John’s Blog No 59 – Pensions - The Way Forward 2

There are many aspects of contributory pension that appear to have been forgotten or lost; these are the pension yield factor, which allows easy assessment; the annuity gain in which a 4% return allows a 6% payment resulting in the fact that Pension funds do not have to be repaid but only serviced at a modest 4%.

These can all be used to allow the cost neutral transition of the State unfunded schemes to the more beneficial funded ones provided new money is available. The existing and future pensions are a State liability, which in 2004 were given at £1200bn and are now probably twice that.

In the UK, 75% of the working age population of age 16 to 64 are in work (some 29 million), 25% belong to pension schemes and 50% make no other provision outside State NI, the balance are students, housewives unemployed, disabled and early retired, who will depend on welfare.

There is little point in envying those in defined benefit schemes, we should all aim to join them in a fair and value for money system reflecting our personal savings and hard work. The State should concentrate on pension welfare.

It is clear that at least half the working age population need an attractive pension scheme to ensure their retirement future. It is apparent that BSP or NEST will not fulfil this need or give value for money, hence the need for personal contributions. The State should also do their share in the guarantee of pension income from NI.

The current state spend on BSP is £55bn, which is over half NI income and roughly equals average individual contribution of 8 to 10%, hence the proposed 8% rebate tied to 50% NI income. To survive, it is essential that State  expenditure is linked to income and this can only be achieved through a funded scheme.

Over the next 40 years the over 65 population is projected to double, together with real costs which are clearly unaffordable and short term measures of delayed retirement etc. will not meet these costs, resulting in more taxation.

Time is an essential factor in a funded scheme, needed to allow savings to accumulate and grow into a fund sufficient to meet the demands of retirement and to survive with its owner, 40 years is an ideal length with 20 years the minimum.

 With retirement at 65, this makes age 25 a good starting point; studying is usually complete and wages have stabilised allowing affordable savings to be started; it is also difficult after age 45 to build up adequate funds.

The 20 year transition allows time for the new scheme to become established and build up funds; after this time pensions from 45+ will become due and need to be met and it is also proposed that the new and existing schemes take responsibility for all new pensions that become due thereafter, including BSP.

It can be shown that a £1,000bn State pension bond or asset transfer yielding 4% will meet the 45+ pension and population liability. This would release a third of current BSP spend for NI rebate, providing new money is available to meet the 2% shortfall.

The new money could come from asset income, rent or by the build up of new pension bond, sold to the new scheme, effectively the new scheme using contributions or NI rebate as part of fund investment. Over the first ten years BSP spend would need to increase with population and inflation and during the next move to match NI income proportion.

Such a transition is possible with major advantages to all concerned, starting with new scheme members and moving to established schemes later, with State liability eventually fixed at 50 to 60% NI income and members gaining from a funded defined benefit scheme with a guaranteed pension outcome related to savings input.

The member’s Pension contribution savings will be affordable and multiplied by four from Employer, Tax relief and NI rebate with final pension replacement some 4 to 6 times total annual contributions and 16 to 24 those of members. Good scheme management should generate sufficient funds to give pensions of at least 50% wage and allow redistribution to lower earners and elderly care needs.

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John’s Blog no 58 – Pensions - The Way Forward

Over the past blogs we have developed the needs and basics of pensions and it is now time to convert these into positive proposals. This was covered in an early blog which outlined a Universal funded defined benefit pension scheme whose aim was to bring everyone in work up to the same degree of excellence as the best schemes available today.

The only way to meet the projected onslaught of the increasing over 65 population is pension self sufficiency in which everyone who works carries his own pension pot into retirement, adequate for his needs. These must be treated and protected as personal savings, each with their own name tag and share of the overall fund.

However it is essential that the major advantages of size is not lost, including those of annuity type payments, as this gives Commercial strength both in continuity and fund returns. Funds should also stay alive, but separated, after retirement, not to be replaced by insurance or other promissory notes, which is a major weakness of existing schemes.

Plans are in hand for a single state pension of £140 per week to replace BSP, S2P and SERPS, and also a new NEST contributory scheme starting in September. Both are flawed and will not meet the needs and challenges facing pension provision. The new level is still below the current welfare pension plus other benefits, and Nest is based on defined contributions shown by DWP to lose money in real terms.

