John’s Blog 54 – Pensions New Year 2012

This is the time when we look forward to the New Year and our needs and aspirations for 2012; it is a positive time, one of new resolutions, but also a fairy tale time, when one looks at what could and should be.

It is one in which the powers that be, should reflect on what they do and plan, a Jacob Marley time; whether they be Politicians, High Executives, media or anyone that controls what we do.

Self interest should be put aside and the common good and interest of the population of the UK, established and followed. We need to regain internal strength and prosperity.

Pride in work and achievement is a major priority, we take for granted and complain about our basic services and requirements, until we lose them for an occasional day, the blame game dominates.

Public Sector services are a good and recent example, we should take pride in our Doctors, Nurses, Teachers, Police, Fire and all that back them up; also in our Postmen, Local Government and all the numerous charities who work to make life easier.

One of the despicable acts of our present Government is the attempt to divide by envy; the resurrection of the never had it so good mentality, when in fact they should concentrate on the never had it so bad majority.

These are the working population who pay high taxes for very poor returns and little credit and the new generation, who now have to pay to study and then are thrown on the scrap heap whether they qualify or not.

We are in difficult economic times and accept the economies that are needed, applaud the 20% cut in Public spending to balance the Budget, but do they have to be carried out in such a haphazard and ill thought out manner.

It is the easy way out cut services and labour, delay investment and scrap years of existing assets to save labour costs, whether they be fighter aircraft (snapped up by the Americans), schools and hospital buildings, libraries or social buildings, etc.

It is strange that the odd billion can be found to change course or meet a sudden popular demand in public opinion, stated as savings made in Departments, which was the whole object of making cuts, not to spend it again.

We need to assess our basic position,  priorities, aims and objectives, if we need to cut defence expenditure, are we really a world power and can we afford it. We need a little more self interest and let the rest of the world, including Europe, look after itself. Not isolation but preservation!

Should our poor be better off than those in work; do we need to travel faster and faster in high speed trains and cars or should our commuters travel in comfort, preserve our resources for our use, buy British where possible, create jobs for full employment and become more self- sufficient. The list is endless.

Nowhere is this more apparent than in out treatment and attitude to the elderly and retirement and in pension provision. The State takes NI contributions and spends it as part of taxation, without any thought to the future, it is even worse in the Public Services, where it is straight embezzlement.

They pay substantial contributions, which are steadily being increased to swell the Treasury coffers and spent on subsidising other pensions or the general budget for a very meagre return and treated as a charitable benefit. Not as a right as in the Private Sector schemes, which give three times the benefit.

Yet basic reform of all State pensions could give the savings required in the spending review, yield three to four times the final benefits, eliminate the need for present changes, and provide the money needed for the investment required for our infrastructure, future work and prosperity.

All it needs for 2012 is a little vision, good management and change of attitude, plus of course some hard work, which we are all prepared to do if given the opportunity.

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John’s Blog 53 – Pensions – Simplified 7 – Increased Life Expectancy

Never a day goes by without some reference to this, it is used as an excuse to impose hardship and misery and of course save money. It appears to be accepted blindly by all, particularly those who have major control over our lives; Major Institutions; Ministers, MPs and even the CBI and Trade Unions.

Yet there appears to be little study or investigation on the validity of the forward projections of increased Life Expectancy, just the conclusion we will live longer and therefore work longer, pay more and receive less.

The term life expectancy is vague, it is generally taken as the time we have to live from a certain age, usually 65, but this is not true, it is the time half of us may live and is derived from Statistical projections based on Mortality rates, which represent less than 1% of the population.

Over the next 28 years by 2036, the over 65 population is projected to increase from the current 10 million to 17.4 million, some 74%; however over the past 28 years it has only increased by some 18%, from 8.4 million to 9.9 million. This lower rate would only give a projected population of 11.8milion in 2036; the latest estimated 2008 to 2009 figures only show a 1.27% increase per year.

It is only sensible to ask what has changed so dramatically by over a factor four, there has been no anti-ageing drug developed and current major medical advance will take 10 to 20 years in proving trials.

There is no question that people are living longer and the over 65 population increasing, but the main effect arises from increasing numbers reaching 65 and the main question is at what rate over what timescale. We are currently in a peak transfer rate due to the historical effect of increased birth rate after WW2 combined with high immigration figures from Commonwealth Countries at independence. We also have a baby boom.

