Friday 24 February 2012

John’s Blog No.63 – Pensions- Overall Failings

In the last blog, I considered the ridiculous situation that arises in insecure and unstable Annuity rates, which are one of the reasons for the poor return on pension savings. It is part of the overall failure of pension provision to recognise that contributions are individual savings with personal ownership.
If you put money away in a Building Society, Bank, PO or similar savings account, you are told the net return after all costs and charges; receive regular statements; can even get interest free of tax and also guarantees from the State up to £70,00 for each account.
Put that money away in regular monthly Pension contributions and you have a completely different scenario, it is no longer treated as belonging to you and disappears into an unknown void. If you are lucky you may get vague annual statements with projections of the expected pension, if you continue to make payments for the full 40 year term. These tend to be revised downwards every year, reducing as you approach retirement.
Of course you get the advantage of tax relief on these contributions, which for the normal person are worth a fifth (20%), however your provider will immediately take a quarter of this (5%) to buy units at the bid/ offer difference and probably double this for charges. The State also makes a protection levy in case your money is stolen by your provider or Employer.
As you may have guessed, your pension monies have no protection or security guarantees by the State or that they may even grow in the Fund, with FSA having no control over performance. Any projections given in initial proposals or subsequent statements are only an indication of if, if and if and not worth the paper expended.
It all culminates after 40 years of diligent saving in the annuity lottery, dealt with last time. The State is no better with NI contributions and the final poverty pension is treated as a benefit not a right.
You may of course be lucky enough to belong to a Company scheme in which further contributions are  added as part of your employment contract, effectively earned by you, but again the anybody’s money attitude applies. The majority of major Companies run good defined benefit schemes in which Funds are wisely managed and invested but unfortunately these are on the decline.
Some put the money directly into the business, where they are  lost or stolen in Company liquidation without redress or Government control, hence the protection levy !!! The State has also regarded such Funds as a good source of taxation revenue and also introduced minimum Fund levels which often limit the weathering of market drops resulting in forced selling and associated losses.
Public Sector, the subject of current dispute and rancour, is even worse, with no excuse made in not saving contributions or even treating them as such, in fact they are used as taxation income with little real information made available. Returns on contributions paid are poor with a similar benefit attitude rather than rights.
Members contributions range from 6 to 11% and are due to e increased by 3% and supposedly are met by similar employer sums, yet the last GAD report indicated average NHS replacement returns of 25%, hardly reflecting the members contributions alone.
 It is difficult to foresee the outcome of the compulsory Nest pension savings being brought in this year, with a potential 20 million new pension members, but it appears to have been based on pension business as usual with loss making defined contributions, excessive charges, and existing poor speculative investments.
The opportunity for drastic pension reform seems to have been ignored and we appear due for an extension to the failed NI system with large investment funds lost in the failed Commercial and Banking system.
The need for reform is apparent but still being ignored, a pension as savings attitude would make a large difference.
Annuities, Public Sector, NHS, Teachers, Police, Local Government, Hutton, State Pensions, Transport, Comment

