John’s Blog 39 – A New Pension Era

The State and Public Sector pensions cannot survive in their present form, the cost is too prohibitive, the solutions chosen are all short term and unrealistic and being revised every year. We must all work longer, pay more and live on less in retirement, not acceptable or possible.

·         Where are the jobs? - the State and others are all cutting back; our youth and others face a bleak future and resent it, as seen by recent riots.

·         Where is the money? – wages are being frozen, living costs are rising rapidly, sometimes unnecessarily and we are being told to tighten our belts, with the State making drastic spending cuts.

·         Where are the pensions?- how can you live on less in retirement when the basic State pension is already below the poverty line and reliable schemes are being priced out of business.

·         Where is the incentive -  all in work pay NI contributions, which is no longer delivering, neither are other once reliable schemes and the new Nest scheme is based on a loss making history.

The need for drastic change appears obvious if you accept the questionable population projections for the next 30 to 50 years. The Powers that be accept them but do not appear to look at the resulting consequences.

New Schemes will only be found by being realistic, standing back, assessing the problem and looking for solutions that will work however impossible or unpalatable, within the obvious cost limitations.

When one studies it, the problem is not as bad as it first appears; there is a lot of money in pensions. They are over-contributed, Funds are under- valued and the money does not work hard enough and with the State not at all, as a result pensions are a drain and not an asset, which they could and should be.

We live in a “get rich quick” World where greed and speculation dominate, long term savings, particularly pensions over 40 years, like a delicate plant, cannot survive unless taken out of that atmosphere.

I have been studying the problem over several years and completed this week a computer spreadsheet study on pensions and now have to write it up in a readily understandable form, and convince others that changes would work, the hardest part.

It looks at replacing the State basic pension, the Nest and defined contribution schemes with the Universal Funded Defined Benefit Pension Scheme outlined in Blog 12, which will complement existing defined benefit schemes including Public Sector pensions, now the subject of strife and strikes.

The aim is to bring all schemes up to DB standards of good and secure pension provision whose benefit outcome is guaranteed and which gives value for money. State and Public Sector will transfer to fully funded schemes over a period of ten to twenty years with enhanced benefits and large State cost savings.

The transition to a funded scheme is feasible on a neutral cost basis by combining it with a contributory scheme and utilising all the advantages of the existing schemes and the fact that they are all, including the State, over-contributed and undervalued.

The result is a pension scheme or schemes fit for the 21^st century, independent of the State and if necessary the large Financial Industries, which returns freedom of choice about retirement to the individual, security and knowledge of their retirement income at an affordable contribution savings level.

The models studied take the worst case population projections for the next 50 years, combined with the best aspects of present schemes and proposed changes. It takes and changes the new scheme, starting next year of  4% employee contribution (8% total) , which is matched by an equal NI rebate of 8%, aimed to double the basic proposed minimum of £140 pw, £7,280 pa, to give £14,500 per year or more, put forward as a comfortable retirement pension, which increases to match inflation at 2.5%.

This Utopia is possible and will be detailed in the next blog.

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John’s Blog 38 - Pensions - A Diversion

This blog is a change from normal, commenting on the doom and gloom of current predictions of our future; the need to tighten our belts, selectively of course, and the pettiness of many of these measures.

Reverting to the old fogey, that I am, and reminiscing using the Hovis “when I was a lad” theme, one cannot help thinking how things go in a full circle. I was taught to read and write phonetically, learnt my times table in regular classroom chants, resulting in ready mental arithmetic. Now both being rediscovered and becoming all the rage.

As part of my mathematics degree study, economics was taught on the money circulation principle, which I find simpler to understand and making more sense than the intangible GDP.

Money circulated in an internal circle in which taxes paid wages and spending bought food and goods, going back into the circle distribution creating more services and spending. The size of the circle, that is the amount of money circulating the system could sustain was determined by the losses from the circle.

These losses at that time resulted from imports with gains occurring from exports; at that time every £ of exports created £5 in internal circulation, whereas every £ spent on imported goods or food cost £5 in living terms. In bad times of recession one stimulated the economy by creating internal money and as long as the import content was controlled and exports unaffected, this was possible.

