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.
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