Pensions and their provision are critically dependent on the efficiency of the commercial markets and the demographic factors of population, together with their fluctuations with time.
In order to be worthwhile, pension savings need to grow at a rate of at least 1.5% above inflation, around 4% and to be successful at 6% or greater. This needs to be sustained over a long period of forty years and requires long term stability free of present market speculation and uncertainty.
Anyone who has taken out a private pension, on a defined contribution basis over the past twenty years, will have seen their projected benefits in 10 to 20 years time drastically reduce over this period by a factor three or four. Originally projected at 8 and 13.5% growth, these have reduced to 5 and 8% growth.
Yet pension and investment funds are still reporting annual growths of 9%, with target rates of 8%; commercial borrowing rates are 6% and above; Bank investment arms report large profits and bonus. The problem is part uncertainty and part greed, combined with a slowing down of world trade expansion.
The industry needs to adapt and change; there is still a major demand for investment capital and pension funds are a unique, large and ongoing source of long term capital which by its nature has to be serviced but not necessarily repaid.
Quite low returns over the 40 year timescale can give reasonable benefits for the present level of contributions. We have already shown how a 4% return will give yield factors of 3.5 in real terms, increasing to 5.7 at 6%.
Increased life expectancy with the resultant effects on the retired population is the other area of concern, yet it would appear that these effects may have been overestimated in future projections, resulting in some cases to purely nonsense figures.
Forward projections are based on life tables and estimated decreases in mortality rates, which do not appear to relate back to current population figures when projected forward, particularly in the retired. The latest figures show the lowest mortality rates recorded, but the proportion of deaths for the over 80’s has doubled over the past 40 years and the over 60’s remain high.
The UK retired population over 65 in 25 years time is projected to increase by 50% to 15 million; yet these will be the 2008 population aged from 40 to 64 which is currently 20 million. If they make their own pension provision whilst in work, problems with increasing population do not arise.
For the State, pensions have become a liability which they cannot afford; there is the prospect that costs and hence taxation will increase by 50% over the next 25 years due to the reduction in the work/ retired ratio from three to two.
The reaction is one of cost cutting rather than a positive approach to find a more affordable and equitable solution to the problem.
Forward pension planning by the State should be based on greater self sufficiency and increasing the numbers in employment, currently 75%; not reduced benefits and delayed retirement.
Common sense indicates that this will only be achieved by clearly separating State welfare benefit from self provision and breaking the dependency of the retired on those in work. A return to value for money in pension savings, including NI is well overdue.
A well devised and managed fully funded, universal pension scheme with guaranteed returns is the obvious solution with completely separate welfare provision for those who need it.
After all existing pensioners and those in work have paid or will pay substantial NI contributions to ensure an adequate retirement income and will not readily forgive the failure to deliver. Resentment will also grow at the present “pay today, worry about tomorrow”, which results from the present unfunded system.
Savings Annuities Public Sector NHS Teachers Police Local Government Hutton State Pension
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