John’s Blog No 95 – Pensions – Provision

The latest information shows that members of Private Pension Schemes have fallen to the lowest ever at 2.9 million with the Public Sector remaining the same at 5.4 million. This means that there are some 21 million people in work who are entirely dependent on the meagre poverty level State pension. Next month they will be progressively enrolled into the new compulsory pension scheme with member contributions of 5% (4% after tax) and Employers at 3% of gross wage. Someone on average wage will therefore find extra deductions of £20 per week at a time when they and Employers can ill afford this cost. This has not been given the publicity it deserves and little real information exists on what is going to happen to this money and how it will be managed. We are talking large potential sums, at an average of £2,000 per head over 21 million gives £42bn per year, almost 80% of the current basic pension cost. It is being collected by the State and if it disappears into the Exchequer coffers it will be just another major increase in National Insurance contributions, who are just absorbing the large Post Office Pension funds, and could end up as just another unsustainable Public Sector scheme. It has been indicated that over 40 years saving the replacement rate would be 1.8 that is the total contribution of £2,000 would give a pension of £3,600 per year at today’s living costs, i.e. in real terms. This is well below inflation proofed level at 2.4 (£4,800 pa) and the current good private scheme potential of 4.5 (£9,000) and only half of the proposed State pension of £140 per week, which would require contributions of £4,000 pa at this lower level. The State is the major pension provider in the UK and is unable to efficiently or effectively carry out this role; it should restore National Insurance to its original purpose to provide for those in work and contributing, when unemployed or in retirement and in relation to contributions and timescale paid. This is member’s money deducted for this purpose, their personal savings against hard times and old age. It should be treated as such in a sensible and prudent manner and outside direct State control. Mutual Pension Societies or Super Trust associations are two possible ways, with possibly a National Protection body. We should also forget the idealistic rubbish of wealth redistribution which affects the prudent middle wage earners, leaving the wealthy unscathed. You should get what you pay for in proportion to the amount and time you have paid taxes and NI, whether it is child, fuel allowance or any other universal benefit; fair without envy. Currently 69% of net NI contributions are spent on the basic State and S2R pensions on a “pay as you go” basis, with today’s contributions paying today’s pensions, a very unsatisfactory state of affairs, it gets worse when you include welfare payments to pensioners some 33%, using up the rest of NI income. Half of this money, invested in a well managed funded pension scheme would yield similar or better results, if combined with the new contributory scheme, the sky’s the limit. It could guarantee the minimum £140 pw pension to all in work, which would double for those with full average wage new contributions and could generate surplus to allow for elderly care and even limited wealth redistribution. The State would have the problem of the present pension liability, which it has already squandered, but even this could be accommodated in a controlled transition period on an almost cost neutral basis. The other main problem is the over 65 population increases, which need detailed study; projected at doubling over the next forty years they make the present State system completely unsustainable and unaffordable. Everyone in work will need to be pension self sufficient, carrying a pension pot, sufficient for their personal needs, into retirement, which if managed correctly could meet their expected increased retirement time. Currently the major cause of the over 65 population rise is due to increased flow into retirement which demands self sufficiency. Pension provision for all in retirement is possible, it just needs a different and personal approach, it also has to be perceived as worthwhile which many schemes are not; the combination of the new scheme with a NI rebate results in quadrupling members contributions, giving a very attractive and substantial outcome.