One could therefore expand spending on anything involving internal labour or materials; cost cutting by job losses was counter-productive unless from redistribution to more essential work. House and road building all used sand, gravel and cement, readily dug from the ground; manufacturing imported metallic ores processed internally using energy from home dug coal, as did railway construction and food was mainly home grown

Of course in present times this is all simplistic, outdated and insular and no one thinks that way; we live in a global economy and should buy at the cheapest price, let the third world manufacture and mine; enter into trade agreements and European Union rules which will promote trade and growth and eliminate world poverty.

Unfortunately this idealistic approach is not universally adopted, we are the only ones who obey the rules, whilst everyone else sticks to the old ones. The strongest economies are those who put self interest first; the Far East stringently apply import controls, relaxing only as they build up large foreign currency reserves; Germany, France and USA all follow similar trends, although the latter has large balance of payment problems mainly due to oil imports. Many spend their surplus £’s buying up our Companies, Utilities, Heredity artefacts and properties and investing in our infrastructure.

Yet the Nation’s budgets are much larger but not much different to our domestic ones, we need to balance what we spend with what we earn, both overseas and internally, but have a lot of flexibility within home spending with DIY, home cooking, food production and making things. Living within our means and paying our way. The latest PFI fiasco illustrates this, which was the miracle way to afford modern hospitals but now threatens some NHs trusts due to high costs; some seven times build costs, who would take out a 20% mortgage on their home and expect to afford it!

We, of course, rely on the Commercial Sector to export services and speculate abroad, resulting in the large losses which led to the present recession, resulting in exporting money from currency and gold reserves. Our balance of payment control has gone all to pot, our European and other migrant workers export increasing amounts of money home, we give generously in foreign aid to keep African dictators in power and what is worse buy expensive armaments from America, railways from Germany whilst making servicemen and other workers redundant.

We live in a mad mad world and as a country have delusions of grandeur as a world power; spending our hard earned currency in oversea’s conflicts: our politicians have lost sight of the real world and need to get their feet back firmly on the ground to put UK interest first, in line with the rest of the world. The EU is a good concept but not ready for full integration as present problems show, a global economy is even further away.

Previous recessions have shown that the only way out is to spend, spend, spend but in a controlled manner, create employment from work that requires little imported materials like housing, roads and even the Severn barrage. Reduce our dependence on imports to achieve a trade balance without being overly insular and examine and control the influence of the speculative commercial markets.

It will not be easy but could be directed, the present spending review is rigid, inflexible and haphazard taking the easy way out on labour and services instead of basic reforms. Pension reforms could make greater savings over the next 20 to 40 years than present review targets. Wastage is abundant, a current example is the Basildon traveller fiasco, because planning did not do their job, with costs reported as equal to the projected savings from pensioner travel concession withdrawal.

There is an artificial aspect about living today, one is not sure what is real and what arises from speculation; does it cost more to pump oil from the same well today than yesterday?;  possibly but twice as much?; the same applies to large salaries and bonuses, are they justified?; are the farmers being paid more? is there a Euro crisis with each Country’s assets worth nothing?.  Or are we all being held to ransom by some faceless tycoon or Institution.

There is confusion about money is it real, or paper or just imaginary; we can spend on our credit cards, with HP, loans and mortgage extensions without really considering whether we can afford it, need it or can finally pay for it and building up large expensive debt. We are not alone our Government, Banks and Commercial Institutions appear to have done the same.

Countries are being run by global Commercial conglomerates, Banks and tycoons, not by the democratically elected Governments; a hidden dictatorship controlling what we do and buy and punishing on a whim. Orwells predictions are coming true but not by a police states but by faceless financiers and media moguls. The hacking scandal shows what can happen when these get out of control and we have all seen good politicians forced out of office unless they toe the media line.