Thursday 16 February 2012

John’s Blog No.62 – Pensions- Annuities

I was shocked last week at the announcement that Annuities had dropped by a third over the past six months, debated whether to change my blog but settled for a footnote, whilst I checked on it.
It is a nonsense that a lifetime savings can drop so suddenly at a time when those concerned have no choice, but is typical of annuities and the whole private pension system, which has become a speculative lottery.
One needs to save over a minimum of forty years to afford and build up a reasonable pension fund and it is therefore unreasonable to be forced to decide within a few months what to do with that money and ridiculous to have to give it away to ensure an income for life.
Although initiated by the Revenue (scared of tax evasion), it has been made worse by the pension providers. At retirement, hard earned savings are put in limbo, earning little or no interest and a quotation valid for a few weeks is given for that money to be exchanged for a guaranteed payment for life.
In a well ordered Society such an exchange was reasonable and beneficial, maximising the amount available from varying life expectancy and giving a secure income, until it met modern commercial greed and speculation. The money still exists; it has earning power and yet annuity rates no longer reflect this.
It can be shown quite simply that even with the worst increased population projections for persons, an annuity return of 6%, with inflation increases of 2.5% annually is possible. Yet current annuity rates are 2 to 3% less than this, now at 3.57% joint or 4.1% single life and yet at one stage were as high as 16%.
Currently In order to give a basic living standard, one needs a pension income of £9,000 per year plus basic State pension, at 6% this requires a minimum Fund of £150,000, however if this drops to 4% return, the Fund increases to £225,000. To meet this pension savings have to increase by half as much as expected or income drops to £6,000.
With present Life expectancy at age 65 at 20 years, one could draw an income of 5% before any fund runs out, if the fund earns 4% then this would extend to some 30 years or an increased drawdown of 7% or an inflation proofed drawdown of 6%. This shows how much a rip off annuities have become.
The obvious solution is living Funds, that do not die at retirement, to be replaced by an almost worthless promise, if they were treated as savings, then total funds would transfer smoothly at retirement to your personal account to be withdrawn on a steady basis. The Revenue do not like this but it can be done in a limited manner.
Drawdown is possible at present; Funds are held by your pension Provider and paid out monthly but are set at a level agreed by the Revenue every year, which is costly, usually attracts poor returns and not considered worthwhile under £100,000 Funds. The stated aim is to ensure that the money will last your expected lifetime, to basically save the State money.
As usual this has not been thought through properly; is dominated by mistrust and State economic motives. It is your money, saved over a long time, why should you be subject to restrictions not imposed on those who do not bother to save. Of course some common sense is needed as many simply cannot budget, and Funds need to last your lifetime.
Simple inexpensive rules can be devised for self protection and a guaranteed Pension Bond devised outside of the Commercial markets and therefore non-negotiable and run by mutual Pension Societies or Associations, Banks or other bodies as long as a minimum return of say 4% is given.
The approach can be very flexible, rules could be based on 6% drawdown from £150,000 Fund; savings above that can be freed of all restriction; taken at a higher rate or even a tax free lump sum, limited in value.
Of course one can forget the tax relief and make your own pension savings free of all rules as many do in property and investments, but this is only viable for a well informed and capable few.
Although the proposed UFDBPS scheme is preferred with continuity through work and retirement and advantages of NI rebate and life expectancy variations, this half way house alternative is much better than the existing system.
Once the principle of personal savings for pension funds are accepted, with more open competitive treatment and PYF targets, then many of the existing problems of performance, charges and security disappear. This leaves the way open for a more positive and dynamic pension systems to meet modern needs.
Annuities, Public Sector, NHS, Teachers, Police, Local Government, Hutton, State Pensions, Transport, Comment


Friday 10 February 2012

John’s Blog No.61 – Pensions- The Way Forward Economically

Pension reform could play and be a major part in the economic recovery from the present recession, and arises from the large amounts of money that would be released into investment infrastructure in the economy.
The proposed new Universal pension scheme would involve 50% of the working population who have made no previous saving in pensions, even restricting this to age 25 to 44 still gives some 8.5 million new savers. At an average total contribution of £1,600 per year this gives annual fund addition of £13.64 billion, which could be doubled by the NI rebate to £27 billion per year.
If all of this were invested in infrastructure, it should not be difficult to meet a 6% return, which would itself be invested and effectively frees any project of Capital return during the construction/ investment stage.
It would be essential for maximum economic impact in the UK that the majority of this money is retained within the UK, i.e. spent here, particularly in the early years. This would have a major economic impact, creating jobs and growth spread over a wide range of skills and ages and would need careful planning.
There are many areas where this spend could occur in a positive beneficial way and which are urgently needed and slowed down by present spending cuts and investment starvation. Affordable Housing, Schools, Hospitals, Care homes, Transport, Energy and various High-tech R&D areas ready for implementation are all good examples.
 The majority of these in the early stages are labour intensive and use materials and skills available here such as bricks, mortar, concrete, steel etc. and our manufacturing capability could be built up to meet a good part of the equipment needs of the second phase.
Most of the project have timescales ranging from several up to 10 years, with expenditure spread over this period; over ten years the pension funds available in real terms with interest would amount to some £350 billion plus.
It needs little imagination to visualise what such spend would do both to growth and basic structure of the UK.
  • The ill conceived HS2 at £32bn could be replaced by a 1200 mile advanced vacuum network linking all the major cities, which even with rolling stock would leave £12bn+ for major electrification work elsewhere.
  • The Severn Barrage at £32bn would create employment from the West Country, Wales up to N.Ireland and solve our green energy needs.
  • A  Water grid; Broadband highway; Gas grid and major sewer, water and electricity work
  • A million affordable homes should cost some £60 billion, 1.000 schools and hospitals could be similar.
  • This would still leave some £120bn for other projects and investment in roads, Hi-tech etc.
All in the first ten years, with another ten before the first pensions become due.
There is the opportunity to recapture the spirit and endeavour shown in the 19th and early 20th Century and the social responsibility, which pulled millions out of extreme poverty into a more comfortable existence. We live in an exciting era with technical advances equivalent to those occurring in that time.
W e need to face up to the challenge and grasp the opportunities firmly but this will not occur without major changes to the current social structure and our attitude to change, plus positive vision in approach.
Comment Footnote – It was reported this week that over the past six months, annuity rates have dropped by a third; someone retiring has therefore lost a third of 40 years of hard earned pension savings, effectively “stolen by a forced sale. This money still exists to be realised by its new owner and shows the stupidity, dishonesty, speculative and unacceptable nature of the present pension system. It will be a major problem in Nest, be very much afraid as all will soon be involved in this modern form of highway robbery.
Time for a change is well overdue and requires positive action to guarantee, protect and safeguard the personal pension savings of all in the UK. It is our pension future and the State as well as the individual has as much to gain.  
Annuities, Public Sector, NHS, Teachers, Police, Local Government, Hutton, State Pensions, Transport, Comment


