John’s Blog No.72 – Pensions - Pensions and Increased Life Expectancy 3

In previous blogs, we have tried to build a simplified picture of pensions, their problems and what could and should be achieved. Most of these problems are self inflicted, and those associated with nature can be managed with change and attention.

The real problem is the collapse of the contributory State NI scheme, which all in work depended on and the lack of a suitable replacement, as a result only a third of those in work have adequate pension provision, half of these are in Public Service and all are under threat.

National Insurance was introduced to insure those in work against ill health, unemployment and in retirement. However these monies were not assigned or put aside as intended or prudence required but used as insurance premiums, which they were not, in a pay as you go system.

 Logic and commonsense were not applied, which would have resulted in the money being put aside to grow as pension savings. It is not too late to reverse this situation and although difficult can be done in a cost sensible and affordable manner. The advantages are tremendous.

Annual savings of some £22bn over 40 years would meet the current Basic State Pension spend of £55bn at the minimum inflation met level (PYF=2.4), at 4% growth this reduces to £15bn; the present spend level would yield pension payments of  £132bn and £198bn with pensions at £257 and £383 per week.

This indicates the growth power of pension savings and the effect on pension outcome, even at the lowest growth level worthwhile they would provide an adequate annual pension of £13,314 to someone on full BSP. At higher return rates there would be surplus for welfare pensions and elderly care.

Imagine the effect on the economy of the investment spending of £55bn per year on Housing, Schools, Hospitals, Transport, Energy and general Infrastructure. It would be a rerun of the Industrial revolution with full employment and prosperity.

Just over half of NI income is spent on BSP, equalling roughly 8% of earnings, if this was matched by private pension savings (as in NEST). This would double pension levels and investment funds.

The guaranteed defined benefit schemes are being abandoned because of the high Employer cost in favour of suspect contribution schemes where employee contributions are matched without risk. This leads to an uncertain and unfair speculative system in which futures cannot be planned.

Consideration is being given to some form of Employer guaranteed pension fund which would still be dependent on outdated uncertain annuity schemes. Pension funds need to stay alive into retirement; living super funds earning money from investment income but changing character from savings to payments.

Such funds would smooth out the economy and market fluctuations and meet the challenge of longevity; they could run on a macro and micro scale retaining advantages and individuality. They could be flexible with personal choice on retirement age, pension level, special circumstances and hardship and meet both welfare and earned pension provision, through AVC’s and State input.

The State has just announced a further loan of £10bn to the IMF (to save the Euro!), which we cannot afford; similar amounts would kick start a Universal Pension Fund to be invested in infrastructure, straight into jobs and the UK economy. That we could afford in a double dip recession, if the Construction Industry had not shrunk by 3%, we would have had growth of 2.8% in the last quarter.

Unfortunately the State’s position and attitude is one of penny pinching cost cutting, NI and Public Sector do not give a fair return on contributions made, which are disregarded when the working generation is paying the pensions of the previous one. Pension Funds hold the key to recovery and prosperity.

The present system is doomed and outdated in this modern age; the Time for change is well overdue.

Annuities, Public Sector, NHS, Teachers, Police, Local Government, Hutton, State Pensions, Transport, Comment

John’s Blog No.71 – Pensions - Pensions and Increased Life Expectancy 2

A growing problem in Pensions is the projected increases in the over 65’s compared with the rest of the population thus outstripping the capability of those in work to support the older generation, which is critical in the State unfunded “pay as you go” schemes.

There is an almost panic approach to increased life expectancy in the over 65’s, leading to delayed retirement, increases in NI and other contributions, benefit reductions and care problems. Yet little study has been made of the actual basis of these projections.

Life expectancy is a particularly vague term, it is in fact the average time a person may live, the halfway house, which half the population may expect to survive to and is based on statistical Life Tables. These track the progress of 100,000 persons from birth to age 100 giving the number surviving at each age and the mortality rate of decline. They are dependent on birth, migration and death rates.

More relevant are population figures, particularly the comparison of working to over 65 populations, the age dependency factor, currently at 3 to 1 and projected to change to 2 to1. Population reminds me of the old exam question on filling a bath or garden pond, with the hose flow (births) and leakage or overflow rates (deaths), with the odd bucketful poured in or scooped out (migration).

Current medical advances means the population numbers are increasing, although we all do our best to reduce them with smoking, drink, drugs, traffic accidents and now obesity. However the medics are winning and current figures are 90% of births survive to age 65, although they reduce rapidly thereafter, the rate is decreasing.

