We need first of all to look at the overall picture and current position. The object of any pension scheme is to make provision for an adequate income in retirement with sufficient flexibility to choose when and where and ensure security and guarantees.
Recent developments in longevity and market returns have put that objective at risk, in fact there is:-
Panic over Population and Pensions and nowhere is this more apparent than with the Government.
The over 65 population is projected to double over the next 30 years, this appears to be accepted without question and yet little work or detailed study has been carried out in preparation for this with logic and common sense applied to the problem.
In fact the approach is similar to driving a modern car at 70 mph on the cart tracks used by the Model T Ford, doomed to fail. The cart track is the unfunded nature of State schemes and the dependence on an unstable Financial market by Private schemes. Both need modernisation.
State schemes are in the worst position, they are based on a “pay as you go” system which uses current income from contributions to pay current pensions. This defies the fundamental principle of pension provision, to put savings aside for one’s future needs, but they are the key to solving the problem.
Over the years the State has squandered these savings on current expenditure, instead of investing this money in Capital projects which could earn income and grow, but it is not too late to reverse this folly.
At present there are 29 million in work paying NI contributions to support the 10 million over 65’s, roughly 3 to1 ratio, which is projected to rise to 20 million and 3 to 2; the Public Sector is already at 3 to2 and will change to 2 to3, hence the panic measure on working longer, paying more and receiving less.
These 29 million assumed that their NI contributions would support their old age pension, however the State has reduced this to poverty level, refers to it as a benefit and insisting that they should now contribute towards their pension future in a new scheme “Nest” starting next year.
This opt out by the State is not fair or logical, when is a pension contribution not a pension contribution, when it is paid through National Insurance. Contributions are high with each paying 11% from wages and Employers contribution a further 13%, a massive 24 %, which in a normal funded scheme should yield a final pension of 120%. Public sector pensions are even worse with even extra contributions of 19%.
However the panic, doom and gloom is not justified, if one takes the worst over 65 population projections and compares the population with the pension fund survival, one finds that a Fund income of 4% will sustain inflation proofed payments of 6%.
If one now applies this to the current State pension, then transfer of capital assets yielding 4% could be used to meet the current pension liability, (or a State pension Bond created); effectively one is creating a pension Fund to meet liabilities. New money, from say the new contributory scheme, would be needed to make up the third shortfall in payments, buying these assets as part of its fund build up.
For the basic State pension this would release the current payments, allowing them to build up in a good funded scheme manner, giving retirement self sufficiency, the only solution to population changes. The advantages are large, besides enabling a stable and secure pension scheme, benefits increase substantially as would confidence and large amounts of investment money released to create economic growth and work.
Public Sector are simpler, at least as far as the unsubsidised NHS Teacher, Police and Fire are concerned, all are in contributory schemes and the NHS has sufficient surplus to become independent today. However the Government refuses illegally to treat the schemes in a proper funded manner. The approach via Hutton is blinkered without considering alternatives, it is a good deal only when compared with nothing.
The problems of the Private Sector schemes are not as great and arise from the dependence on the Financial Markets and Insurance Companies (annuities), historical generous pensions and the inequality of final salary schemes. The large salary increases, usually in later years, leaves no time to build up pension entitlement from contributions, resulting in subsidy by other members; frequent large market fluctuations lead to Fund instability, which also occurs with large annuity changes that many depend on.
This will continue in the next blog, together with the viewing the population myth.
Savings Annuities Public Sector NHS Teachers Police Local Government Hutton State Pensions
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