Friday 3 February 2012

John’s Blog No.60 – Pensions-The Way Forward 3

We outlined in the two previous blogs the basis for a new universal pension scheme, which if implemented would have major beneficial effects on the working and retired population and the UK as a whole. It would
·         Guarantee all in work a pension proportional to contributions made with a minimum acceptable basic level and modest contributions
·         Relate State expenditure to a fixed percentage of NI income aimed at 50%
·         Allow flexible retirement before or at the present 65 level or beyond if preferred.
·         Allow major annual investment Fund spend to promote Economic growth, Employment and prosperity
·         Create Pension Funds large enough to give stability and security over the long saving period, with fund continuity through work and retirement
·         Give all members a defined Pension pot, retained for the rest of their life
·         Generate sufficient Fund surpluses to meet elderly care, social needs and quality of retirement
·         Allow sufficient redistribution of pension wealth to guarantee the lower paid an adequate pension
·         Clearly separate and define welfare for those incapable of work, as a responsibility of the State
 This may sound a Pension Utopia but is readily possible with will, determination and strength of purpose, combined with vision and good management.
The money is already being saved and spent in pensions, it just needs organising and control to give maximum benefit and value for money. For example if the £55bn spent annually on the basic State pension was invested over 40 years at a modest 4% return it would yield a pension spend of £200bn per year, giving a BSP of £370 pw.
Unfortunately it is locked in the unfunded system distortion, paying today’s pensions for people who thought wrongly that their NI contributions were being saved for their own retirement and this continues ad nauseum.
It is time to break this viscous circle, treat contributions as personal savings, accrued for  their benefit, with all the advantages this entails; the proposals outlined offer a cost neutral way of doing this.
It is not suggested that it will be easy or not involve political u-turns, particularly in Public Sector pensions, who require the same change; or not involve changes in investment attitude and practice.
The present Financial markets cannot meet the demands of long term saving of stability, fairness and guarantee, they are too involved in fast buck, quick profits and basic greed. Modest slow and steady growth gives adequate returns over 40 year plus with a modicum of risk and higher returns in the early years.
Our Victorian Ancestors showed determination, vision and long term investment, grasping opportunities, to leave us a legacy of infrastructure which has lasted 150 years and which we are struggling to repair or replace. We need to follow their example and rediscover their spirit.
Unfortunately we are stagnating, without firm or strong leadership, stumbling from pillar to post often with two steps back for each one forward, saturated with idealism with realism forgotten or ignored. Meanwhile the Far East have adopted the Victorian zeal and attitude and steadily leaving us behind.
Before we become the Commonwealth countries of China, we must stop the self flagellation of blame, woe and  despondency and take common sense steps to ensure our future, whether it be an insular UK or a realistic and sensible part of the Global economy, where we recognise and accept our place and relative importance.  
Pension reform offers the means to do this and secure our retirement and economic future.
 Annuities, Public Sector, NHS, Teachers, Police, Local Government, Hutton, State Pensions, Transport, Comment

