If one stands back and looks at pensions from a sensible, logical and fulfilment of purpose point of view, then State unfunded pensions are at the bottom followed closely by the myriad of defined contribution schemes, then the larger ones and then funded defined benefit, none meet the requirements.
For payment methods, none meet the objectives, purely for the reason that all assume a sudden end to years of savings and the final accumulated fund, this money still has a value and there is no sensible reason that it should not continue to work hard after its owner has stopped. It should have a life after retirement.
The larger DB schemes do make their own payments, but fail to separate retired funds from active ones, although some American schemes do. All DC schemes and smaller DB select annuities as the payment method although Private schemes are adopting drawdown for larger funds.
Annuities are based on the co-operative principle of pooled resources, with the death of one member benefitting the survivors, provision can be made for surviving dependents to receive the payments, often on a two thirds basis and guaranteed payment periods of 5 to 10 years are also available as are contract periods.
Such schemes are run mainly by Insurance Companies and payment levels supposedly based on Actuarial tables, but current results suggest otherwise. They appear increasingly affected by short term considerations, dependent on the markets and Commercial gain and like debts even the funds are being traded, sought after by venture capitalists. As usual the State turns a blind eye and when failures occur will introduce a levy.
Historically in 1982 they were an unsustainable 16% and are currently 5 to 6% but fluctuating wildly, over the past year by a third and can even drop whilst being set up. This is a nonsense and unstable, you set a level of savings for 40 years and when it is too late, find that what you have to live on has dropped by a third
It is also unnecessary, large funds have stability and can absorb such fluctuations and should be alive.
Inflation is another problem, if you wish to protect against rising living costs then annuity payment levels drop to a meagre 4%, and longer life expectation is being used to reduce benefits in all form of payments.
It can be shown quite readily that even with the worst forward over 65 population projections, a fund earning a modest 4% can support payments of 6% with annual increases of 2.5%, the average inflation rate over past years. This is a third higher than currently available thus requiring lower contributions.
One therefore arrives at the best Pension scheme, which was outlined in previous blogs as a Universal scheme:-
· Funded defined contribution buying units from 25 to 64, with price defined by performance and age.
· Super Trusts, associated with occupation, with active funds separated from retired funds.
· Payments on an annuity style basis at 6%, increasing by 2.5% and guaranteed for 10 years.
· Flexibility of larger contributions to allow earlier retirement, larger benefits, tax free lump sums etc.
The performance objectives were outlined earlier together with a simple yield factor, the scheme target should be the easy factor 5 based on 6% growth less costs. This means that savings of £1,000 per year should give an inflation proofed pension of £5,000 and matched to increased savings.
If the State were to replace the unfunded basic State pension by a NI rebate of 8% matched to similar contributions in a DB scheme (details in a later blog), then based on the Nest scheme due next year, someone earning £10,000 pa would pay contributions of £400pa to receive a pension of £8,000pa at 65 at current living cost (real terms). At the average female wage of £20,000 this would be £800 contribution and pension of £16,000pa.
Such a scheme is possible requiring a 4% contribution matched by 3% employers, 1% tax relief and 8% NI rebate from the State. This would stabilise pensions, giving a guaranteed outcome fixed in real terms, effect large savings for the Treasury and taxation with costs fixed at 50% NI income, and release large sums for investment of some £100bn per year to create jobs and growth.
This is the obvious and sensible way forward to secure retirement.
Savings Annuities Public Sector NHS Teachers Police Local Government Hutton State Pensions
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