This illustrates the time scale we are dealing with, not 25 years but 65 or over and this is shown by actual population figures, which give much lower rates than projections for both increases and life expectancy. The population decline for males show life expectancy at 9 years as opposed to the projected 18 year figure.

This is because projections are based on life tables derived from birth, mortality rates and migration. Birth rates are currently 1.2%, which means that the UK population is replaced once every 80 years unless massive migration influx or disaster occurs. This sets the timescale for change.

The lower rates allow more time to adjust and the 2011 Census figures should give a better indication of change rates and I am surprised that they are not yet available, perhaps they undermine current estimates.

There is good reason to question the validity of forward population projections for the elderly, if they do not occur they give more time to act, but they are generally accepted. We need to act now on the basis that they will occur and will lose nothing if they are lower.

This worst case population scenario has been studied by the author and shown to be manageable, if tackled correctly, but not by short term panic measures.

Effectively they are a wake up call to act, State and Public Sector pensions cannot survive this population onslaught in the present unfunded form, particularly as they are currently badly managed, if at all.

Contributions need to be stored, husbanded and made to work and grow to produce individual funds at the lowest cost and provide self sufficiency in retirement, at present levels they could also fund welfare pensions at a good level, provide increased care and care homes for the elderly plus other needs in retirement.

We need to treat pension provision in an efficient, sensible and Commercial manner, we work hard and save all our lives for the peace and tranquillity of retirement and deserve value for money and security. The State has failed if it does not do this and that failure is apparent, it needs to correct this mistake, it has adequate funds from contributions, it needs to return them to members in an independent efficient funded scheme.

There needs to be an urgent serious study of the over 65 population, why it should suddenly increase so rapidly, whilst the rest does not and the validity of the assumptions being made, which do not appear to be supported by the actual or estimated population count.

Major panic decisions are being made on what is no more than supposition, which affect all our lives and future, we need to know why?

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John’s Blog 52b – Pensions – Christmas Extra

Christmas is a period of Peace and Goodwill to all, it is also one of reflection before looking forward to the New Year.

It is a good time to assess our Society, lifestyles and overall living standards and traditions, whether they are Christian or any other faith, particularly in this period of recession and doom and gloom.

If one compares with life of 40 years ago or more, we have never been so well off, but needed the warning shot across our bows occasioned by the Bank collapse and subsequent recession to curb our excesses, greed and self indulgence.

The Bank crisis was more than speculation and greed, it was Money Made Easy with HP, credit cards, loans and mortgages and remortgages; which undermined our basic common sense, beliefs and lifestyle. It pushed up house and land prices well above their real and true replacement value, releasing further shoals of money. We have all been living beyond our means, spending more than we earn and failing to save for a rainy day.

Once upon a time, in the kingdom of reality, one counted the pennies and saved until there was enough money to buy what one wanted, anything extra available or saved was used to build a home or reduce the mortgage to ensure that one went into retirement free of debt.

Debt is an intricate and perceived part of everyday life, no one counts the cost or appears to take it seriously. I was amazed to hear senior Ministers justifying the iniquitous Student loans on the basis that such lifetime mortgages do not have to be repaid until earnings occur and that they were a debt to Society. All progressive Countries look on education as an investment by Society, ensuring their future, how misguided are we now?

This is just one aspect of our decadence, tied in with self-interest, greed, excesses and blame, whatever the incident or accident, someone has to be blamed, justified in a criminal offence, but this should not be so when due to some form of unintended negligence or mishap.

My mathematical studies involved looking at things logically, searching and setting out the facts, checking there is a solution, thinking through the problem, questioning the answers and applying common sense. A basic mind training, which has served well when faced with new disciplines and modern technology.

Yet this general thorough approach does not appear to be used to solve the challenges facing Society today, we do not assess the cost and what we can afford, especially the State, but live short term.

Universal Funded Pensions offer a solution and the way forward, they are a long term commitment like education, work, building a home and bringing up children to a better standard and social sense. My parents worked long, hard and sacrificed much to ensure that we had better opportunities than they did and we profited by it, both in work and attitude to life.

In addition to ensuring a stable retirement future, the long term savings generated, if invested wisely, offer the means to meet 21^st Century needs in Homes, Education, Health, Infrastructure and Employment.

The New Year of 2012 should be used to ensure that such pension changes occur, that we start thinking long term and forget the quick fix solution, which cause upset and strife without solving anything!!

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John’s Blog 52 – Pensions – Simplified 6 – Retirement

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.

