John’s Blog No 99 – Pensions – State Pension

The State and Public Sector pension system will not survive the onslaught of the projected population increases, which will occur over the next twenty to forty years. those in work will not be able to afford the extra and unsustainable costs  that the present unfunded “pay as you go” scheme entails.

With the retired population projected to double over this period, the National Insurance contributions will also need to double just to maintain the already poverty level State pension, the alternative is not worth thinking about.

The main cause of this population increase is due to an increase in flow across the 65 threshold, which arises from increased longevity in the under 65 population; if they all have their own personal pension fund adequate for all their retirement needs, the problem disappears.

This requires a change to a fully funded pension scheme, which although difficult is not impossible if carried out over a 20 year transition period, even with existing financial restraints. The main problem is the existing State pension liability and the time taken to build up sufficient pension funds, normally 40 years.

The benefits and advantages are enormous, particularly if combined with the new compulsory contributory scheme in a universal defined benefit scheme; the State pension would be abolished to be replaced by pension contributions either directly from NI contributions or a NI rebate.

To achieve a basic pension of 140 pw in real terms, would require contributions of £2,000 per year over 40 years and Fund growth/ income of 4%. The present total NI contributions represent 20% of average wage, requiring an 8% rebate to meet this minimum funded scheme level, some 40% of State NI income.

Individually therefore the new contributory scheme contribution of 4% plus 1% tax rebate, 3% Employer and 8% NI rebate, would give a fourfold gain on pension savings and a potential pension income of twice the basic level, some £14,000 per year, which would make pension saving attractive and worthwhile.

The large contributions would not be lost from the economy, but could be invested in the UK in  infrastructure, business, housing, schools, hospitals or anything that would give a modest 4% return. If set up as an ongoing Fund through work and retirement, it would also not need to be repaid, just serviced.

The State could also see substantial gains, once the existing pension costs decline, with rebate linked to income at a 40 to 50% level, some £30 to £50bn would be released with freedom from any future liability.

The system would need to be set up outside State control within an independent Trust or mutual Pension Society in a well managed and accountable manner with group accountability. Pensions should be clearly linked to contributions made, with only limited wealth redistribution.

There is a tendency today to mix up welfare and earned benefits, the all grey society of the idealist dream and envy of those better off. If you work and save hard and are prudent, you should keep the results; you are entitled to take out what you put in or more if it grows and keep hard earned wages and savings.

Welfare and charity should be something completely separate, possibly a responsibility but not necessary a right and certainly not at the expense of someone else, we must also accept differentials but within moderation. Our present Society is strongly biased against the average population in work.

Existing pension liability is the biggest problem, the pension contributions have been taken and spent, leaving the debt behind to be met by current and future generations; it is a never ending circle that needs to be broken, but one that can be managed.

The same applies to the over 65 population expansion; increased life expectancy is not having the major impact projected; mortality rates and mortality are reducing, but mortality only accounts for 4% of the retired population, although some 83% of total mortality.

As a result there is a discrepancy between population decline and life expectancy; the total over 65 population for 2011declines to half its value in 9.5 years, whilst life expectancy is twice this. This means that at age 75 only 45% of those alive at 65 survive, which reduces to 23% by age 85.

At present there is no justification in delaying retirement based on increased life expectancy.    

John’s Blog No 97 – Pensions- Welfare Benefit 2

The population in work cannot afford the present level of State pension and welfare expenditure and future population increases, particularly over 65, will make these completely unsustainable. Present charges are:-

Weekly  £	200	300	400	500	600
Annual  £	10,400	15,600	20,800	26,000	31,200
Tax	460	1,500	2,540	3,580	4,620
Nat’l Insur	580	1,204	1,828	2,452	3,076
NEST  5%	520	780	1,040	1,300	1,560
NI Emp'yer	667	1,385	2,103	2,820	3,538
NEST  3%	312	468	624	780	936

Members and Employers in defined benefit schemes pay two to three times the contributions of NEST.

With NEST Employers total deductions at average wage are 28% and Employers cost is 14%; total NI is 20%.

This is a substantial direct drain on employment and individuals.

Recent published figures show the pension liability of the State at a massive £3.2 trillion, this is effectively the value of the NI pension Fund from member’s contributions and even if it gave a modest 4% return would result in an annual investment income of £128 bn, almost twice the current basic and State pension costs at £68bn.

Although not recognised as such, this level of debt shows the extent of the problem and questionable legality of State pension provision in the UK through an unfunded scheme. Yet the money is being collected from wages with the DWP keeping a database of members and their NI contributions and their pension eligibility.

The system is run as a compulsory contributory pension scheme, without the controls or membership protection that the State insist on with private schemes and in fact without the benefits or rights, as welfare pensions pay more. The mode of operation and accountancy practices of the Exchequer make the State an unsuitable Pension Manager or Provider; it is unable to cope with member’s savings, degrading into the present “pay as you go” chaos.

In fact the same charge could be levelled at many private Insurance providers, with members of defined contribution schemes losing money in real terms (DWP report). Yet the successful Company and other schemes are being driven into extinction by the State from taxation, pension levy and inflexible and excessive Fund liability demands requiring extra investment at a time of recession, which the State itself does not observe.

A similar position exists with the main Public Sector schemes with a liability of £1.8 trillion and is likely to occur with the new compulsory NEST scheme. The tragedy is that the State is the main UK Pension Provider and two thirds of the population in work are contribution or have paid into it for their retirement future.

