Previous blogs outlined this scheme and considered implementation, with transition to a funded system.
In any financial problem one needs to establish whether it has a solution; in fact whether the sums add up, income meets expenditure etc. The previous blog showed that they did not
The basic aim of any savings is that they should keep pace with inflation otherwise they are not worthwhile
If this occurs then £1 today will be worth £1 in spending power in forty years time. This simplifies the minimum one should expect from pension savings. Contributions of £1 per year would give £40 in real terms, at a 4% annuity rate this yields £1.60 pounds in pension; at 6% the pension yield is £2.40.
This pension yield factor, mentioned in previous blogs, can be used for actual values; percentages or any general form, e.g. 10% contribution would give 16% of salary growing with inflation. Growth above inflation would give higher yield factors as follows:-
· Growth At inflation 4% (1.5% above) 6% 8%
· 4% Payment/ annuity 1.6 2.3 3.7 6.1
· 6% Payment/annuity 2.4 3.5 5.6 9.1
Public Sector pensions, in particular the fully contributed schemes of NHS, teachers, police and fire, are a good example to consider. Contributions amount to £19bn with pension payments at £14bn.
Even at the basic minimum yield a funded scheme would yield payments of £30.4bn after 40 years.
Contributions are mpe -6.5%; mpr – 7.5%: Serps-5.1% and Proposed 9.5%/4.5%/ 5.1, Total-19.1%
Current levels of pensions paid therefore barely keep up with inflation and are much worse than any private sector, indicating the urgent need to change to a more equitable scheme.
The current proposed job cuts and pay freeze effectively means that any scheme will be in a steady state for several years, an ideal time for a change to a fully funded scheme.
The existing pensioner liability is £233bn to provide an annual inflation proofed (2.5%) payment of £14bn at 6%, which would require a return of 4% to sustain. This could be met by a transfer of Capital assets or creation of non negotiable Pension bonds, ( outside the National debt?).
This would allow the full current contributions to accumulate, be invested and grow for the current active members. A modest investment return of 6% should show a steady Fund build up, sufficient to meet future retirements as they occur. At present 1.4% of the working age population reach the age of 65 each year.
This would suggest, dependent on age distribution that some 70,000 members enter retirement each year which would be met by the first year’s average investment income, but only using some 50% thereafter.
This would allow a rapid fund build up, if contributions and balance investment income keeps pace with inflation then in twelve years the Fund value would be close to the original liability value in real terms. This demonstrates the strength of Funded schemes with accumulation and compound investment growth.
Even if the retired population increased by 50% over the next 25 years, there would be sufficient Fund strength and reserve to meet this demand and increase member benefits.
Transfer of the State pension scheme would be more demanding; a fund of one trillion pounds would be needed to meet the current £60bn spend at 6% return. A compromise solution involving a new scheme with employee/ employer contributions and generous NI rebates would seem possible.
Current SERPS rebate is 5.1%, if this were doubled to include basic State pension opt out, a reasonable 9% top up would give a position similar to PS transition. The next blog develops this.
Savings Annuities Public Sector NHS Teachers Police Local Government Hutton
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