Wednesday 1 February 2012

John’s Blog No. 59b – Comment

It is now a month since we entered the New Year and little has changed on possible good intentions
Executive Pay and Bonuses – are still unresolved with mind staggering figures being quoted. In a responsible Society it somehow seems obscene that someone can earn in a year what a person on average wage needs a lifetime to achieve.
The present Century has seen an escalation in Executive and Management pay to levels unprecedented in earlier years and out of all proportion to normal wages and work justification. It is argued as a matter of worth to our leaders of Industry, major Institutions and Local Councils, but what worth and at what cost.
The average wage in the UK is currently £25,800 per year, is this management worth four, six or even ten times those who work hard in the business and help to create that wealth. Even these factors do not approach the 40 to 200 times the average wage that these people assess themselves at.
Many of the worst offenders in the Financial Industry run no more than a large casino gambling our money and livelihood away, others ruin perfectly good businesses by denying working capital or asset stripping. Yet the basic financiers, the shareholders who take the risk, see their money disappear in falling share prices as a result of these astute management efforts.
Benefit Control – on the other end of the scale, we see a very similar position amongst a large number of those on benefit. Both Houses are arguing over a benefit cap, needed to control the runaway costs, yet this is intended to encourage a return to work, but is set at a level above the average wage!
 A person on the average wage will pay tax and NI amounting to some £5,600 and will have work costs, pension contributions, etc., which will bring take home pay below £19,000. Yet there are no proposals in the £26,000 benefit cap that include tax or NI deductions, making recipients some £7,000 per year better off not working.
At the other end of the scale, pensioners are expected to live on £5,300 or £8,400 if a couple. The minimum the State says a person needs to live on is set at £6,600  and even if we apply these more generous levels, allowing for children we arrive at benefit cap levels below £14,000, giving adequate income and leaving incentive to work.
High Speed Trains – another area which has been kicked into touch, but the more one looks into it the more it appears as a colossal waste of money, creating disruption and upset for many.
In addition to the normal arguments against, it would seem that it could be out dated before it even starts running, The Chinese are working on a Vactrain, which they say can be put into operation in ten years. It would run in a vacuum tube at speeds of 620 mph, which could increase up to 5,000 mph and with no air resistance, consumes little energy.
Such a virtual perpetual motion machine offers obvious advantage although costs are expected to be higher than HS2.
There is however a much lower cost opportunity in vacuum transport using smaller car size capsules running in five foot diameter tubes with speeds of 340 mph, but capable of much higher speeds. Cars would take six passengers or 600kgm of freight in an automated dual tubeway claimed to have the capacity of a 32 lane highway and cost one tenth of HS2.
The concept is not new, as a child, I can remember my mother paying the assistant in a store, who put the money and sale ticket in a twist lock capsule and inserted it into a vacuum tube. I listened fascinated as it went up to and along the ceiling to the office and within a minute or so returned dropping into a tray with change and receipt.
Thousands of miles of gas pipelines exist up to four feet in diameter, buried just underground in excavated trenches and even under sea, at costs from £ 2 to 3.5 million per mile, including terminals and pumping stations. Dual tubeways should therefore cost £7 to 8 million per mile, making London to Birmingham (25 minutes) less than £1bn, in fact a 1200 mile tubeway linking all major cities in UK mainland would only cost one third of HS2 plus rolling stock.
The prospect of travelling in a vacuum may be daunting, but in fact a major part of modern travel is carried out this way in aircraft. Capsules should cost less than cars with no engines, once accelerated to speed they would then coast without power. Linear motor and Maglev trains exist or rail or coil gun techniques could be used, to get 1,000 kgms up to 340mph, which requires 3.1Kwh of energy in half a minute timescale.
The UK has the opportunity to be at the forefront of such green and advanced technology.
Public Sector Pensions – have gone quiet but are rumbling on with the government forcing its unfair round one proposals on to teachers and nurses, this will be an annual event with growing unrest and dissatisfaction.
   Annuities Public Sector  NHS  Teachers  Police  Local Government  Hutton State Pensions Transport Comment