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John’s Blog 51b – Pensions – Europe Extra

Christmas 2011 is looking to be a doom and gloom event, a Scrooge Festival, with dire financial misery predictions leaving little to celebrate. Yet is it all real or just a fairy story?

One gets the impression that we are talking ourselves into another recession and the Euro fiasco does not help, with the Euro position not advancing one jot. Central Bank intervention would pacify the markets but Germany is opposed, either through dithering or design. Neither bodes well for Europe’s future and Britain stays on the sidelines, perhaps the best place to be.

A single currency requires true democratic Political Union, which is unlikely to occur this Century whilst self interest dominates the scene, the alternative is a Dictatorship, which works well in a crisis, but outdated in this modern age. Yet that is what seems to be occurring.

After the week’s events, Britain appears to be isolated, divorced from the rest of Europe, of course this is not the first time this has happened and the historical similarities are too close for comfort.

This time it is on the Commercial battlefield, Industrious Germany has good commercial strength, with a positive balance of payments, the rest are weak and riddled with debt including Britain, which again is the only strong political opponent. The European Commission has been steadily chipping at Sovereignty.

The new Treaty will remove the final barriers, approval of Financial Budgets will be needed before individual States can consider them, completing the Central control and the Federal States of Europe will be born. The imposition of fines on offenders is like stealing money from a beggar’s cap.

However Public opinion in Europe will be ignored, as any referendum would be lost and such a step must be taken in peril in this modern communication age. Meanwhile the major problem of the Financial system’s excess and the indulgence in Political activity will not be curbed.

As in previous times, Britain needs to stand back and assess its own position with self interest at the front; the only sensible part of European Union the Common market will continue. We depend on 40% of our exports, but what of our imports and balance of Trade with Europe, which is larger.

We import £4bn per month more goods from Europe than we export, the same as the rest of the world who take 60% of our exports. The total deficiency of £8bn pm is halved by the export of services, now under attack.

However can we afford a rift with Europe, w e are too dependent and need to exert a stabilising influence against excesses, on the other hand can they?  We need to return to the basic trading treaty and forget the Political Union we have never been asked to agree to. Increasingly every day we are being controlled by faceless bureaucrats from Europe, told what to do and fined if we don’t obey, with idealistic, petty and pointless rules and regulations, which cost us dear and are not democratic.

 Can we afford our world role and do we need it, Germany spends virtually nothing on world affairs and is the stronger for it; we need to temper idealism with realism and to separate internal and external economics. We spend a quarter of our GDP abroad and build up international debts of £45bn per year which needs to be curbed; there is no need to break trade agreements, just to make the population aware of the true cost of French apples, Dutch flowers, German trains, American arms  and Far East toys on a £4 to £1 basis.

We need to earn what we spend, as a Nation, a Government and as individuals; self sufficiency is a good ideal and needs to be practised more in our homes and Society. We downgrade ourselves perpetually, yet as a Nation we have many strengths, often hidden and have much to be proud of in tradition, lifestyle and expertise, which needs to be developed and built on.

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John’s Blog 51 – Pensions – Simplified 5 – Retirement

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.

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John’s Blog 50 – Pensions – Simplified 4

Investment returns are the basis of any good pension fund management but like everything else in pensions have lost their way in the fast buck financial society and the gambling casino of the Stock and Futures market, speculative trading in Currency, debts, property and even pensions.

Pensions need stable and long term investments which increase in a steady and possibly modest manner, previous blogs showed that these can yield adequate and secure returns on present contribution levels meeting both population and inflation increases.

Even in the present recession, saving returns of 4% are still available over 1 or 2 year fixed after charges;  pension funds are still reporting returns o around 6%;  internet comparison sites report monthly saving investment fund returns over 10 and 20 years of 7% and American PS funds report 25year yields over 9%.

Commercial and Company investments aim for 15 to 20% which is often exceeded, PFI in Hospitals and Schools suggest even higher returns, mortgage and Equity release rates are over 6%; Banks and Credit cards charge 18 to 29%.

It is therefore not unreasonable to expect modest returns of 6%, after costs and charges, on long term pension savings and to plan forward on these; infrastructure projects should be able to readily pay such rates, as should rents on housing, hospitals, schools etc. Pension funds are already financing Shopping precincts, Supermarkets, Office blocks and Industrial Estates.

Higher risk can still play a part giving higher returns in large funds and the early year savings, the idea of Super Trusts in pensions has been put forward (NAPF) and large funds offer stability and security; they can absorb income fluctuations, reduce charges and often dictate terms to the benefit of members.

