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
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