John’s Blog 30 – Pensions Public Sector again

Public Sector pensions continue in the news with the Government ploughing ahead with employee contribution increases and other changes, whilst “consulting” on such changes.

PS pensions are in a mess and the Government are doing little to sort it out, no accounts are published on scheme performance, although members pay contributions, which with employers and SERPS rebate amount to some 19% overall. The money goes straight into State coffers without normal accounting controls.

Any private scheme running in this manner would be prosecuted and fined, barred from running a scheme and even imprisoned for misuse of funds. The scheme is run on a “pay as you Go” basis which means there are no funds to account for, moreover some members make good contributions and will pay much more, whilst others pay little or nothing, being subsidised by other members and the taxpayer.

Yet none of this is publicised and changes have not been logically justified. NHSs, Teachers, Police and Fire pay member contributions from 6% to 11% and the scant figures available suggest pensions paid are low for the average member around 30% of average wage. The higher earners and late promotions do well, taking an unfair proportion of payments. The figures also suggest that the State pension is included as part of benefit.

As there are no funds, the scheme fails from the lack of investment income which cam meet anything from half to all the pension payments paid, making a funded scheme 3 or4 times more cost effective as the contribution work hard in the members interest.

The 2008 figures available indicate that NHS contributions exceed pension payments by at least a third, as do police and fire, with Teachers somewhat less. However they could all transfer to a funded scheme without the major problems predicted, particularly if the State met its liabilities on existing pensioners.

 There are a lot of misleading statements about the viability of PS pensions, most of which could be dispelled if the facts and accounts were published in the same manner as other schemes are forced to do.

Much is made of increased life expectancy and the need to work longer because one lives longer, but little study has been made of the over 65 population, the main area affected by these projections In fact the major impact is on unfunded schemes from demographic effects, if you are self sufficient the impact is small. PS schemes on current projections will see a one to one ratio of those in work contributing and those drawing pensions within 25 years, an obviously impossible situation when there are no pension funds to meet pension increases.

There is an urgent need for an open and frank disclosure and discussion of the problems, which affects an important and trusted part of our society, who many depend on and who are being forced towards strike action they do not want or know how to avoid.

Savings   Annuities          Public Sector   NHS         Teachers   Police   Local Government    Hutton   State

John’s Blog No.29 –Pensions – Elderly Care

Care needs as one gets older has become an increasing and important aspect of retirement well being and also an expensive one, with the necessity to sell one’s home to pay for it.

Here again the State does not take the matter seriously, without doing the simple sums to find the costs or properly assessing the needs to establish what is affordable and the best way of meeting it. As a result the improvident flourish and are looked after by the taxpayer and the prudent are left to fend for themselves.

Of course what has this to do with pensions you may well ask? Only that self-sufficiency and pension savings could offer the funds, income and method to provide a real and long term solution, with the State offering the medical care and welfare aspects.

Care in old age should be separated into dependency regions ranging from full hospital needs down to the minimum social contact and activity requirement of old people living alone. At present it is all or nothing with charitable groups trying to supplement the nothing, but care could be phased in more effectively.

In general, needs increase from age 75, possibly earlier with someone living alone, social contact and activity the main ones and these were provided by luncheon clubs etc, which unfortunately have been steadily reducing over many years due to spending cuts. A false economy.

Sheltered housing meets the next phase where a warden or live-in couple keep an eye on residents, with communal recreation rooms, guest bedrooms, and possibly meals supplied and this can extend over a long period and for some all that is necessary.

Residential homes are next, where intermittent medical care and help become necessary, usually with a resident nurse and doctor on call and then finally hospice or hospital care., which is the expensive stage.

Cost steadily increase as you go up the chain and this is made worse by stringent regulations, often resulting from odd incidents, specifying staff patient ratios, 24 hour and medical attendance etc., all of which become unaffordable.