In the consideration of the pension mechanics of funded schemes, the concept of pension yield factors was introduced in order to simply predict and monitor pension saving performance, which was related to investment returns, inflation and number of years of contribution savings.

This showed how over-contributed and under-performed current pension schemes are, particularly the State who are tied up in the pernicious pay as you go trap, which needs to be broken. If the money was made to work properly, there would be none of the problems of affordability; State expenditure, life expectancy with its delayed retirement or reducing benefits and poverty in old age.

It may seem like Utopia but it is possible and the new universal pension contributions could allow a smooth transition to this Mecca over the next ten to twenty years. The benefits are enormous not just to pensioners but to the State and the whole population, creating a revolution equal to that in the 19^th Century which transformed the whole of Britain. It just needs similar faith and vision for the 21^st Century.

Unfortunately our Politicians do not appear to understand this and are too tied up in the status quo and unreceptive to any major change. Fortunately the new current communication technology allows everyone to research, think and use their voice, e-mail, text, chatter, etc. to force change, make the Academics, think tanks and eventually the Politicians to take off their blinkers, look around, take note and act.

Let us hope it happens soon before it is too late, we all need to make major changes in our attitudes, aspirations and living styles to create a future for our children and grandchildren, it is their right.

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John’s Blog 50b – Pensions – Public Sector Strke – Aftermath

The one day strike is over, with its expected disruption, which hopefully will not re-occur, the overall impression was that the Government is not taking this matter seriously or responsibly. Cameron refers to a damp squib and his friend wants to shoot 2 million Public Sector workers, this is effectively what the Government is doing anyway with its changes although more like penal servitude in retirement.

That this was not as disruptive as it could have been was because those on strike were matched by more who wished to but put their duty first to provide emergency and essential services, many on strike had never taken action before in their lifetime.

Although they now be starting talks again, the basis appears unchanged and does not meet the long term needs, There is talk of generous terms and benefits and “gold plated” but pensions are nothing like; would you to pay £3,700 per year for 40 years to get a pension of £5,000 over possibly 20 years or less.

It is not even their money back, let alone inflation and with the changes proposed they will be lucky to get that; these changes are a taxation on the pension scheme, the NHS are already paying £2 to 4bn per year and this is set to double or treble over the next ten to fifteen years.

The State pension is as bad, NI contributions count for nothing and are treated as taxation revenue, there have already been successive rises and at 24% have probably reached the maximum possible, hence the transfer to increase PS income and the new Nest pension scheme next year.

All in work should be concerned and not be diverted by the envy red herring, having reduced State pensions down to below poverty level it is moving on to its next victims, be afraid, be very much afraid. It is their turn next year, when they will all face contributions for the new scheme of 4%, £8 per week for someone on a £200 wage, twice that or more for those on average wage.

In its accounts it treats State Pension as “benefit”, not a hard earned right, showing the attitude and the single tier pension proposals, not widely publicised, will abolish the State second pension and the SERPS NI rebate, leaving all on a pension below pension credit benefit level.

The Government should spend its energy getting everyone up to a gold plated standard and putting the hard earned savings into a Capital account to work and grow. It is getting the message to invest funds into infrastructure, but asking Private funds and the Chinese to find the money.

It currently collects and spends on pensions some £100bn per year from NI and PS contributions, if this money was spent on infrastructure and other National investments, even at a modest 4% return over the forty year work period it would grow into a £6,600 billion Fund yielding an annual income of £260bn and supporting individual pensions of £19,800pa for double the present over 65 population in today’s terms.

This is the advantage of the transfer to a funded scheme of both State and Public Sector Pensions and it could occur over the next ten years if the Government set its mind to it. The current pension liability would need to be met, but the State already owns more than adequate infrastructure assets in buildings, schools, hospitals,  and even Bank Investments to raise the 4% return needed.

The advantages to all concerned would be tremendous:-

·         Pensions levels would rise dramatically, by a factor 3 or 4

·         The State would save amounts greater than the spending review cuts in benefit and future expenditure

·         We would get the sorely needed infrastructure of Buildings, Transport, Energy and Social needs.

·         The Economy would grow, Unemployment fall; the Autumn Statement doom and gloom disappear.

·         New Life and Pride would be injected into the Nation to replace the moans, hardship and envy.

It just needs the Will and Vision to effect this change, and the People need to force its adoption.

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