Thursday 31 January 2013

John’s Blog No. 113– Pension Reform 3

Also included in the State pension reform was the abolition of the SERPS rebate, which automatically follows the stopping of the State second pension. This will occur in 2017, although existing benefits will be retained.
Again this has not been thought through, a 4.9% NI rebate contribution to pension funds will be taken away, reducing further the incentive to save for pensions and putting at risk many funded schemes, which are having problems meeting existing stringent Fund liability demands.
It is almost as if the Government has a Pension death wish and wants to see the end of the successful funded pension schemes, forcing all into the loss making Defined Contribution schemes and outdated, uncertain and minimal annuity situation which is currently failing all entering retirement today.
Originally all were able to opt out of the second State pension if their income and NI contributions exceeded a certain threshold. Although some were worse off, many benefited and in fact were able to retire from 55 and take tax free lump sums and were better off.
Of course it became unaffordable, taking too much out of the Exchequer revenue from NI contributions, and was restricted to the major schemes of which Public Sector pensions were the largest. This rebate was taken in and represented as part of Employer contributions, which they were not, making schemes appear generous.
On Public Sector pensions, the position becomes more mysterious, as it is being stated that employee NI contributions will increase by 1.5%, their part of the rebate, yet the scheme did not work that way. Employees paid full NI and the rebate was then supposedly repaid to the scheme.
This suggests that in practice the rebate did not exist in Company and Public Sector schemes where pension provider and employer are the same entity. It raises many questions, particularly with the State scheme which is not accountable.
Do the State make any payments into pensions at all, or do they just pocket contributions and pay out the minimum when forced to do so? Only  the non- subsidised areas of NHS, Teachers, Police and Fire are affected, who all pay full contributions.
At the present high level of members contributions, if the State paid for the use of the money for some 40 years, then the average pension level could be met on members contributions alone, without any Employers or SERPs contributions. The schemes are just Employee savings schemes without any saver protection or savings!
The alleged taxpayer’s cost of these schemes is just payment for past sins, to meet the present pension liability and has nothing to do with existing contributors. They deserve to be given value for money in a well managed and funded scheme; they pay extra contributions for extra pension above the present NI welfare pension.
If the National Insurance Scheme had been properly drawn up and specified with amounts allocated for pension provision and if the State had dealt with these in a proper business manner, then all in work would have seen decent pensions and accountability. It is not too late to correct these errors, but time is running out.
 Such a transition is possible in a cost acceptable and almost neutral manner, the NHS could almost go it alone  as contributions exceed pension payments. If a suitable alternative was available all could opt out and be no worse off and the State would be forced to find the money for existing pensioners.
The State should stand up and accept its pension liabilities, if change to a funded system were phased in, then the initial extra cost burden over existing pensions could be met by the SERPS saving and savings from the unfair tax relief system, plus potential benefit savings.
Additional funds could be made available from pension welfare reform; in fact the cost of paying all pensioners the single tier level is some £20bn less than the current spend. The State would save money in the longer term; members would receive the pension excellence they deserve and considerable investment funds would be released into the economy, with many other far reaching benefits.
Pensions are a mess and becoming extinct and need urgent action or do we all move into the workhouse at retirement.

Thursday 24 January 2013

John’s Blog No. 112– Pension Reform 2

Last week we considered the drastic effects of the proposed changes to a single tier pension, which will bring all State pensioners down to a welfare level pension, however the matter gets much worse than this when you take into account the changes to retirement age that are also being put into effect.
Pension age is being steadily increased from 2021 and by 2051 it will have reached age 70 or higher, which will have a dramatic effect on the quality of retirement and also the numbers able to retire at all.
The population projections carried out by the Office of National Statistics show that the 65 and over population in the UK will have reached 20 million by then, however the age 70 and over is shown at only 16 million. This means that one in five, some four million individuals will see no retirement at all.
This is the social cost of the attempts to save money on pension expenditure, which in real terms at the single tier level amounts to some £30bn. Is this saving worth the cost in human terms and are you prepared to make this sacrifice to keep an outdated system alive?
Of course the position is presented that we are all living longer for 20 years or more from age 65 and therefore can afford to work for a further 5 years and this appears to be blindly accepted by all the experts, but not supported by the population facts.
Life expectancy is the point at which half the population have survived, that is you have an even chance of living that long, however current and projected population totals have reached this halfway point by age 75, only 10 years after 65. Also medical reports  suggest that the quality of life deteriorates very rapidly after 75, with some form of disability occurring after age 77.
Ageing is slowing down, mortality rates are reducing, but in practice this is not occurring at the high rates being projected, particularly from age 70 on, in fact the present position may not change that much in the next 20 to 40 years. The over 65 numbers are increasing rapidly but mainly due to changes that have been occurring for the past 40 years from birth to 65, which are slowly moving into retirement.
The real problem is the pay as you go State pension scheme and the increasing reliance on welfare benefits combined with the increasing numbers over 65 compared to the numbers in work, which are stabilising out. At present there are three people in work for each retired, this ratio is expected to drop to two or less.
Those in work will no longer be able to support the children, elderly and disabled and the system is in danger of collapsing, which is already starting to occur in parts of Europe. This is the real problem in pensions and the only solution is for each in work to put money aside for their own retirement future and not someone already there, who you don't even know!
Such self sufficiency is just common sense, which is practised by most people in work, who pay off their mortgage over their working lives, put something aside for their children and a rainy day and have been paying National Insurance contributions for their retirement future, unemployment or hardship over their working lives.
However this appears to have been lost or forgotten by the State and successive Governments, who are more concerned with income and expenditure, rules and regulations, human rights and the welfare of those who have no wish or intention to work.
The backbone of the nation, its working population appear forgotten, a source of taxation and income, believed to be limitless.
It is not yet too late for a change, but time is running out; work, retirement and quality of living need to be put back into perspective, given the attention it deserves and its importance recognised. All should have the opportunity to work and not left to rot on the scrap heap, wasting valuable resources and expensive education.
Such common sense should also be applied to pension savings, whether through NI or other contributions, they belong to the individual concerned as personal savings and are not a source of income to be spent on others or wasted, but invested  and allowed to grow for that individual's sole benefit.