  The crisis could offer a good opportunity to return to sensible systems where things have real worth based on what they cost and where people matter, a return to old values and stability. We should also question whether high growth can continue, where can it come from? can living standards become more luxurious? Or are we due for a period of stabilisation and redistribution. These are basic questions on living standards and expectations, we have come far since the end of the last war, but how much further do we need to go, or should we make the most of what we have, living standards are not based on money and possessions alone, should we work less and enjoy life more.

John’s Blog No. 37 – Pensions and Change

I thought this week that that the clock had been set back two centuries in the opposition to change seen at the start of the industrial revolution; however the tables have been turned. It is not the peasant farmers and landed gentry, but the Commercial and Political fraternity, once the instigators, now opposing change.

Banks are refusing change, maintaining it is not necessary and the Government is delaying action, yet another major Bank reports large rogue trader losses, the cause of present recession problems; Countries and Companies are held to ransom by commercial pressures of deemed worth and speculation.

We are embroiled in a Computer unreality world, where hard work and real values are ignored; speculation and manipulation dominate in the race for the fast buck regardless of the consequences.

Nowhere are the results more obvious than in Pensions, which are long term, but are being dealt with short term; we are papering over the cracks where drastic action is needed. Commercial and Political interests combined with State taxation and regulation dominate, resulting in excessive charges, Fund erosion and poor returns with pensions being over-contributed and Funds undervalued and in cases downright fraud with misuse of funds.

There are factors on funded pension schemes which appear to be unrecognised or ignored, certainly not understood:-

·         Pension contributions give a steady source of investment funds over 40 years and then do not need to be repaid only serviced at a modest rate of 4%.

·         Investment income can overtake and amplify contributions in a well managed fund; can be more important than Capital growth and in a retired Fund meet pension payments leaving Funds untouched.

·         Even at current population projections, a 4% investment income will sustain an inflation proofed 6% payment/ annuity.

These make pension schemes attractive Commercial propositions, not the burden as seen by many and result in Commercial interest after speculative gain. They need to be taken out of this environment and also the Political and State arena and put into Mutual Pension Societies or similar bodies, possibly work related, and the large funds invested in National and Social infrastructure to promote economic growth. Contributions also need to be protected as personal savings, which they are.

A  recent DWP document “Pensions fit for the 21^st Century” was anything but, proposing a single tier pension at poverty level but still below benefit pension, abolishing SERPS rebate and State second pension.

If one accepts the questionable population projections it is obvious that the State unfunded schemes cannot possibly survive; the retired population will double over the next 30 years; the basic State pension, now at 50% NI income, will require an increase in present total contributions from 24% to 36% for what is already a fourth rate return.

The Government is conducting a campaign of misinformation, distorted facts and envy against Public Sector pensions, but this is the thin end of the wedge, setting the stage for State pension changes. The aim should be to take all State pensions up to this level of defined benefit at acceptable living standards. This can only be achieved with a universal funded defined benefit pension scheme as outlined in previous blogs.

The population in work deseves a scheme which gives value for money, treats contributions as personal savings and gives a guaranteed benefit outcome associated with contributions paid. They are not getting this in State, Public Sector, and many Private schemes. The new Nest scheme in an accepted loss making defined contribution form which should give 2 to 3 times the projected return of 15%; £3,000 pension on a £20,000 wage!

Transition to a funded scheme is economically possible, financially beneficial to both members and State and the only option forward to a secure and guaranteed pension future in retirement.

The TUC met this week and all unions present put forward their intention to ballot for strike action  over Public Sector pensions, although I deplore such action, I can only accept and sympathise with the reasons for it. The Coalition has been crass and high handed in their attitude to the problem, bulldozing changes through whilst supposedly talking.

They have given no data or information to support their arguments or reasons; after lengthy talks and agreement to major changes in 2008, they are now entering into annual “consultations into changes and contribution increases with documents that are factually incorrect.

Whilst talking of Open Government and people power, they are busy battening down the hatches to repel any other viewpoint or ideas, this is not restricted to PS pensions but all areas of Government policy and cost savings under the spending review, which are being pushed through regardless of their social impact or common sense need.

Will we need shortly to fight for democracy?  

