Tuesday 29 November 2011

John’s Blog 49 –Pensions Public Sector Strike

The Strike now seems inevitable, as a person I dislike strikes, they are disruptive and penalize the general public, but on this occasion the Teachers and NHS workers have a just cause, which has not been listened to.
It is as if the Government wished to provoke this action in order to bring the cause into disrepute, there appears to have been a policy of misinformation and a failure to disclose the facts on Public Sector pensions. There has been a firm intent to create envy and a distortion of the limited figures available, pensions for the majority are not gold plated and offer poor return on contributions made.
In Pensions overall the sums do not add up and the figures do not make sense, nowhere is this more apparent than in the State and Public Sector Pensions,  The Hutton report gave no real facts, figures or details on the different schemes, their viability and actual financial state and followed closely an earlier CBI report. In fact it is uncertain whether these even exist or anyone in the Government understands them.
All give conflicting and varied statistics and reports almost designed to confuse and older pre-election information has been archived and not readily available. Freedom of information has become misinformation
The solution to the present dispute is simple, return the unsubsidized pension system back to its members. They all pay good contributions in addition to the NI State pension and therefore have the right to run their own schemes without Government interference.
Total contributions are no different to those paid in private DB schemes, the conditions and benefits are much less and with the frequent reviews are diminishing steadily with less security. In a private scheme with the same contributions they would receive two to three times the pension, linked to what they paid in; choose when they retire; with annual information in an efficiently run and well managed scheme.
The average pension in the NHS is £6,000 (GAD report) for their contributions of 6.5%, SERPS contract out of S2P of 5.1% and employers contribution of 7.3%, which should give a pension of half their final salary or more. Yet they only get a further pension equal to the below poverty State pension, are expected to increase contributions by 3%; work longer with an uncertain pension which may not even keep up with inflation.
A nurse on the average female salary of £20,000pa has contributions of £1,300,SERPS rebate of £1,020 with employer contributions of £1,460, which even in a fund keeping up with inflation would yield a pension of £9,600 and double this in a good scheme. GAD figures indicate £5,000, almost half this figure.
It is not surprising, but lamentable that they are reluctantly reduced to strike action; the fault lies completely with the Government, who having completed and agreed a lengthy review in 2008 now want major drastic changes for the worst. They want further annual reviews; large increases in contributions, etc.etc.
The real problem is that the State has squandered the Pension Funds and is now forced to pay pensions from existing members contributions as they receive them, as an unfunded scheme, this is a clear abuse of savings and anyone else would be sent to prison for the criminal misuse of monies entrusted to them.
At present in the NHS total annual contribution income is £8bn and exceeds pension payments by £2.1bn (OBR), although earlier figures showed £3.6bn (GAD), even in a modest funded scheme over forty years, this should yield payments of some £20 to £28bn per year, four times the present pension levels. They could run as such a successful funded private scheme, free of State interference, if allowed and even meet existing pensions, which are clearly a State liability.
Police and Fire are in a similar position, although Teachers only break even due to more generous pensions, the Civil Service, Armed Forces, MP’s, etc. are subsidized with little or no contributions, whilst Local Government  have good Funded schemes. It is little surprise that dissatisfaction occurs.
The only sensible and long term solution is to change the unsubsidized Public Sector schemes into normal funded member schemes free of State interference and involvement, in the way any normal employer would do, as University and similar schemes. Existing pension payments are a State liability and should be paid by the Government, although the current pension liability could be afforded and met by the new schemes.
Even the projected population increases could also be met, without the major changes being proposed and with substantial cost savings to the State who would relinquish all liability for future pensions and large benefits to members with a secure retirement future.
I am one of the lucky older retired with no axe to grind.
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Thursday 24 November 2011

