John’s Blog No.82 – Pensions

I continue on the theme of NHS again this week.
It was reported that the South East London NHS Trust is to be declared insolvent with debts of £150 million, mainly associated with the excessive costs of a PFI contract running at over one million pounds a week. This resulted from the building of new hospitals, which apparently they could not afford.
It followed a recent publication on PFI projects which makes grim reading, in which total costs are some four to five times the original building costs over a 20 to 30 year contract. Successive Governments have been mortgaging the taxpayer’s future on ill negotiated and unaffordable HP contracts.
If you buy a new house on a mortgage over a 30 year term, at current interest rates around 6%, you would expect to pay around twice the original cost, which would be balanced out in real terms by inflation increases and might even show a profit on house price rises.
Apparently if the Government were to buy that house, it would agree to interest rates three times the normal 6%, expensive maintenance contracts and large professional fees to manage the contract. In a new house, you would expect few maintenance costs and also structural / build guarantees, with just redecorating, minor repairs etc., which you would do yourself or get done when needed, but that is not how the State does it.
These PFI costs unfortunately have to come out of annual budgets, thus limiting the amount that can be spent on patients, teaching, police and fire. A breakdown of other costs in NHS Trusts were also reported, besides the high labour costs expected in a 24/7 work operation of which almost half goes back to the Treasury, there were also large external service and professional charges.
These suggest that there are much greater savings to be made in these areas than those from the present conflict on pensions and the demand for larger contributions, which pales into insignificance. The main problem on State pension costs arises from the increases in projected over 65 population.
The same problem was reported in the increasing elderly care costs, which are projected to swamp Local Council budgets, resulting in major reductions in services, which have already started.
There has been little serious study carried out on the over 65 population, the present panic and projected numbers arise from the reducing mortality rates and the current high population influx over the 65 threshold. These result from a combination of the post WW2 baby boom and the immigration flood from Commonwealth Counties following independence, all now retiring.
The over 65 population is projected to almost double over the next 40 years at a rate some five times faster than over the past 30 years; the population is increasing due to medical advances, smoking reduction and health awareness but there is no logical explanation for this sudden change.
In fact there is a wide variation in population projection figure ranging from 40% to 100% by 2051 for the over 65, actual figures for the past 30 years show 22% rise, whereas projections to 2041 are 80%; the 2011 Census results are therefore crucial in deciding trends and validity of forecasts.
After 65, mortality rates rise rapidly, increasing with age so that at age 85 to 90 it is some ten times the rate at 65, one therefore has to be very careful when using factor mortality reductions to estimate population as this can exaggerate the over 85 numbers, which from some of the figures appears to be happening.
Care cost projections arise directly from these figures, which therefore need justifying, the lower population estimates, some 30% over 40 years make all these problems manageable, without the doom and gloom. Even the higher projected rates however are readily manageable in a funded scheme, allowing payment rates to be sustained and annuity rates to be improved.
One wonders whether some of these figures are politically motivated in order to justify cost cutting measures, looking at the worst scenario to give greatest savings; if one accepts them the only sensible conclusion would be to abandon unfunded systems, which in any event would give a better more affordable system. The resulting investment funds could buy out PFI contracts, if feasible or fund future ones at better rates.