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John’s Blog No. 36 – Pensions and Taxation

The campaign against Public Sector pensions has been based on the future cost to the taxpayer associated with this so called  “lavish” pension scheme, but in fact this is not true and in any event the aim should be to ensure all pension schemes, including the State, should come up to such a minimum standard.

The problems arise from increased life expectancy and the unfunded nature of the scheme, where today’s pensions are paid from today’s contributions instead of accumulating and growing to give each individual a pension pot to retire on. They are then themselves dependent on contributions from those in work to provide their pension when they retire. The result is obvious, delayed retirement and reduced benefits down to the poverty level.

The State projects that in thirty years the over 65 population will double, whereas those in work will barely change, this means that the dependency ratio will change from 3 in work to each one retired to 3 work to 2 retired. The Public Sector funding problem is therefore only the tip of the iceberg, with much larger problems on State pension provision and the almost certain need to increase NI contributions by 50% or increase taxation; a major taxpayer burden.

At present half the National Insurance income is spent on the State basic pension, with the other half being spent on welfare pension credit, State second pension and pensioner benefits. The basic pension is much less than the welfare pension and there are new proposals, but not widely publicised, for a single tier pension at £140 per week, £7,280 pa and to abolish the second pension and the SERPS rebate, effectively a single poverty pension which will still be below the welfare Pension credit level and its associated other benefits.

The Nest scheme, due to start in a year, is planned to supplement the minimal State pension with compulsory contributions of 5% for employees less 1% tax relief and 3% for employers, with the money going to the State and little guarantee of results. It is effectively a NI increase, being set up as a defined contribution scheme, reported by DWP as performing badly and making a loss in real terms overall by not keeping up with inflation..

The conclusion is obvious, as the costs increase the State will not be able to afford it and the State pension will be phased out to be replaced by Nest or something similar; the contributory scheme will be treated in the same way as Public Sector pensions as a source of State income, with NI absorbed as effectively a welfare tax.

The result will be everyone reduced to pensioner poverty with no control over our pension future when or even if we can retire and an ever increasing drain on earned income. Now is the only time left to change this scenario; total NI contributions are large and adequate enough to give a good pension if managed properly.

The State needs to seriously consider introducing a Universal Funded Defined Benefit Pension Scheme to replace the State pension and the Nest proposed scheme, as outlined in Blog 12. This transition to a fully funded scheme has been dismissed as impossible, but is feasible if managed carefully, probably for the State the impossible bit.

Studies show that change to a funded scheme over a twenty year timescale is possible if combined with an individual scheme such as above at a neutral cost basis for the State. Initial entry would be restricted to the under 45’s, thus allowing a twenty year period for funds to build up before pensions need to be paid, with contributions matched by a NI rebate similar to SERPS to replace the State pension.

The aim would be to double the State pension to £14,500 per year, deemed to be a comfortable pension level, with the State meeting existing pension liabilities during the transition period with the new Fund steadily taking these over.

A person earning £20,000 per year (£385 per week) will pay NI contributions of £1,570 with employer paying £1,828, a total of 17% giving a replacement pension of 35% (£7,280), the Nest scheme contribution would be £1,000, with employer at £600 to give a 15% pension of £3,000. The new funded scheme would be almost 2.5 times this at £7,280.

The difference arises due to the investment income gained from the Fund, in addition to substantial investment funds, in successful schemes this can make up 50 to 75% of total income; effectively two or three times contributions and in some cases can meet all of the pension payments, leaving Funds untouched.

Overall the result would be a pension scheme fit for purpose with State costs after the transition period contained within 50% of NI income; individual self sufficiency and satisfaction with the knowledge of a secure pension future with a fair return on contribution investment. The amounts of money, cost savings and Funds would be large. Only a third of those in work make any private pension provision, mainly in Public Sector and Company schemes.

The income from NI contributions is currently some £100bn, if half of this matched individual 8% pension savings, then this amount would be available for investment and released to stimulate the economy and create growth. Funds would grow to trillions (million, million) of pounds with large savings in State pension expenditure of some £20 to 30bn, equal to current spending cuts and security in pensions would be guaranteed and personally related..

