The over 65 population is projected to double over the next 20 to 30 years, resulting in the Government taking drastic and panic action such as increasing retirement age, NI and other contributions, etc. to meet the demand. All short term measures which are doomed to fail.
The present State and Public Sector schemes will not survive the onslaught of this population increase. At present there are 3 people in work, paying Tax and NI to support every pensioner, projected to rise to 3 to 2, requiring a twofold increase in expenditure, thus outstripping the capability of those in work to support the older generation, which is critical in the State unfunded “pay as you go” system.
This is not affordable or economic for those in work or the State and is in fact fraud. Each person in work is paying NI and other contributions, but instead of being put aside as pension savings, this money is spent immediately to pay another’s pension at a better rate and condition than can be expected when due later.
However if you consider the alternative where contributions are stored as personal savings a completely different picture emerges; each person becomes self sufficient with at retirement a pension pot adequate for their needs in retirement and capable of meeting the worst pensioner population increases.
When one looks at this in more detail the main arguments of cost and frozen money disappear. This money is not hidden away under the mattress but needs to work, just like its owner; to keep up with and grow above inflation. Over 40 years of work, quite modest rates and contributions are adequate.
If one saves £1,000 per year (4% of average wage) for 40 years with wages, hence contributions, and fund savings keep pace with inflation, then in real spending power terms one accumulates a pension pot of £40,000. Spending this at a rate of 6% gives an pension income of £2,400 per year.
This accumulated gain, referred to as the pension yield factor, increases to £3,600 at 4% growth and £5,700 at 6%, all in real terms with 2.5% inflation. Current contribution rates are much higher than this; the new NEST compulsory scheme is twice this at 8%; Public Sector and Private schemes are 16 to 20% and the State Basic pension payments equal to half of National Insurance contributions are 8% of average wage.
It can be shown that a pension fund, which stays alive after retirement, can sustain a 6% pension payment with inflation increases of 2.5% per year and the worst case over 65 population projections with a modest investment income of 4%. This is much higher than the present uncertain annuity rates.
We therefore have the overall pension position where the State unfunded system is outdated and obsolete and needs to be replaced by funded schemes capable of meeting future challenges. Present funded schemes fail to meet the acceptable, affordable and sustainable solutions required.
The best, Defined Benefit are in decline suffer from overgenerous and unfair payment distribution making them too expensive to maintain; the alternative, which is rapidly becoming the only choice, Defined Contribution, shown to lose money in real terms, give no guarantee of a predictable or reasonable pension returns and are based on even more uncertain annuity rates.
The commonsense solution is to adapt the defined benefit scheme to make it viable and transfer all schemes into this type of pension. This has been dismissed as impossible but in fact is not.
Current pensions are over contributed, giving a lot of flexibility for pension reform. A combination of the compulsory scheme with 8% contributions and 8% NI rebate to replace State pensions in a universal DB contributory scheme, properly managed, would generate sufficient funds over 40 years to meet the pension and population demands and even welfare pensions and elderly care.
If spread over 20 years, transition to such a scheme can be done in a cost neutral manner with major cost savings and benefits; Individual 4% annual contributions would be multiplied four times and then grow over 40 years, increasing £1,000 per year into a pension of £12 - 14,000 inflation proofed in real terms.Annuities, Public Sector, NHS, Teachers, Police, Local Government, Hutton, State Pensions, Transport, Comment
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