It is time for a new radical approach and this is made possible by combining the two approaches; to replace the State pension with an NI rebate incorporating NEST for all in work not making any self-provision .

This contributory UFDB scheme would take the proposed 4% members contribution plus the 3% employer and 1% tax relief and match it with an 8% NI rebate, effectively increasing members contributions by a factor four. The scheme would guarantee a minimum pension in today’s terms of £140 pw to all in work, which is increased by members contributions and increases with inflation assumed at 2.5%.

 For example if we take the average female wage of £400 pw, this would earn a guaranteed £140 pw plus an additional £116 pw, in total £256 pw all for member contributions of only £16 pw over a 40 year savings period in real terms. Total contributions are £64 pw requiring a pension yield factor of four and a modest investment return just over 4%.

 This is a good return for a very small outlay and should therefore be attractive, an offer too good to miss, it also takes account of worst case population rises; retains existing retirement age; with a secure outcome and sufficient flexibility to allow earlier retirement or larger pensions with extra contributions. It also has the advantage of a visible pension return on NI contributions, rather than the present “begging bowl” State benefit approach.

The main problem is the transition from the existing State position to an independent scheme in a cost neutral way for State expenditure. Existing pensions and welfare payments take all and more of the current NI income and these have to be met besides finding the money for rebate, which is where the new contributions take effect.

In the transition stage it needs to be a compromise between the State, the new scheme and existing pension schemes meeting the existing pensions; one way is effectively investing the NI rebate in State pension bonds to finance them and taking over new pensions as they arise after the 20 year transition.

In order to allow the new scheme and its members to build up funds, eligible entry is restricted to age 25 to 44, building up to 64 over the twenty years when the first new pensions become due, this also reduces the NI rebate to more reasonable and affordable amounts. This also fits in with the 25 to 64 memberships criteria, allowing 40 year saving.

 The overall aim is to give a scheme which is attractive and fair to all, whose guaranteed returns reflect the contributions paid with a minimum safety level, which is flexible enough to meet changing needs and situations and to meet the long term challenge of ageing population and pension provision in the 21^st century.

The advantages of the proposed system stretch well beyond the provision of pensions and could have far reaching economic effects; the State no longer has liability for pension provision, except for welfare, and NI rebate cost are linked firmly to NI income. This results in savings in State expenditure reaching £30bn or more in real terms, in addition funds for investment amounting to £60bn+ annually become available to allow infrastructure and other expenditure to boost jobs and prosperity, besides improving living standards.

The next blog will put more flesh on the basic bones outlined today from the build up of funds to the problems of the cost of meeting existing pensions and the money generated to meet benefits.

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John’s Blog No 55b –Pensions – Comment on New Year

The first week of 2012 has been busy with lots of New Year’s resolutions in Politics, Business and all in influence, of course what we really want is a NY revolution in thinking, approach and action.

There is no real leadership in the UK; Cameron blows with the wind, seizing on the latest Public Opinion; Clegg has disappeared, as a lifelong Liberal I find little to support; and Milliband does not exist, not that you can notice. In fact there is little leadership in the World today, except for China and various dictatorships.

Anyway if we look at the various events of the past week, not in any particular order.

Breast Implants  - These are faulty goods, not fit for purpose and should be treated in the same way as anything else we buy. With all the stringent control on drugs, how on earth did they get on the market, five minutes testing with modern analysis would have shown them up as industrial silicone! Surely the clinics have insurance to cover this.

HS2 – The case is based on increased capacity, business need and job creation. Due to the braking distances required and the laws of physics, doubling the speed increase the train spacing four times thus halving the capacity and needs dedicated lines without slower traffic. Motorway experience shows that at peak times reducing the speed to 50mph, smooths out the flow and reduces travel times, we have all experienced the stop start travel surges on busy motorways and the delays.

Business needs- the 25 minutes saved on travel times will be spent in delays getting to the station, the logistics of waiting to board and delays getting to the final destination. Modern technology allows one still to work, deal with e-mails, video conference or just sit back and enjoy the countryside on a slightly longer journey.

On previous experience job creation will certainly occur in Germany, France, etc. but how much will really be spent here; it is another way of increasing our balance of payments deficit, as if we need one.

It will go down in history as an epic waste of money, there are better ways of spending £33bn; the Severn barrage would do more lasting good and meet green targets, as would Housing, School, Hospitals and modernising all  infrastructure generally, they all would  create more jobs and boost the economy and prosperity.