This is made worse by commercial exploitation, as witnessed in recent events, where homes are bought or transferred  to a management company and then leased back at high rents and maintenance charges, similar to the situation in PFI for hospitals and schools.

Pension funds could offer investment funds at reasonable rates to meet property needs and could generate sufficient funds to meet costs at the high dependency end. The lower levels need greater planning and use of resources.

There are a large number of experienced unemployed, housewives and early retired who would welcome part time work running day centres and organising activities. There are also a large number of halls, leisure and recreational facilities and even pubs and hotels that are under-utilised which could be readily organised for meetings and daily outings.

How to pay for it is the next question; at the intensive care end, the State must be responsible, but could assist and save itself money by supporting charities and part time wage bills. Management charges in retirement apartments range from £1- £3,000 pa  outside London, depending on level of service, partly offset by reductions in personal insurance and maintenance costs.

Many hotels, who meet fire and other regulations, offer short breaks as low as £20 per night half board with good staff and back up services, so it should not be unreasonable for minimum residential care centres to start around this level, increasing with level of care. This may require changes to different homes or wings as conditions deteriorate. Minimising upset where possible.

A review of numbers and needs would be required, but this is in any event overdue, together with a common sense approach to regulations. State estimates of cost suggest individual payments of £20,000 and annual expenditure increases of £2-3bn, which is a small part of current pension costs and fund values.

Savings   Annuities          Public Sector   NHS         Teachers   Police   Local Government    Hutton   State

John’s Blog No.28 –Pensions – The Future

The Pension future is looking dire; if Charles Dickens was writing Bleak House today, it would be about pensions and in workhouse terms.

The State is projecting the retired population doubling over the next 30 to 40 years, with the working population hardy increasing, which makes its own contributory unfunded pension schemes unsustainable, with not enough in work and paying taxes to support the retired.

Yet it is tinkering round the edges and going in the wrong direction, refusing to consider changing to a funded system in which people clearly make their own self provision. Retirement is delayed and taxes increased with NI moving to a universal grey pension at poverty level, regardless of contributions, effectively a welfare tax.

At the same time the successful defined benefit schemes are being forced out of business by taxation, levies and regulations, which the State does not apply to itself in the State and Public Sector pension schemes.

The alternative Defined Contribution scheme, in which all the Commercial risk is borne by individual members, is not fit for purpose, and in its own DWP report shows that it does not even return members contributions, losing some 3% per year in real terms.

The latest proposals for a single tier State pension of £140 per week, would phase out the State second pension and SERPS rebate putting even more pressure on private schemes and increasing their contribution levels. The State contributory pension is not good value for money and with Employer NI contributions are almost at 24% of gross wages, effectively giving basic tax levels of 44%.

The State spends roughly half NI revenues on basic pension; at £53bn per year this should give £100 per week to all pensioners, the same as the £102 currently paid to the three quarters or less of actual contributors. The State says that the minimum income for a single person should be £132.60 per week and this is the basis of the welfare Pension credit, plus other benefits, mainly Council Tax, which add a further £20 pw.

The £140 PW therefore does not even bring pensions up to the welfare poverty level and other changes of reduced contributory years makes the basic pension a welfare one, with contributions a farce and meaningless.

Next year the State brings in the Nest automatic pension scheme with individual contributions of 4% plus 3% for employers and tax rebate (State) at 1%, with much less publicity than the Olympic Games. Effectively this supplements the inadequate State pension and cynically could be seen as another form of taxation.

It does not appear well founded; it is based on defined contributions which are uncertain and perform poorly; current Insurance providers dominate the scene, which does not inspire confidence on previous record and does not appear independent of the State. It is aimed at a 15% wage replacement, half of what should be possible.

Membership is aimed at 5 million, only a quarter of those in work without adequate self provision, but even at this level contribution amounts are large. At £1,000 per year (8% of £12,500 pa), this would give £5bn per year income, totalling £200bn over 40 years in real terms before growth, possibly twice after this.