The Public Sector pensions are in an even stronger position to transfer to a funded scheme, as they already pay substantial extra contributions, particularly the NHS who have existing surplus of contributions over payments.

John’s Blog 35 – Pensions – Simplified?

There was an item on the news that the Government is issuing a new language guide for pensions in an attempt to explain pension jargon in order to create better understanding. It would be more helpful if they were to simplify pensions and cut out the jargon to make them easier to understand.

The complexity arises because of the language, the numerous rules and regulations and the apparent intention of all parties to confuse the individual. Most people now understand savings, mortgages, Bank statements, car and home insurance and household budgets; increasing numbers shop for the best deal on the web, etc.

Previous blogs have tried to do this, introducing simple factors and the means to determine aims, objectives and performance. Pensions are regular monthly savings over a long term of forty years; the individual needs to know that they give reasonable value, guarantee a good benefit return when they retire, with a firm date for that retirement.

They do not need to know the detail only regular confirmation that all is well; they do not get involved in the statistics of car insurance, no of accidents and costs, or house insurance on houses destroyed etc. They do not enquire when putting savings into a Building Society which house is bought and don’t worry about costs and charges, they are all included.

As long as the end result is the best, they are quite happy to leave it to the experts. Once upon a time this was the position with Pensions, one worked, paid one’s National Insurance and at the agreed time retired to a reasonable income. However as this degraded, the necessity grew for private schemes, previously for Company Management, they extended to other workers as Defined Benefit schemes with a guaranteed outcome.

These in turn degraded, a combination of over generous benefits; rapid final salary rises; changing markets conditions and increasing State pressures on regulations, taxation ,and pension levies, forced up contributions to unaffordable levels. The next downward step was the Defined Contribution scheme, where members take all the risks; providers make the profits with high costs and charges and returns that don’t even keep up with inflation.

It is almost as if the State has a death wish on Pensions reducing the retired population to poverty and State dependency. As with the Banks, they make no attempt to control the Industry; there are no guidelines on Fund performance or charges, where Tax relief is tapped off at source.

Of course their own track record leaves much to be desired, the State and Public Sector schemes are in a mess, due to the change to an unfunded scheme which is unaffordable and unsustainable. Had contributions been allowed to accumulate and grow into Funds, they would have been extremely successful providing much of the investment capital required by the State and the Country.

It is not too late to change things, with the vision and effort shown by our forbears in the Industrial revolution, a Pension revolution could occur. Transition to funded schemes are possible, with the State pension by the Universal scheme previously outlined financed by the 8% contributions proposed in Nest, (but not in that form) and matched by an equal NI rebate to replace the basic State Pension. Such a change could meet a major part of the Budget review targets without the agony, with savings of £15bn in real terms by 2030 rising to £20bn by 2040 and increasing thereafter, besides giving real pension benefits.

The unsubsidised parts of the Public Sector pensions could readily transfer; the strongest the NHS have good surpluses and could transfer tomorrow and even take over existing liabilities and meet the worst population projection increases, without the proposed changes; improving the scheme and saving taxpayer future liabilities

Instead of considering and taking such positive steps, the Government has adopted a policy of bulldozing short term changes through and mis-information, exaggerating costs to alienate the general public. The latest NHS “consultation” document gives pension costs over the last decade as increasing to £32bn, whereas the last GAD 2008 report showed major schemes at £16bn. We are all going to live to 100, but the latest population figures do not support this and the validity of increased life expectancy is questionable and not justified.

The State should release the facts, give full accounting for State and Public Sector schemes. Information on the web is more difficult to find; files were archived at the change of Government and disappeared with searches giving “no results found”. Statistics have not been updated since 2004 or earlier for State pension liability or breakdown of payments, pension expenditure is consolidated under general Benefit costs, although PS contributions are still given with unexplained rises. The whole thing is a mess and does not promote confidence

It is time for a change and the sooner the better! Times are hard but do not justify such inefficiency and ad hoc decisions. Let common sense prevail, based on the facts and let us have some true vision for the future.

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