John’s Blog 86 – Pensions – The State

If we look at the whole of our Pension provision policy and its basic pension mechanics, which unfortunately involves figures and sums, we find some surprising facts and figures. The State Pension spend on the last figures released amounts to £102bn made up of :- State Basic - £55bn State Second - £14bn Benefit spend - £33bn This is made on an unfunded “pay as you go basis and spends the whole of the income from NI contributions, an unsustainable situation, projected to get worse. If it was run as a funded scheme, then the costs would be dramatically reduced. Contributions of £20bn, put away as pension savings, growing or earning at a rate of 6%, would over 40 years meet these costs in real terms, and give potential expenditure savings of £80bn per year. This is much greater than any of the economic review savings that is creating so much hardship in the present cuts in spending. Even at a more modest investment return of 4%, there is still a saving of some £67bn per year real and shows the strength of pension savings in a funded scheme, where the money is made to work. There is of course the problem of the existing pensioner spend, but this is not as great as may be first imagined and can be covered by careful transition management over a period of 20 years as outlined in previous blogs. At present life expectancy, the existing pension spend will have halved in 20 years and new pensioners entering retirement will be progressively met by the funded scheme; it can be shown that initial extra spend on NI rebate contributions of £17bn would meet the transition. This money however is pension savings in an investment Fund, which can be used in present proposed Capital spend on infrastructure projects or the transfer of State assets in buildings etc., and therefore does not appear as a current expenditure. In addition the investment income generated would meet the pension payments without the need to repay the Capital, which steadily reduces in real terms due to inflation. The overall effect would be to release some 50% of the income generated by National Insurance contributions to do the work that was intended in employment, training, health and welfare of those in work, over a transition period of 20 to 40 years and give a more sustainable and satisfactory pension system. Such a scheme should be independent of the State and be run in conjunction with a modified Nest contributory scheme as funded defined benefit scheme, whose advantages are obvious without the need to increase contributions, delay retirement and also give a better retirement outcome. The other major advantage is besides saving money, the substantial Funds would be available for widespread investment in the UK to create a growing economy and full employment. It is time the problem of pensions and older people was taken seriously and intelligently, the answers are there, they just need separating from the rubbish and modern commercial opportunism, we are talking about people here our parents, grandparents and our own and children’s future.