John’s Blog 48 – Pensions – Simplified 3

The main objective of saving for a pension is the end result of retirement and drawing of pension income and the Fund must be large enough to give adequate payments and survive the life expectancy of the pensioner. This is achieved for the majority of private pensions by means of an annuity.
An annuity is a form of co-operative in which funds are pooled and the survivors benefit from the earlier death of other members. Usually run by Insurance Companies, they are based on complex actuarial calculations derived from Life tables and mortality rates.
At retirement, funds still have an earning capability and the resultant income can extend the life of the fund, in some cases it can even meet the pension payments; in many ways it is not logical that funds should terminate at retirement and payment arrangements are therefore becoming more flexible.
The population decline from age 65 can be balanced against the fund decline for any given payment and investment income levels in a straightforward spreadsheet calculation to establish the sustainable payment in which the fund and population finish at the same time. This can be done for the existing or any future over 65 population decline distribution.
Such calculations show that a 4% investment income can sustain a payment level of 6%, inflation increasing by 2.5% per year, even with the latest 25 year projected population increases and has been used as the basis of pension yield factors.
Annuity returns have been dependent on the stable returns of State Gilts and Bonds, but these have been subject to increased speculation and market fluctuations making them unstable, in the 1980’s rates were at an unsustainable 16% and have dropped steadily to 6% and even 4% for an inflation proofed annuity.
This is another major factor in the poor returns available from annuities; a drop from 6 to 4% means that a given fund will only yield two thirds of what it could be and fluctuate wildly even whilst setting it up. Over the past six months the pension yield from a £50,000 Fund has dropped from £3,240 to £2,600 per year for an annuity which does not increase with inflation.
Furthermore it is not possible to delay taking this annuity; the lack of flexibility and cut off date make pensions unstable and unreliable, but why should this be; the money is still there and without earning a penny would last some 19 years, the life expectancy at 65.
There is good reasons why in a pooled fund, as suggested in previous blogs, that rate fluctuations should  be smoothed out and sustain a uniform pension regardless of retirement date and much higher, by a third on existing rates. The money can still earn income and in some schemes continue to grow after payments.
An alternative is Drawdown, which keeps the fund intact and earning whilst paying out a monthly income; this can also leave a residual sum for heirs. The money of course does not go as far and is subject to annual Revenue controls on withdrawal rate is costly to manage and only available for larger funds over £100,000.
More flexible annuity schemes are becoming available which allows contracts to be renewed every five years or so, with rates dependent on market conditions at renewal and residual funds available
The real answer is large stable funds well managed and secured in stable investments and investments will be dealt with in the next blog.
Savings   Annuities          Public Sector   NHS         Teachers   Police   Local Government    Hutton   State Pensions

Tuesday 22 November 2011

Johns Blog 47b – Lest We Forget

Another Armistice day has passed but the Spirit of Remembrance is still as strong. I, like many, have good reason to remember, my father fought throughout the war; my brothers served and my uncle fought in both World Wars. I spent my youth in WW2, was evacuated four times, returning to London for the main events of the Blitz, when we were bombed out and for the V1 and V2’s. We all thankfully survived.
We should also not forget the reasons for these wars, to prevent European domination by Germany. It is even more important at this time, when it is occurring by the back door of Commercial strength, many of us have forgotten the basic economic rule of balancing our Budget to pay our way in the Global economy.

Germany has not, aided by the large cheap and hard working labour force of Eastern Germany, it has maintained a strong manufacturing capability and self sufficiency with a good balance of payments.

One should not underestimate the Teutonic thoroughness or ability to plan ahead, which caught all by surprise in the past, although hopefully they may still not have the ability to think and carry things through.
Through the European Union, it has tightened its grip on Europe with the move for a United States of
Europe, which it aims to control. The delays in calming the Euro crisis in Europe, appear deliberate and
dangerous, they could be cleared and the markets pacified by Central Bank action.
The results are of course the replacement of democratically elected leaders by Euro-puppets in Greece and Italy, soon Spain and possibly France, although they are already most of the way there.
Britain is once again the main barrier, but we ourselves are commercially weak, with large World trade balances and indebtedness. We have taken our eye off the ball and lost the plot, embraced the global economy before it existed, lost our manufacturing base and self sufficiency and need to recover it.
The basics of economics also appears to have been forgotten; the internal economy can be allowed to grow, subject only to the need to balance the external economy, i.e. the balance of trade. The cost of goods and services is related only to their imported content; home produced labour, food and raw materials cost nothing in internal terms as long as the demand for imported goods are controlled to match exports.
I am not anti -Europe or anti- German but we need to keep things in perspective; the Common market was good and necessary; Total Union is a delusion except by a dominant Dictatorship, unacceptable in modern times. We are all individual countries and should value our tradition and culture and fight hard, as we did in the past for our independence and democracy.
“The path to hell is paved with good intentions” and the approach is devious; create dependency by benefits e.g. agricultural policy, then by debt; undermine T & C by regulations, migration, edicts and common currency, until full control is obtained.
Although National debts in Euro countries are large, no one gives the external debts to the Far and Middle East and America, if they are just internal within Europe, why should they be subject to punitive interest rates, is it just profiteering or political ? and not part of a single currency problem.
It is difficult these days to decide what is real; what is media and what is political misinformation; of course you cannot call a spade a spade without political connotations, being racist or against human rights.
What we need is some good old plain common sense, but of course that is out of fashion and breaches some edict or other, probably European.
We should still all plan for a strong future in Europe, but one based possibly on old fashioned democratic virtues of equality, liberty  and fraternity, in which individual countries retain their identity, culture and tradition, whilst working for common growth, prosperity and security. These were the original aims of the Common market, distorted by political ambitions.
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Monday 21 November 2011

