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.
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