That future is bleak, the second pension is being abolished to be replaced by a single pension of £140 pw, some 28% of average wage; the NEST scheme is projected to give a further 14.4%, a total of 42.4% av wage, some £217 pw. Yet at £500 pw (av. wage) total NI contributions are £101 pw  (20%); if half of this was allocated to pensions combined with 8% NEST at 18% in a well managed scheme with current 5% growth over 40 years would yield £400pw pension.

Even in Private schemes dependent on annuities, the return has dropped so low making them unstable and not worthwhile, which could also apply to NEST on the same defined contribution basis. 

The case and need for major changes in State and private pension provision is overwhelming, the solution would be transition to a universal fully funded defined benefit scheme, but is not quick or easy; pensions are long term and changes would be similar and major State transition could occur over twenty years.

However the advantages and benefits would be large, both to the State and the individual with pension cost related to income resulting in major expenditure savings and a scheme giving greater benefits, which are linked to total contributions made. These have been considered in previous blogs but dealt with again later.

John’s Blog No 98 – Pensions- Welfare Benefit 3

Last week my disabled son received a letter regarding benefit changes. The Gestapo could not have devised a letter better designed to create fear, anxiety and terror; a Psychologist would have had difficulty, but for DWP it was easy. A little humanity and common sense could have softened the bureaucratic message. The letter indicated a questionnaire, followed by a re-assessment; the last time there was a purge, he was subject to a cross examination, asked to walk up and down stairs and even stand on one leg on a table (will catch you if you fall). The local Supermarket also wet- nursed him through several weeks of general work, but did not take him on. There are some people who are incapable of work and should be recognised and registered as such and exempted from re-assessment, their GP’s, Consultants and various excellent charities know this and should be consulted and believed. Registered and known disabled should be given benefit for life similar to a pension. Benefit costs and fraud need to be drastically reduced, but the policy of guilty until found innocent and disbelief needs to change. Inability to work ranges from permanent to partial to temporary, all medically certifiable and subject to checks by or visits to GP’s. anyone outside these limits should be subject to assessment. Many charities say the simplified assessment will make many disabled people substantially worse off, this is a ridiculous state of affairs. Statistical information on living costs, household spend etc. is readily available to establish monetary needs and allow income continuity; anything less is penny pinching economy. The State appears to have a current policy of universally offloading costs to Local Councils, business, charities and individuals, expenditure which rightfully and traditionally belong to the State. This is wrong; they should face up to their responsibilities; sort out the economics/ budgets; decide what they can afford and implement it properly. Charities and individuals do tremendous work, saving the taxpayer millions but do not get the support or recognition they deserve. We need to decide on the type of Society we want and how we can afford it, the problems are universal for pension provision, education, health, housing etc. all are closely related. As a Nation we apparently cannot afford to educate our children, support those incapable of work or even look after our older generation, yet our taxes keep rising, whilst no-one appears capable of doing the basic sums on what we need or can afford, preferring to plod on day by day and from crisis to crisis, with massive waste. It is time a well thought out, co-ordinated and common sense policy was thrashed out, linking all parties concerned to establish and match the needs and resources of UK Society and the most effective and economic way of meeting the demands. Are we an advanced Nation or just a Third World “has been”?

John’s Blog No 96 – Pensions- Welfare Benefit

An increasing number of pensioners are becoming dependent on welfare, even the Government refers to State pensions as benefit, not an invested right from contributions made, mixed in with other benefits and the total cost for all pensioners exceeds the National Insurance income. If you retired twenty years ago, even with State pensions, you were relatively well off; if you also had a private pension you were laughing all the way to the Bank, with annuity rates at 16% your pension fund gave at least three times the income in real today’s cost terms. Over those years, the State pension has been steadily eroded by rising living costs, which have not been matched by pension increases up until last year. This was the first time that both the basic and second pension matched inflation at a high rate of 5.1%; it is likely to be the last, judging by the official reaction and the moves to use lower indices. It is now at the basic poverty level, in fact those who have not worked or saved are now better off, during both their working lives and retirement, than those who work contributing National Insurance, a nonsense state of affairs. The truth is that those in work cannot afford the cost of welfare and unfunded pensions and this is going to get worse with the retired population projected to double in the next 20 to 40 years. The system is unfair and unsustainable, without even the guarantee of a good return from NI contributions when you eventually retire. Welfare Benefit is a problem in all developed Countries, with the solution ranging from let them starve to over generous housing and payment benefits. The Victorians created workhouses, which were just that and to be avoided at all costs, whilst landowners created tied cottages and large Employers built villages complete with schools, shops and recreation for Employees to encourage work. Today conscience and the heart rule over the brain and common sense, we need to create a compromise between starvation and “better than work” situation. Present standards are based on what we expect when in work and fairly paid; good housing, ample food including the luxuries and all the musts of modern living, which Society cannot afford and also resented by those who do for those who do not contribute. Benefit should provide the most basic living, the minimum to survive, it should discriminate between those who worked diligently, paid taxes but have fallen on hard times, deserving good treatment and the new entrants which divide between young citizens and immigrants. Benefit should not be long term, replacing work but a short term expedient. Those incapable of work, like disabled or full time mothers should be treated differently on a longer term basis, as should students. Earned work insurance and pensions should be treated as a right and not a benefit, although the latter may be needed in borderline cases. There needs to be a clear distinction between these, which requires the National Insurance contributions to be separated from State accounts, i.e. the Exchequer, in an independent body or Trust, serving those that work, the borderline is fudged with increasing numbers being forced into benefit. Benefit should not be a right but a concession and the State should manage the economy to minimise the cost; not by short term and penny pinching economies, but by planned policies and budgets to ensure maximum use of assets, which includes labour. Any able bodied unemployment is a waste. To be continued in next blog.