Yet there is no clear investment or protection policy, possibly low risk probably gilts or bonds, which means back to the State, with the overall risk of descending into another State pension.

This would be another lost opportunity of a sound guaranteed pension scheme (as previously outlined), with funds being invested outside the risky current commercial areas in social infrastructure of affordable housing, schools , hospitals, care centres, energy and transport, all of which could give good and reliable returns.

Decisions on this and State pensions should be brought out into an open forum, the new peoples democracy and charter, being politically voiced but ignored, with policies being made behind closed doors by a selected few and only changed when subject to public opposition. Now would be a good time to start the change.

We have had many reversals recently on ill thought out and cost cutting measures, which even common sense would have rejected. We have also seen signs of the ugly side of Capitalism and not so free enterprise, with the revelation of media and Commercial influence on Government.

Savings   Annuities          Public Sector   NHS         Teachers   Police   Local Government    Hutton   State

John’s Blog No. 27 Pensions – Retirement Income

The options for income in retirement depend on whether you are dependent on State pensions, where they are nil, to that fixed by the employer in defined benefit schemes in terms of final salary, or in private schemes, mainly defined contribution, where you have some choice.

The majority of private schemes, and some others, depend on annuities issued by Insurance Companies who in exchange for your funds, guarantee to pay you an agreed amount until you die and is the most favoured choice. This is a form of co-operative where the survivors benefit from the death of other members, However if you are unfortunate to die early, then your fund disappears before you receive any real benefit.

You can specify a dependent, usually your partner, to receive all or part of the agreed pension amount upon your death and you can also specify a guaranteed period, usually 5 or 10 years for which payments are made. In practice this is well worth doing and the reduction in pension are usually not large.

Recently other options have become available; fixed term annuities are now available where the annuity is paid for a number of years and then renewed for a further period. The annuity amount and the surviving fund amount are agreed at the outset and at renewal, you can renegotiate or withdraw the residual fund and put it elsewhere, or if you die, to your estate. This sounds great but probably rates offered will be poor.

Drawdown is another option, but is only possible with funds of £50,000 or more, usually higher. It has to be agreed and reviewed annually with the Revenue, to ensure funds don’t run out; so setting up and running costs are high. You can delay taking an annuity until 75, with talk of increasing this age, and just take the investment income from the fund.

One of the main problems at present is that annuity rates are at their lowest rate ever and investment returns are uncertain. So the golden rule, like everything else today, is shop around, do not accept the first offer made by your insurance provider, get other quotes, go back and negotiate or argue for a better rate and check the timing.

Annuity rates vary almost weekly and so may your Fund value, therefore check what is happening; your best quote offer may be prepared to find the best time to cash in, especially if the fund is large and you could possibly manage on fund income short term.

Do not hesitate to ask for different quotes; 5 and 10 year guarantee term; with and without partner; level annuity or increasing to meet inflation at 2.5 or 5%; with and without Tax free lump sum, etc. ; ask for advice. You should also explore enhanced annuity due to medical conditions, which can increase values by as much as 20%. Also remember that the rate is based on the longest living partner.

Annuity rates are poor, ranging from 3.5 to 4.0% for an inflation proofed one up to 6% for a single level annuity and this is one of the main reasons pension performance is low. Increased life expectancy and poor Gilt returns are given as the main reasons, yet if one does the calculations on population and fund decline, one finds that even on latest population projections, a 4% investment return will sustain an annuity of 6% inflation proofed at 2.5%.

Insurance Companies appear to ignore the fact that funds have earning potential. At a straight drawdown of 6%, the fund alone will last almost 17 years, add a 4% income and this increases to over 25 years; include population decline even at a slower rate and you are moving close to a hundred and almost past caring, if alive.

An increase of 2% from 4 to 6%, increases the pension income by 50%, or reduces contributions required by the same amount. The tax free lump sum, although attractive increases contributions by a third and this money could give a better return if used to reduce debts or mortgage.