Thursday 17 January 2013

John’s Blog No. 111– Pension Reform

The Coalition this week announced radical changes to State Pension, which may in fact be more radical than they imagined or intended, with the proposals for a single tier pension of £144 per week, the abolition of the State second pension and SERPS rebate and the reduction to 10 qualifying years for a pension.
It may just be a coincidence but the pension amount is the same as the minimum that the State says a single person needs to live on and therefore the same as the Pension Credit level. Effectively this means that whether you work and pay NI or not, you will be entitled to this amount.
It is a farce, the State pension becomes just a welfare benefit and National Insurance contributions just taxation, is this the real intention? or have they not thought it through again, perhaps they believe we are too stupid to realise this or don’t care.
It contradicts all the policy aims of making work more worthwhile and essential, why bother, in fact with other side benefits you are still better off on welfare throughout your life. This amounts to the abolition of the State pension, forcing anyone who wants a comfortable retirement to make additional contributions, which will lead to the eventual means testing of any basic pension from the State.
It is a great pity that the State cannot manage National Insurance more effectively, the income amounts and potential are large, but are absorbed by payments to pensioners and the sums do not add up. If all the ten million over 65 were paid the proposed basic amount of £7,500 per year, the total cost would only amount to three quarters of the present pensioner spend.
Yet the future is grim, population projections show that ratio of pensioners to those in work, which as at present 3 to 1 would at least halve so that those in work will be unable to afford to keep the rest of the population, particularly the retired. The only solution is the self sufficiency offered by a funded scheme.
If all in work carry forward their own adequate pension pot into retirement, then the demographic burden of age dependency disappears, this would need well managed Pension funds, which are likely to be more effective outside the present State and even present Financial Institutions, i.e. independent Mutual Pension Societies.
The new State proposals move away from the basic and sensible principles of pension provision, which is to put money aside for your future retirement, this was the basis of the National Insurance contributory scheme, which will now retain the contributory aspect but nothing else, raising the questions what are we paying for and who and why?
The amount required in pension contributions to meet a pension of £7,500 in a direct contribution pension saved over 40 years is some £4,000 per year, which could be halved or even less in a well managed benefit scheme, requiring a fund of £125,000.
However if the saving period is only 10 years, there would be little accumulated growth and savings would have to build up such a fund over this short period, needing some three times this contribution.
It is therefore virtually impossible to earn this level of pension with a 10 year limited saving period, if the lower paid Ni contributions are also taken into account, there will be a high level of pension wealth redistribution. This undermines the basis of any contributory scheme, which when combined with the unfunded nature destroys it.
Savings in any form are intended for the benefit of the saver, their dependents or anyone else specified, pensions are no differrent, they are not a charity, particularly when there is no guarantee that the money will be there when needed in forty years time.
National Insurance contributions should be returned to their owners and the original purpose for which they were intended, if the State cannot manage matters in this manner, they should transfer them to someone who can. If half of NI income were treated in this manner and invested in a funded scheme, everyone would gain.
Prospective pensioners would see their NI contributions accumulate and grow, with the security that the funds were there for their use and see some return from their deductions; the State would have costs linked to income and pensions free of demographic pressures and there would be the added bonus of large funds available for UK investment to give growth and job security.
The level of NI refund or rebate would allow the minimum pension level, with sufficient excess to fund elderly care and wealth redistribution to allow this general base level for all in work, with extra related to amounts paid..

