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