In any event, it is not a good idea to depend on this bonus to clear outstanding debts at retirement; it is more prudent to manage if possible this reduction from 50 or 55 on, leaving this as a contingency amount for location or other costs or investment. A good area at present is the Feedback tariff on renewable, especially solar, which can give an 8 to 10 % return guaranteed for 25 years, plus the free energy generated.

Savings   Annuities          Public Sector   NHS         Teachers   Police   Local Government    Hutton   State

John’s Blog No. 26 Pensions – Current Events

I seem to be running out of steam, I missed last week’s blog due to a combination of things and lost track of where I was.

It has been a worrying and disappointing week, back to the union confrontation, strikes and inflammatory mistruths of Ministers. Unfortunately this is the first strike I felt I could support; teachers and NHS pay good contributions, work hard for a pension that is little better than they would have got without contributions.

Pensions are in a mess, yet all our employees, the Ministers do is hum and haw and tinker round the edges and blame our increased life expectancy. “We live longer and must work longer” is the cry and accepted without question by all the experts and Statesmen (another misnomer).

The Public Sector is the tip of the iceberg, if the retired population grow at five times the rate of the last thirty year and the working population don’t, as projected, then we are all doomed for the workhouse, unless WE do something to support ourselves in old age.

Yet there is a lot of money in the pension system, contributions are high, the total State NI is 23.8%, the main Company and Public Sector schemes are 19% and Private schemes are some 10%, all should support good pensions without taxpayer support. There are 75% of the working population in work and 45% belong to pension schemes. Yet the basic pension is only 70% of the welfare pension credit but the spend of some £53bn should give all contributors that level.

The money needs to work harder, be managed better and retirement needs properly planning, it has to be put aside as pension savings for our individual use, only self sufficiency will give us the retirement we deserve, break age dependency and meet longevity.

The State has not done this with pensions, it has squandered any savings and is now dependent on “pay as you go” with today’s contributions paying today’s pensions. You are paying for your retired neighbour’s pension in the hope that there will be enough money when you retire, the odds are against it.

Teachers and nurses are not well off when they retire, their contributions buy pensions of 25 to 30% of final salary, the 50% includes the basic State pension they should get anyway. The taxpayer pays for the subsidised pensions of the civil service, armed forces, MP’s and others who pay little or no contributions, who the rest of PS also subsidise.

The problems are endemic throughout the whole State system, no one does the simple arithmetic, assess the basic needs, think things through and then modify them to suit the circumstances. They start at the tail end and bodge to try to make the pieces fit. As a mathematician, I was trained to fully assess the problems, find the variables, to check whether there is a solution, then solve it if possible, amending where necessary.

As a society we are lost; we have a negative attitude and are defeated before we begin, becoming dependent on others. As a Nation we have delusions of grandeur attempting to change the world, idealism has replaced realism as we save the world.

We are a small island who’s day has past and yet we still have major attributes of inventiveness and ingenuity, inherent common sense and forward perspective beyond other nations. We embrace a global and green economy before they exist, to our disadvantage on cost, trading and economically; China produces as much CO2 in an hour as we expensively try to save in a year and we are only just re-finding manufacturing.

We need to put our own house in order, create and keep employment rather than make them redundant; make work for school leavers and graduates; sort out education to avoid the mortgage burden; cost up medical and social care and find ways to afford it or trim down; ruthlessly cut system exploitation internally and from abroad and nurture internal charities and social groups. Plan our society!

Pensions are a good place to start, instead of creating envy to reduce all to the poverty level, we should aim to lift all to a high defined benefit level in well managed self sufficient saving schemes, separating welfare at poverty level from earned at a comfortable one, with freedom of choice on saving amounts, retirement age and care. Make saving worthwhile and use the large funds generated for Capital infrastructure and social needs. The over 65 population explosion needs questioning and study.

Savings   Annuities    Public Sector   NHS  Teachers   Police   Local Government    Hutton   State