 Immigration-“ does not displace British workers except from outside the UK”. Commonsense and observation shows this to be not true, based on those who draw benefit it is obviously flawed, how many EU or other immigrants even exist officially, pay tax have an NI number or work permits. They are visitor workers outside rules, who export money home, they are industrious with a good work attitude which we could well adopt.

Directors pay and Banking reform – still in the doldrums and unresolved, including bonuses; pay should be related to share value and other perks such as share issue and bonuses should be banned; shareholders, employees and all concerned should obviously have a greater say. This would give better value for money, it is debateable whether such high incomes in any occupation are deserved, earned or worthwhile.

Economy – “There is a good time coming but it’s ever so far away” seems to be the theme tune, but the credit squeeze does not make sense. It started off with good intentions, a 20% cut to get things straight, but then someone appears to have been too lazy to sort the detail or think it through.

The result is the easy way out, cut services; shed labour to cut wages; close libraries and community centres; cut grants to charities etc., regardless of whether they are doing a useful job or essential to communities or a necessity to maintain an ordered society and even whether you can afford to be without it.

However it is funny how the odd billion can be found for something or other and we spend money wildly abroad, we need to balance budgets but mainly on our external budgets with the rest of the world.

Olympics – dominate the headlines, the ticket fiasco continues; like the budget spend, they seem to find the odd million or so tucked away; are they filling the tracks with seats or can no one count. The cost rises steadily, now its security, which we were assured had been catered for, but apparently not. It is also puzzling that no mention of parking facilities for cars and coaches has taken place, or is that another jack-in the box waiting to jump out.

Youth – has also been in the news after the riots, but they were only a mindless minority; there is a lot to be admired in the youth of today, they have modern technology at their fingertips and seem to have more get up and go than I can remember from my youth. What they need is more opportunity, they have no work, nowhere to go, nothing to do and if they want to better themselves at University, a lifetime mortgage. Other Countries, especially the successful ones, value and nurture their youth, perhaps we should follow their example.

The New Years Resolution I would like is a little bit more common sense and thought in planning our future.

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John’s Blog 55 – Pensions – Simplified 8 – How Much

The main question of course is how much; what income is needed to live on in retirement? what does one need to put aside and what fund is required to sustain that income? It is a little like how long is a piece of string, but one can have a good guess and come up with some reasonable answers.

Starting with the easy bit, what income?, if you take your latest pay slip, or slips for a working couple, then take pay after all deductions, including pension contributions, deduct mortgage costs, estimate work and children costs and that is what you are basically living on at present.

One needs to work in real terms, that is today’s living costs and assume income and savings value match inflation, to readily understand and relate the figures, as one is looking at long time scales of 40 to 60 years.

There are many figures available on what income is spent and required to maintain an adequate living standard and we shall deal with the lower end at and above the welfare level, as the rest tends to take care of itself. This is not directly related to wage level, at the average part time wage of £200 per week, £10,000 pa, the normal 50% i.e. half final salary is below the poverty level.

Of course the final income depends on living styles and age, if you retire at 55 with some 20 years of active life you will want to travel and spend on hobbies, sport, leisure activities etc., at 65 to a lesser extent and 75 and above this expenditure can reduce substantially. A comfortable level has been put at £14,000 pa.

We have the absurd position that the basic State pension is currently £102 pw, but the minimum the State says a single person needs to live on (Pension credit) is 30% higher at £130, effectively the poverty level.

It is proposed to increase BSP to £140 pw but do away with the State second pension and SERPS, which would make National Insurance contributions meaningless. The basic problem is that BSP is treated as a charitable State benefit and not as a working right and therefore degraded beyond benefit levels.

Effectively all pensioners will live below the poverty level unless they make savings / contributions for an additional pension now being introduced as the NEST scheme later this year, basically paying twice for your pension. This is a defined contribution scheme with no guarantees and traditionally poor returns with an expected PYF of 1.9 well below inflation proofed values at 2.4.

On the average female wage of £20,000 pa, contributions at 8% will be £1,600 with an expected pension of £3,000, even at 4% return it should be £5,700 and at 6% should be as high as £9,000. However contributions from NI are almost the same amount, doubled by Employers yielding £5,300, so there must be a better way.

This will be explored in the next blog with a radical new approach to pension provision.

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