The 2012 Olympics are receiving massive publicity with one year to go, but the other major event, the start up of compulsory pension contributions under Nest, receives no attention at all.
I doubt if the majority of people in work are even aware that from September 2012 there will be a deduction of 4% from their wage or salary and that their employer will be required to pay an extra 3%. In the present climate, neither can afford it with the resultant potential threat to employment. The Government is also proposing to implement Public Sector contribution increases in April, in spite of still negotiating these.
A report out this week states that the average working person will be worse off when they retire than their parents and will struggle in old age, less than a quarter are making any pension provision and the schemes of those that do are under increasing attack and diminishing in number.
What is needed is a universal pension scheme with a guaranteed income for all in work with affordable and worthwhile contributions. Of course, one may say, this exists with NI contributions designed to meet pension needs, but many “parents” who depended on the scheme struggle to exist on the poverty level pensions that this now provides. Future proposed changes to State pension provision will make this worse.
The State pension is now a universal welfare pension at workhouse level and for many years has given poor returns on the contributions made or separated out welfare from earned benefits and following the normal trend with the State, you are better off if you don’t work and don't pay!
Nest is supposed to supplement the inadequate basic pension and the 8% total contributions are expected to give a 15% wage replacement value; if it kept pace with inflation and population projections, it should return a minimum of 18 to 21% and with modest returns aim for 40%.
It is being set up as a defined contribution scheme where members bear all the investment risks and costs, the setting up costs are 4%, one year’s contributions and annual charges of 0.3% pa of Fund value, yet large funds have lower values than these. There appears to be no clear position on Trustees, although a committee of major Insurance Companies is being set up; the money is going into State coffers, which is also disquieting.
Member numbers aimed for are 6 million although there are some 20 million in work and not contributing to pensions at present and one can opt out although conditions are not clear on this. One gets the impression that this could be another rerun of NI, becoming another tax and slipping into an unfunded system, the State has a record of treating all income as taxation revenue and spending it.
Even the DWP, in a report state that defined contribution schemes lose money in real terms and fail to repay the cumulative contributions made, thus giving poor value for money.
It needs setting up in a sound way, free of the State, similar to the scheme suggested in earlier blogs, with sound management, investment targets and full accounting. A more sensible approach would be to forget the basic State pension altogether for those in work and replace it with an extension of SERPS rebate of NI. The basic State pension takes up just over half the NI income, which would give a rebate of 8 to 10%, matching the proposed Nest contributions.
Total contributions of 16 to 18% in a well managed funded scheme should be able to deliver a 50% level of average wage in real terms, creating a self sufficient pension basis free of demographic problems of population increases. This would also give incentives to save with growing individual funds.
Positive steps need to be taken to secure a pension future fit for this century, not the patching up of decrepit and outdated schemes. The large investment funds produced could also be used to finance the present needs in social infrastructure similar to that achieved in the nineteenth century.
Pensions need to return to their original purpose of individual savings made to accumulate and grow to provide a known position in retirement with freedom of choice and security, not the current free for all, where what you get depends on the market state when you retire.
The only people who gain are the Financiers and the Government, who both live off the steady income that contributions supply and cream off the funds when the markets fluctuate. There must be and is a better way to reward hard work and the large pension savings than the present pension lottery.
This will only occur, when the population in work demand a fair return on their contributions to the State and other Pension schemes. The envy and anger at those who get a decent return should be directed at the State and pension providers to ensure all rise up to that basic level rather than all reduce to poverty.
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