John’s Blog No. 14 Pensions – The Budget

This blog was delayed until after the Budget and possible changes to pensions. whose main points are:-

·         Universal pension rate around £140 per week; £7,280 pa, some 28% of average wage; correcting the unfair difference between the basic pension and the higher Pension credit. 

·         Tax and NI administration to be combined

·         Adoption of the Hutton report on Public Sector pensions

·         Delayed retirement age to match longevity

Effectively these herald the cessation or opt out of State contributory pensions with NI being recognised as a Welfare tax, effectively bringing the basic tax rate up to 43% and the higher rate to 63%. It is also hoped to make PS pension self financing which is impossible with an unfunded system.

Of course this will be strongly contested as not the aim, but is the logical conclusion from these moves and the overall obsession with cost cutting.

The Universal funded DB contributory scheme outlined earlier (blog 13) offers an alternative scheme, with the potential for large savings in pension expenditure and immunity from longevity effects.

In order to consider further the transition to a funded scheme, one needs to deal with a few facts and figures, as published by the Government, associated with the current pension position.

Pension sums do not add up or make sense

·         State  expenditure on pensioners is £93bn, with £32bn in SERPS / tax relief; total -  £125bn

·         Public Sector is £25bn; private pensions £51bn; total - £76bn;  an overall total  of  £201bn

·         Population over 65 is 10 million giving £20,100 per head; 80% of the National average wage. State expenditure alone gives 50% of NAV.

In addition Private pension contributions amount to £82bn.

These figures indicate that, if fairly distributed, there is adequate money in the pension system in fact it is over contributed, particularly if allowed to accumulate and grow fully in a funded system.

The State schemes are based on an unfunded system which is financially unsound and bad husbandry. It is spend today without any provision with what you will need tomorrow.

A sound and secure pension future can only be built on a well managed self sufficient contributory system, which separates out earned and welfare pensions.

The transition pain, which is dismissed as impossible, would be short lived and no greater and more rewarding than the financial bail-out of the Banks. The current spare capacity could ease this pain.

Pensions like the rest of the financial sector are dependent on faith and goodwill. Contributions are made and invested in assets where they should accumulate and grow into substantial funds, which do not have to be repaid. At retirement they are paid out almost on an interest only basis until the death of the member / dependents, although funds may be transferred to other parties, e.g. Insurance  Annuity.

Assets must therefore be capable of meeting these liabilities, but advantage can be made in group co-operatives of the population decline for a given age due to progressive deaths, which is made in annuities and defined benefit schemes. One death is another's gain. 

Pension payment rates are dependent on Fund investment returns and group survival/longevity effects.

It can be shown that a 4% investment return will sustain a 6% pension payment, on present longevity predictions, which increase by 2.5% pa to meet inflation.

This can be used as the basis for liability projections in the transfer to a funded system. The next blog.

John’s Blog No.13b Pensions – Public Sector Report

There is a well known quotation that says “There are lies, damned lies and statistics”.

The current controversy over Public Sector Pensions in the media and the various reports remind one strongly of this. Nowhere does it apply more widely than in pensions, where they are used to confuse.

Statistics are factual; errors occur when they are applied out of context or more widely than intended.

The final report on Public Sector pensions has now been published and appears to offer little new from the interim report, in spite of the consultation period. The approach is limited with the main emphasis on dire predictions of increased life expectancy and the potential taxpayer costs.

The report, like the interim one, is taken up with complex mathematical models and jargon which appears designed to confuse and does. It is doubtful whether the authors even understand it, I don’t.

It advocates transparency but does not practice it. There are no actual facts or budget figures giving income and expenditure for schemes; costs are given at £25bn and projected to rise to £33bn by 2015.

Such figures are hard to come by; Pension Trends give Private but no Public scheme values; Gad 2009 gives average salaries, pension and member details, but information is spread over other reports.

The Blue Book gives PS contributions as; mpe-£6.7; mpr- £7.9 and social (SERPS?) -£5.1bn, which corresponds to averages of 6.5%, 7.3% and 5%.

The report gives NHS at 5-8.5%;Teachers at 6.4%; Police/ Fire  at11-8.5%; Civil Service at 1.5-3.5% ; armed forces nil and Employers at 14% for NHS and Teachers, with the others almost twice this. There is no attempt to separate out the subsidised areas, although higher earners are dealt with.

