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 21st 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.
Savings Annuities Public Sector NHS Teachers Police Local Government Hutton State Pensions
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