In previous blogs, we have tried to build a simplified picture of pensions, their problems and what could and should be achieved. Most of these problems are self inflicted, and those associated with nature can be managed with change and attention.
The real problem is the collapse of the contributory State NI scheme, which all in work depended on and the lack of a suitable replacement, as a result only a third of those in work have adequate pension provision, half of these are in Public Service and all are under threat.
National Insurance was introduced to insure those in work against ill health, unemployment and in retirement. However these monies were not assigned or put aside as intended or prudence required but used as insurance premiums, which they were not, in a pay as you go system.
Logic and commonsense were not applied, which would have resulted in the money being put aside to grow as pension savings. It is not too late to reverse this situation and although difficult can be done in a cost sensible and affordable manner. The advantages are tremendous.
Annual savings of some £22bn over 40 years would meet the current Basic State Pension spend of £55bn at the minimum inflation met level (PYF=2.4), at 4% growth this reduces to £15bn; the present spend level would yield pension payments of £132bn and £198bn with pensions at £257 and £383 per week.
This indicates the growth power of pension savings and the effect on pension outcome, even at the lowest growth level worthwhile they would provide an adequate annual pension of £13,314 to someone on full BSP. At higher return rates there would be surplus for welfare pensions and elderly care.
Imagine the effect on the economy of the investment spending of £55bn per year on Housing, Schools, Hospitals, Transport, Energy and general Infrastructure. It would be a rerun of the Industrial revolution with full employment and prosperity.
Just over half of NI income is spent on BSP, equalling roughly 8% of earnings, if this was matched by private pension savings (as in NEST). This would double pension levels and investment funds.
The guaranteed defined benefit schemes are being abandoned because of the high Employer cost in favour of suspect contribution schemes where employee contributions are matched without risk. This leads to an uncertain and unfair speculative system in which futures cannot be planned.
Consideration is being given to some form of Employer guaranteed pension fund which would still be dependent on outdated uncertain annuity schemes. Pension funds need to stay alive into retirement; living super funds earning money from investment income but changing character from savings to payments.
Such funds would smooth out the economy and market fluctuations and meet the challenge of longevity; they could run on a macro and micro scale retaining advantages and individuality. They could be flexible with personal choice on retirement age, pension level, special circumstances and hardship and meet both welfare and earned pension provision, through AVC’s and State input.
The State has just announced a further loan of £10bn to the IMF (to save the Euro!), which we cannot afford; similar amounts would kick start a Universal Pension Fund to be invested in infrastructure, straight into jobs and the UK economy. That we could afford in a double dip recession, if the Construction Industry had not shrunk by 3%, we would have had growth of 2.8% in the last quarter.
Unfortunately the State’s position and attitude is one of penny pinching cost cutting, NI and Public Sector do not give a fair return on contributions made, which are disregarded when the working generation is paying the pensions of the previous one. Pension Funds hold the key to recovery and prosperity.
The present system is doomed and outdated in this modern age; the Time for change is well overdue.
Annuities, Public Sector, NHS, Teachers, Police, Local Government, Hutton, State Pensions, Transport, Comment
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