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.