John’s Blog 47 – Pensions – Simplified 2

Pension schemes divide into two categories unfunded and funded; the State and Public Sector are unfunded, where contributions are spent as soon as they are collected and effectively the State issues an IOU promise to pay these when due. Of course it has to be able to afford it in 20 to 40 years time as it has no accumulated funds available to do so and increasingly it has found itself unable to meet its liability.
This is the underlying reason for the current dispute with the Public Sector workers, where the Government wants to increase contributions and reduce benefits to make ends meet, in spite of recent renegotiated terms.
In funded schemes the money is accumulated and invested to build up a pension fund, which should be there on demand to give a stable and secure pension provision, besides the guarantee advantage over unfunded schemes there is also the investment income which can equal or even exceed the contribution income.
This should therefore in practice halve the cost of providing a given pension income, which should also be boosted by the longer working life compared with that in retirement. One should therefore expect that saving a quarter of one’s income would yield a full wage on retirement in a funded scheme.
That this does not occur is one of the major failures of modern pensions and this will be considered more fully later, however one of the main reasons is that pension contributions are not treated as personal and individual savings, which in fact they are and therefore should be protected as such.
The basic mechanic of funded pensions are not difficult and involve straightforward calculations of money accumulation and compound growth,, similar to savings and mortgages. One can obtain simple factors relating annual contributions to final fund  and even pension values allowing one to establish expected pension from given contributions, or savings needed for a pension need.
For example if one saved £1,000 per year for 40 years then £40,000 would accumulate plus any interest or investment income earned, if this was at 6% then average interest would be 20 years at 6% on £40,000, giving a factor 88 times annual savings ((1+1.2) x 40).
This would be in actual values, but one is really interested in its spending power at today’s values, i.e. in real terms. If wages and hence contributions together with Fund growth keep pace with inflation, then in real terms after 40 years the fund yield factor would be 40, if this fund then paid out at a rate of 6% pa then the pension yield factor would be 40 x .06 =2.4.
This is therefore the minimum factor to make savings worthwhile, otherwise you are losing money in real terms, i.e. spending power is reducing with time, which happens with many schemes. The factor increases as the investment income or growth exceeds inflation, over 40 years at 4% it is 3.4, rising at 6% to 5.7.
It is easy to use, £1,000 per year over 40 years at 4% should give a pension of £3,400 per year, rising to £5,700 at 6%, or in percentage terms contributions of 10% pa should give a pension at 4% of 34% of wage or at 6% 57%, all in real terms. This is for all contributions made and assumes wages and hence contributions keep up with inflation.
Current schemes rarely meet these levels due to several reasons :-
·         Tax Free Lump Sum which increases contributions by a third taking a quarter of final fund
·         Poor Annuity performance and overgenerous payments
·         Excessive Costs and charges, Protection levy, dividend and other taxation including VAT.
 On normal savings, interest returns are quoted after all costs, i.e. nett and this also occurs on investment funds, annuities and payments, but not for pension savings. They are also charged as a cost on total Fund value, which becomes increasingly excessive as the Fund builds up and can include setting up charges to ensure early income. Charges on well managed schemes can however be very low and competitive.
Pension protection levy arose due to the commercial failure of some major schemes and subsequent loss of pension funds; this was a failure of State regulation and control and would have been less likely if funds had been treated as savings making it a full criminal offence, readily pursued.
Taxation is a short sighted Government policy, prompted by greed and leading to the steady demise of good pension schemes. The next blog will deal with Investment returns and sustainable annuities and payments.
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Thursday 10 November 2011