Expenditure figures available suggest a healthy £5bn surplus in the fully funded NHS, Teachers and Police/Fire at income of £19.2 and expenditure at 14.2 bn and does not justify increases.

In fact SERPS is an employee contribution (waiver of State pension rights) and not employer as generally taken. Adjusting this gives average employee at 11.5%. proposed increases of 3% would give employee at 14.5% rising as high as 19%, with employer at 4.3%, worse than the worst private scheme.

Change to a funded system are dismissed as not needed as pensions are guaranteed by the taxpayer, and yet there are screams at present costs. Change is said to cost £20bn per year but has not been justified.

The panic over increased life expectancy is the scapegoat for all changes. A chart comparing 1950 to 2009 is given, and an example of a woman retiring at 60, stated as spending 45% of adult life in retirement, with the aim to reduce this to a third.

The sums do not add up, life expectancy is given as 24 years to age 84, some 68 years of adult life, which only gives 35%, close to target, also only half these women will reach age 84.

1950 was the post war deprivation period; the NHS and major health and safety campaigns have made massive inroads into mortality rates and it is debateable whether this will continue much further.

Selected pension schemes abroad were considered, but the successful American PS scheme ignored.

The attack on PS pensions is gathering pace with all the technological weapons of the media being deployed and is based on creating envy by using distorted, exaggerated and questionable statistics and facts, e.g. “The gold plated scheme, paid for by the  taxpayer, which the rest are denied”.

 In fact the majority are not; they pay substantial contributions with normal Employer and SERPS for a meagre pension of 25%. Change is needed in the taxpayer subsidised areas of Civil Service, Armed Forces, MP’s and higher earners. The basic flaw in unfunded schemes also needs attention.

The counter attack from representatives and unions has been non- existent. There are now threats of outdated strike action which will only alienate public opinion and support.

Effective action would involve:-

·         Action on the legality of the unfunded scheme; these are hard earned personal pension savings, which are not allowed to accumulate and grow but diverted to benefit someone else.

·         Promoting the real facts of PS pensions; contribution and benefit levels etc. for the majority. These contributions are additional to NI pension provision that others depend on.

·         Demanding full pension fund accounting for each scheme. Available information is disjointed.

·         Questioning statistical projections and relating these to the unsustainable nature of the scheme.

·         Dissociation from DB Private scheme contraction which result from excessive benefits, taxation, contribution holidays and poor management.

·         Accepting the reasonable changes needed

·         Strong promotion of the Public Sector, its service and devotion to the community.

·         The Social- Economic advantages of the Public Sector and their income and pension spend.

In the absence of such action, all of the 5.4 million workers should mount their own counter attack. They should write, text, e-mail their representatives; Unions, the media; MP’s; and Government Ministers.

The solution of increased contributions, delayed retirement, reduced benefits is only a short term one. The basic “Pay as you go” system is uneconomic, cannot be maintained and is grossly unfair.

The general public should also be very much afraid; the State pension system is built on the same unstable foundation and is already undergoing similar changes of increased NI contributions, delayed retirement and decreasing benefits. Private pensions are moving in the same direction (see other blogs)

Savings   Annuities    Public Sector   NHS   Teachers   Police   Local Government    Hutton

John’s Blog No. 13 Pensions - Proposed UDBC Pension Scheme – Implementation

The major problems in implementation occur within the State in the current unfunded “pay as you go” system. Existing funded schemes could adapt or transfer, but would need policy and attitude changes.

There is no provision for pensions whatsoever within the State. It is treated as benefit expenditure and although contributions have been received from NI, together with additional contributions from Public Sector workers is ignored. Pensions are treated as a burden on the State yet could be a major asset.

It is therefore difficult to transfer to a more sensible and economically viable funded scheme and has been written off as impossible in successive reviews including the latest Hutton report.

One has the strong impression that successive Governments; the Financial Institutions; Trade Unions and other bodies do not understand the basic mechanics of pension savings and repayment.

Where else can one get a steady investment income guaranteed for forty years, linked to GDP, that only has to be repaid at a trickle rate of 4 to 6% after that time, probably covered by investments returns. There are few controls or liabilities and for defined contribution schemes no risks or commitments.

