected as such.

The basic mechanic of funded pensions are not difficult and involve straightforward calculations of money accumulation and compound growth,, similar to savings and mortgages. One can obtain simple factors relating annual contributions to final fund  and even pension values allowing one to establish expected pension from given contributions, or savings needed for a pension need.

For example if one saved £1,000 per year for 40 years then £40,000 would accumulate plus any interest or investment income earned, if this was at 6% then average interest would be 20 years at 6% on £40,000, giving a factor 88 times annual savings ((1+1.2) x 40).

This would be in actual values, but one is really interested in its spending power at today’s values, i.e. in real terms. If wages and hence contributions together with Fund growth keep pace with inflation, then in real terms after 40 years the fund yield factor would be 40, if this fund then paid out at a rate of 6% pa then the pension yield factor would be 40 x .06 =2.4.

This is therefore the minimum factor to make savings worthwhile, otherwise you are losing money in real terms, i.e. spending power is reducing with time, which happens with many schemes. The factor increases as the investment income or growth exceeds inflation, over 40 years at 4% it is 3.4, rising at 6% to 5.7.

It is easy to use, £1,000 per year over 40 years at 4% should give a pension of £3,400 per year, rising to £5,700 at 6%, or in percentage terms contributions of 10% pa should give a pension at 4% of 34% of wage or at 6% 57%, all in real terms. This is for all contributions made and assumes wages and hence contributions keep up with inflation.

Current schemes rarely meet these levels due to several reasons :-

·         Tax Free Lump Sum which increases contributions by a third taking a quarter of final fund

·         Poor Annuity performance and overgenerous payments

·         Excessive Costs and charges, Protection levy, dividend and other taxation including VAT.

 On normal savings, interest returns are quoted after all costs, i.e. nett and this also occurs on investment funds, annuities and payments, but not for pension savings. They are also charged as a cost on total Fund value, which becomes increasingly excessive as the Fund builds up and can include setting up charges to ensure early income. Charges on well managed schemes can however be very low and competitive.

Pension protection levy arose due to the commercial failure of some major schemes and subsequent loss of pension funds; this was a failure of State regulation and control and would have been less likely if funds had been treated as savings making it a full criminal offence, readily pursued.

Taxation is a short sighted Government policy, prompted by greed and leading to the steady demise of good pension schemes. The next blog will deal with Investment returns and sustainable annuities and payments.

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John’s Blog 46 – Pensions – Simplified

The next few blogs will attempt to explain pensions in simple terms or as near as possible, on the assumption that previous blogs were too difficult.

The nature of pensions, their aims and objectives, timescale, pension mechanics and implementation; many of these appear to have been lost, forgotten, ignored or just not understand, but all are important.

The nature of pensions is to save for retirement and old age, the aims and objectives to put money away to accumulate and grow into a personal pension pot large enough to give an adequate income to meet the needs and enjoy life after work.

The State forgot this many years ago, when they started using the savings from National Insurance contributions to pay existing pensioners in the pay as you go” unfunded schemes, which are a mis-use and abuse of members hard earned wages and savings.

The timescale is long, at least 40 years, the longer the better and the more affordable it becomes. The ideal time to start is when normal life in work has settled down and a regular income is being earned; the time scale between age 25 to 65 would appear to be a reasonable one.

The State pension has been the mainstay of those in work since the start of National Insurance for those in work to provide for unemployment, ill health and the time in old age after work is complete. Then the Welfare State steadily took over many of these functions, absorbing greater amounts of the money available.

Pensions became starved of money, their aims forgotten, any funds available were raided and distorted into the present unfunded system, annual increases failed to keep up with living costs until they fell below the poverty level. Even worse the minimum benefit level rose above basic pension level by almost a third.

To compound matters, the outdated eligible contribution year requirements were maintained resulting in less than half of females qualifying for full pension, although most males do. At basic full levels of £102 per week, reducing to £62 or less, all were forced into benefit.

The decline of pensions into poverty, with the resultant inadequacy, led to the growth of private schemes, at first as Company schemes on a defined benefit basis and then as personal ones on a defined contribution one. DB schemes guarantee the final pension outcome based on the numbers of years service i.e. contributions and final salary, DC schemes were subject to financial market fluctuations and therefore uncertain.

The State system has failed and will get worse as retired population increases take their toll, it is up to the  individual to make provision for his own retirement future and demand a fair return for pension contributions

The next blogs will attempt to explain in simple terms how this might occur, dealing with basic mechanics of pensions, their implementation and needs, with the possible ways of achieving an adequate result.

Meanwhile a diversion, we are obsessed with time and speed, whether saving a few minutes by overtaking dangerously or in the new high speed train link, which was approved by a Common’s Committer this week.

At a cost of £34bn it will save 20, possibly 40 minutes off the London to Birmingham travel time, which will be wisely spent waiting to board the train or crossing London, or can be wasted, spent sitting for longer in a train. One could eat a good breakfast, use modern technology to read documents and mail, write reports, talk to the office, or otherwise sit back and enjoy the beautiful scenery as it passes by at a safe speed.

This modern high speed technology is supposed to improve rail travel and capacity, yet stopping distances increase rapidly with speed, at 200 miles an hour it is four times that at 100 mph, and four times the several miles of spacing between trains, a quarter of the capacity, needing dedicated lines and restricting other traffic.

Of course this investment will improve employment in Germany, losing jobs here. There must be better ways of spending this money, directly to promote growth, the Severn barrage to meet energy needs, or badly needed houses or even conventional railways and other transport means, which would improve capacity.

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