Sixty five years or even one hundred is a long time and therefore changes tend to happen more slowly than  projections suggest, which need to take account of what is happening on the ground, i.e. the head count.

In the UK this is carried out every ten years in the Census which gives a detailed account of the population by age, sex, occupation, region, etc. The last detailed figures available are for 2001 and Census 2011, now a year old, are surprisingly not yet available, even though these basic details are extremely important.

Population figures for the over 65’s, however show a more rapid decline at a rate four times those derived from Life Tables, with life expectancy halved, this gives time to adapt and stresses the urgency for the latest Census results to be released.

The major discrepancy does not mean that the figures are wrong only the timescale interpretation; death rates are less than 1% of population, giving up to 100 years for effects to feed through. Life Tables indicate the trends and the population numbers the rate at which changes are happening.

The main problem is that the higher figures are being accepted as fact and drastic action is being taken on this basis. Large State costs are predicted, the miserly pension will become less affordable, illustrated by the present monetary attacks on pensioners. Although running contributory schemes the State fails to put the money aside to meet future pensions as in normal husbandry, losing all the benefits of Fund growth.

We are all living longer and need to adapt to meet these changes. Age 55 or 60 is an opportune time to take a break, before old age sets in proper; there are so many things to do, places readily accessible to visit, hobbies to pursue. Work and career become less important, children and financial demands reduce, making it a good time to enjoy, relax and forget the daily stresses of work, allow the younger generation the chance of work.

Is the time to enjoy this retirement the 18 to 20 or even 25 years of Life table projections or 8 to10 years of the population projections  ? We need to know urgently before we throw half of our retirement away !

The over 65 population is increasing but how fast, is it at 2% per year or ½% the rate of the past 20 years, there appears to be no sound reasons why this rate should change fourfold so suddenly. We have not found the elixir of life or an anti ageing drug, even though rapid medical advances are occurring.

Annuities, Public Sector, NHS, Teachers, Police, Local Government, Hutton, State Pensions, Transport, Comment

John’s Blog No.70 – Pensions - Pensions and Increased Life Expectancy 1

The over 65 population is projected to double over the next 20 to 30 years, resulting in the Government taking drastic and panic action such as increasing retirement age, NI and other contributions, etc. to meet the demand. All short term measures which are doomed to fail.

The present State and Public Sector schemes will not survive the onslaught of this population increase. At present there are 3 people in work, paying Tax and NI to support every pensioner, projected to rise to 3 to 2, requiring a twofold increase in expenditure, thus outstripping the capability of those in work to support the older generation, which is critical in the State unfunded “pay as you go” system.

This is not affordable or economic for those in work or the State and is in fact fraud. Each person in work is paying NI and other contributions, but instead of being put aside as pension savings, this money is spent immediately to pay another’s pension at a better rate and condition than can be expected when due later.

However if you consider the alternative where contributions are stored as personal savings a completely different picture emerges; each person becomes self sufficient with at retirement a pension pot adequate for their needs in retirement and capable of meeting the worst pensioner population increases.

When one looks at this in more detail the main arguments of cost and frozen money disappear. This money is not hidden away under the mattress but needs to work, just like its owner; to keep up with and grow above inflation. Over 40 years of work, quite modest rates and contributions are adequate.

If one saves £1,000 per year (4% of average wage) for 40 years with wages, hence contributions, and  fund savings keep pace with inflation, then in real spending power terms one accumulates a pension pot of £40,000. Spending this at a rate of 6% gives an pension income of £2,400 per year.

This accumulated gain, referred to as the pension yield factor, increases to £3,600 at 4% growth and £5,700 at 6%, all in real terms with 2.5% inflation. Current contribution rates are much higher than this; the new NEST compulsory scheme is twice this at 8%; Public Sector and Private schemes are 16 to 20% and the State Basic pension payments equal to half of National Insurance contributions are 8% of average wage.

It can be shown that a pension fund, which stays alive after retirement, can sustain a 6% pension payment with inflation increases of 2.5% per year and the worst case over 65 population projections with a modest investment income of 4%. This is much higher than the present uncertain annuity rates.

We therefore have the overall pension position where the State unfunded system is outdated and obsolete and needs to be replaced by funded schemes capable of meeting future challenges. Present funded schemes fail to meet the acceptable, affordable and sustainable solutions required.