In fact the money does not have to be repaid on demand and the sums in funded schemes are large

 The other factor in funded schemes is the disruption that occurs on retirement when funds are cashed in to buy annuities or other guaranteed income. This is unnecessary in well managed schemes where  income from the fund build up should meet a major part of repayment allowing fund continuity to occur.

The simplest way for the State to change to a funded scheme would be for the State to transfer assets to create a pension fund, or alternatively issue non negotiable Pension Bonds. In either case the rent, interest or investment payments would need to meet current pension liabilities. This could be transitional, meeting current pension liabilities immediately and new ones as they arise at retirement.

The long term benefits would be enormous both economically and socially, giving security and stability.

The main proposals of the UDBCP schemes are self explanatory and implementation would require fundamental changes in attitude and approach and adaptation. This could mean a move away from the traditional pension regime to a more co-operative approach of mutual based Pension Societies, Housing Associations or completely new institutions. The business opportunities are large.

Pensions need to be treated as personal individual savings and ownership firmly established. They should fairly reflect the contributions (savings) made and separated completely from the welfare unearned pension.

In a well managed funded scheme, current contribution rates are more than sufficient to meet the needs and demands of pensioners. They should in fact create surpluses which could meet the needs of dependents, lower paid contributors and even elderly care costs.

One should not overlook the economic contribution to GDP, local and rural communities and general development that pension expenditure brings, well appreciated in other Countries. One also has the large investment potential for capital and other expenditure, business support, etc. that large funds bring.

These and the overall financial considerations will be dealt with in the next blogs.

Savings   Annuities    Public Sector   NHS   Teachers   Police   Local Government    Hutton

John’s Blog No. 12 Pensions - Proposed Universal Defined Benefit Contributory Pension Scheme

We have to date considered the major failings of current pension schemes, this blog aims to be more positive and offer proposals for a defined benefit contributory scheme to replace such outdated schemes.

Aims – to replace the current outdated State Pension with an affordable scheme to embrace all those in work, including those in occupational schemes, and guarantee an adequate income in retirement, suitably index linked. It should reflect contributions paid and be fair, but with adequate poverty safety nets.

Scope and Criteria  - Although primarily intended for those in work it would be designed to run continuously through  work and retirement as a flexible scheme, with the main provisions being:-

o   Compulsory contributions from age 25 to 64 with retirement available at age 65

o   Retirement from age 55 at lower pension level; or by AVC’s: with AVC’s available from birth to 24.

o   Final salary based on wage indexation (taken at 3% currently) and Fund accumulation.

o   Basic aim to give 40 to 50% of final salary based on contributions.

o   Pension benefits to be inflation proofed, i.e. increase annually.

o   Fund accumulation based on unit build up. Units bought monthly at current Fund value giving simple and effective average salary fairness. No Bid / Offer differential.

o   Funds treated as individual personal savings and protected as such.

o   Tax free lump sum excluded but subject to AVC’s.

o   Tax relief capped at 20% with maximum contribution limit at lower band upper threshold plus allowances but increased for dependent partner.

o   Annual statements showing  individual fund accumulation and growth, and performance

o   Fund can be extended to those not working, i.e. unemployed, by State unit purchase.

o   State or independent body to set guidelines and growth / investment return targets

                                                                                      (AVC – Additional Voluntary Contributions)

Primarily it is intended for the population in work who pay National Insurance contributions, together with any dependent partners, and would be based around the National Average Wage.

It will incorporate the pension part of such contributions which will be paid directly by the State as a refund of the equivalent part of such contributions. Welfare pensions to remain with the State.

Effectively NI rebate, fixed on NAW, is the baseboard of the scheme for low earners, but other contributions would be  wage related, and can be increased by choice.

In order to avoid unequal wealth distribution a cap on tax relief of say twice average wage and possibly on existing NI rebate/relief will be necessary; dependent on cost and approach to existing schemes.

The scheme would be designed to replace or complement current State, Public Sector and Private schemes, but not necessarily run by the State; possibly by newly formed Mutual Pension Societies, similar or existing bodies. Good growth, management and value for money return would be the main criteria.

The next blog will consider the possible implementation, transition to and basis of the scheme.  

Savings           Annuities        Public Sector              NHS    Teachers         Police  Local Government