John’s Blog 46 – Pensions – Simplified

The next few blogs will attempt to explain pensions in simple terms or as near as possible, on the assumption that previous blogs were too difficult.
The nature of pensions, their aims and objectives, timescale, pension mechanics and implementation; many of these appear to have been lost, forgotten, ignored or just not understand, but all are important.
The nature of pensions is to save for retirement and old age, the aims and objectives to put money away to accumulate and grow into a personal pension pot large enough to give an adequate income to meet the needs and enjoy life after work.
The State forgot this many years ago, when they started using the savings from National Insurance contributions to pay existing pensioners in the pay as you go” unfunded schemes, which are a mis-use and abuse of members hard earned wages and savings.
The timescale is long, at least 40 years, the longer the better and the more affordable it becomes. The ideal time to start is when normal life in work has settled down and a regular income is being earned; the time scale between age 25 to 65 would appear to be a reasonable one.
The State pension has been the mainstay of those in work since the start of National Insurance for those in work to provide for unemployment, ill health and the time in old age after work is complete. Then the Welfare State steadily took over many of these functions, absorbing greater amounts of the money available.
Pensions became starved of money, their aims forgotten, any funds available were raided and distorted into the present unfunded system, annual increases failed to keep up with living costs until they fell below the poverty level. Even worse the minimum benefit level rose above basic pension level by almost a third.
To compound matters, the outdated eligible contribution year requirements were maintained resulting in less than half of females qualifying for full pension, although most males do. At basic full levels of £102 per week, reducing to £62 or less, all were forced into benefit.
The decline of pensions into poverty, with the resultant inadequacy, led to the growth of private schemes, at first as Company schemes on a defined benefit basis and then as personal ones on a defined contribution one. DB schemes guarantee the final pension outcome based on the numbers of years service i.e. contributions and final salary, DC schemes were subject to financial market fluctuations and therefore uncertain.
The State system has failed and will get worse as retired population increases take their toll, it is up to the  individual to make provision for his own retirement future and demand a fair return for pension contributions
The next blogs will attempt to explain in simple terms how this might occur, dealing with basic mechanics of pensions, their implementation and needs, with the possible ways of achieving an adequate result.
Meanwhile a diversion, we are obsessed with time and speed, whether saving a few minutes by overtaking dangerously or in the new high speed train link, which was approved by a Common’s Committer this week.
At a cost of £34bn it will save 20, possibly 40 minutes off the London to Birmingham travel time, which will be wisely spent waiting to board the train or crossing London, or can be wasted, spent sitting for longer in a train. One could eat a good breakfast, use modern technology to read documents and mail, write reports, talk to the office, or otherwise sit back and enjoy the beautiful scenery as it passes by at a safe speed.
This modern high speed technology is supposed to improve rail travel and capacity, yet stopping distances increase rapidly with speed, at 200 miles an hour it is four times that at 100 mph, and four times the several miles of spacing between trains, a quarter of the capacity, needing dedicated lines and restricting other traffic.
Of course this investment will improve employment in Germany, losing jobs here. There must be better ways of spending this money, directly to promote growth, the Severn barrage to meet energy needs, or badly needed houses or even conventional railways and other transport means, which would improve capacity.
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Friday 4 November 2011

John’s Blog 45 – Pensions – Increased Life Expectancy

I have been infuriated this week about the amount of rubbish being spoken by Ministers and senior Business Managers on increased life expectancy, all should be responsible people and check their facts.
 To give a few quotes;- we shall have 35 years of retirement equal to our working life (2009 life expectancy is 18 yearsor half this from population figures); the current population over 100 is 23,000 (2010 figure is 12,400) and will rise to 230,000; plus the normal we will all live much longer and need to work longer and save more.
This is all part of the increasing campaign against Public Sector pensions to create envy and justify policies, they should know better or do and are following a political agenda. They apparently do not even understand what the term life expectancy means.
What is worse and more worrying is that they do not appear to have thought through the consequences of their statements, they accept the projections that the retired population will double in 25 to 30 year which means that costs will also double.
National Insurance and all pension contributions will need to double, already at almost a quarter of wages this would need to rise to almost half, an impossible situation, requiring changes every few years, which is what is happening and infuriating  Public Sector pension members.
Previous blogs have dealt with this but at the risk of being repetitive, life expectancy means you have an even chance of living that long and half will not survive; we all know and have mourned relatives and friends who have died within a few years of retiring, in fact 1 in 10 will not survive beyond 70.
There are many wild statements about longer life after 65 and major decisions are being made, yet no serious studies on this have been reported and the figures not disputed. The medical profession has not come out to explain why we should live five times longer, what miracle anti-ageing drugs have been developed and readily available. I am sure the drug and cosmetic Companies would have been screaming from the rooftops.
There are good reasons to question projections and believe that they have been exaggerated; the statistical calculations may be correct but the interpretation wrong, they are based on births and deaths, which are only a small part of the UK population and take many years to filter through to retirement; 65 years for births.
We should therefore not panic into rash decisions, but consider the problems more deliberately and come up with sensible and long term solutions, which will meet 21st century needs.
The current hysteria, misinformation and envy on the Public Sector pensions is not justified or sensible; dragging the better pension provision down to gutter level means we shall all live in poverty in retirement, dependent on a State pension of £102 per week or less and higher taxation to pay for this misery.
The energy spent in confrontation should be aimed in finding a long term solution with the aim of bringing all up to the same standard of excellence, the current system is flawed and doomed to failure.
We need a radical look at pensions, what we need, how to afford it, how to meet longer life and its demands and the quality of that life. In fact the present economic crisis suggest this should also extend to working life.
A possible way forward has been given in previous blogs and a full report has now been completed and sent to major parties, this needs consideration, comment or alternative suggestions.
Above all, it is your retirement future that is being decided, you need to take an active part and say in that future; demand that your pension contribution savings be treated and protected as such and give good value, whether they be from NI or work scheme contributions.
Two thirds of those in work make no contributions outside NI and need to secure their own pension future by personally saving more and demanding more from NI. The State and other pension schemes are doomed to failure unless change is made and people take charge of their own retirement destiny.
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