The best, Defined Benefit are in decline suffer from overgenerous and unfair payment distribution making them too expensive to maintain; the alternative, which is rapidly becoming the only choice, Defined Contribution, shown to lose money in real terms, give no guarantee of a predictable or reasonable pension returns and are based on even more uncertain annuity rates.

The commonsense solution is to adapt the defined benefit scheme to make it viable and transfer all schemes into this type of pension. This has been dismissed as impossible but in fact is not.

Current pensions are over contributed, giving a lot of flexibility for pension reform. A combination of the compulsory scheme with 8% contributions and 8% NI rebate to replace State pensions in a universal DB contributory scheme, properly managed, would generate sufficient funds over 40 years to meet the pension and population demands and even welfare pensions and elderly care.

If spread over 20 years, transition to such a scheme can be done in a cost neutral manner with major cost savings and benefits; Individual 4% annual contributions would be multiplied four times and then grow over 40 years, increasing £1,000 per year into a pension of £12 - 14,000 inflation proofed in real terms.

Annuities, Public Sector, NHS, Teachers, Police, Local Government, Hutton, State Pensions, Transport, Comment

John’s Blog No.69 – Pensions –Comparison

Public Sector pensions have gone quiet, whilst the Government presses ahead with its changes regardless of comments, suggestions or opposition. It continues with outdated and unsustainable “pay as you go” systems, without any apparent regard to pensions being a person’s future resulting from personal savings.  

There is a “daddy knows best” attitude in the present Government, which runs contrary to all its statements and PR on empowering the people; to get it right occasionally would help but there are constant U turns and changes.

Both Parties in Power have forgotten all election promises, and produce policies without thought, which then have to be changed and cobbled into second rate compromises or abandoned.

We have stringent economic policies, increasing taxation creating redundancies, withdrawing essential services and causing misery, mainly to the poor and under privileged, which now extends well into the middle classes. Yet the odd million or more still appears out of the hat for something or another from savings made somewhere, which is ridiculous. You either economise or you don’t, savings made cannot be spent elsewhere or they are unnecessary in the first place.

Pensioners are one of the major victims of this so called progress to a better economy, with the prime concern being how to prise them away from their money, whether it is income, savings or even the value of their homes.

The latest victim of this plunder and ill thought policy is the Royal Mail Pension scheme, mentioned in Blog 67. In exchange for £28bn of Fund assets to be taken into Treasury coffers, the State will give promissory notes for future pensioners.

Existing members will become part of Public Sector pensions and see contributions rise accordingly and benefits diminish giving poor returns, whilst pensioners will see their income held at the minimum level possible.

In previous blogs we have not looked at how defined benefit pension scheme actually performed and we have here a good example. Investment income from the assets meet 60% of the pension payments of £912 million, with fund growth of 8% last year, with market predictions suggesting this could be maintained for the next ten years.

The scheme has been closed to new members and at present rates of retirement will take 30 years for active and deferred members to retire, with 25 year life expectancy the fund needs to last 55 years; pensioner population is increasing annually by 0.7 % due presumably to longevity, less than half the State projection rate.

Inflation increases in payment are 3.1%, so that a 4% return on investments would meet this and the pensioner increases; contributions will steadily reduce over the next 30 years and combined with even modest returns the fund assets would survive the pensioners by some 25 years. They could even remain unchanged if present returns are maintained.

The Fund deficit of £10.2 billion (now given at £8bn) is made up of ££7.5 bn of asset write down with no detailed explanation of how liabilities are arrived at. There appears to be a set of rules for defined benefit schemes which are not applied to State or other schemes, resulting in the decline of the only worthwhile pension scheme.

The Royal Mail is in profit, yet the Government appears intent on selling this off, probably at a loss and to the detriment of its customers, the largest rise in postal costs have just been announced and will hit those who are currently struggling to live. All to allow privatisation; it should remain a profitable community service.

The Pension Fund is healthy; it should be transferred to an Independent body, run for the benefit of members, whose savings it is, re-opened to new members with revised terms. Contributions should be clearly stated with SERPs rebate separated from Employer’s contributions which are overstated, they are in fact 6%, 5.2% and 12%, with average pension at £7,000 pa. Little different to or more generous than other DB schemes.

It would be a criminal act to liquidate the scheme; transfer to members with Independent Trustees would make more sense with the scheme remaining active for all Postal workers.

Annuities, Public Sector, NHS, Teachers, Police, Local Government, Hutton, State Pensions, Transport, Comment