Thursday 10 January 2013

John’s Blog No. 110 – Pensions – Living Costs

There was an announcement this week that there will be no change to the way the Retail Price Index will be calculated and its relationship to State pension changes, however the lower Consumer price Index will be supplemented by two further price indices.
What a mad way to run an economy, of course you can now take whatever index suits your purpose, regardless of the people who have to live with it, why can’t we have a simple index which reflects reality and actual living costs? It is now accepted that costs for pensioners are higher, possibly double RPI.
How often do pensioners change their mobile phone or Ipod, their Hi-Fi, furniture and latest clothing fashion? What is their level of HP, mortgage or general loans? Is it not time we introduced an index that reflects the basics of living, the cost of energy, water, Council Tax, standard food and clothing, insurance, travel, normal telephone and all the essential needs of day to day living.
Forget the luxuries, which many cannot afford and concentrate on the essentials, they can be included in a second index, with mortgage and financial costs if necessary. Let us come down to earth on what happens to real people and not what is perceived to be important to some.
Many of the policies coming out of Government and the EU increase living costs in a manner that is too fast or idealistic and often only benefits a minority. Green energy is a good example; a large part of energy price rises come from uneconomic renewable energy sources, which are intermittent and will never meet our energy needs.
Meanwhile the Far East, US and developing  Countries pour out ever increasing quantities of CO2, destroy absorbing forests, all well in excess of the meagre savings of wind turbines and solar panels. The lack of a coherent energy policy and control allows us to be held to ransom by speculators fixing future gas and oil prices.
Transport costs rise regularly affecting the price of everything; rail fare increases exceed inflation for the tenth year, with record traffic but little improvement. In spite of modern communication technology, satnav, computers and broadband, signalling is out-dated, trains and drivers cannot converse or detect each other.
Yet a simple cheap self contained rail side vehicle detector, similar to TV remote, could monitor train frequency and speed, issue warnings and lights and even apply brakes, without wiring. A vacuum freight train network, using gas pipeline technology could link all major areas at a cost well below HS2, with large savings in  fuel, cost and time.
Councils, basically us, face large EU fines if recycling targets are not met, resulting in high costs in meeting these, including shipping rubbish around the world at large energy and shipping costs; fishery protection results in dumping perfectly good fish, we waste more food than we eat etc etc.
World resources need protecting, but by better utilisation, making goods more reliable and using them longer, not by changing them every year to meet fashion or the latest technology. Resources and energy need to be used with respect, there is more to be gained by energy insulation and use, by producing more locally to avoid transport, etc.
Another good example of EU stupidity is the recent sexual equality edict interfering with Insurance; car insurance and annuities are based on risk; male drivers are more accident prone, women live longer, forcing equality ignores this, increasing costs unnecessarily.
 We need to get back a sense of proportion, approach things in a common sense manner, planning for the longer term effect in a logical manner to achieve what we intended or expected to achieve. Living costs are  or should be a major concern in all changes.
The more stable these become the less the need that arises for the ever increasing growth spiral arising from inflation, which would create more confidence in the future, less anxiety and allow real advances in living standards.

Thursday 3 January 2013

John’s Blog No. 109 – Pensions – Living Costs/Benefits

There has been the usual spate of New Year proposals on redistribution of Benefits for pensioners, which all entail means testing and penny pinching measures to save money, all fail to tackle the basic problems.
Winter fuel payments are the latest target, on the basis of using the money to fund elderly care; Council tax benefit is already under fire with new methods of assessment and limitation of funds, which joins travel concessions and the cuts in support to elderly charities, luncheon clubs, sheltered housing and social groups.
All avoid the main problem, which is that the State Basic Pension is now too low to support a pensioner adequately. It is well below the minimum amount a person needs to live on , put by the State at £142 per week for a single person or £222 pw for a couple, the basis of all benefit calculations, but not pensions.
The basic pension is currently £107pw for the full pension and £66 pw for a dependent spouse and those not fully qualifying; when last reported 90% of males but only some 25% of females qualified for full pension, with their earlier retirement age of 60 being steadily phased out by 2020.
The compulsory State NI contributory scheme is a farce, although it goes through the motions of keeping track of contributions, they are meaningless in practice, when you can get more in benefit without working at all. This is the overall problem with welfare benefit, where no one has looked at the position sensibly.
It will get worse when proposals to abolish the State second pension are implemented and the system reverts to a fully means tested pension level. The State will not face up to the problem s of pensioners and the so called contributory scheme which is no more than taxation.
They are incapable of managing such a scheme in a proper manner, if they did so all the present and future problems would disappear and the new NEST compulsory contributory scheme would not be necessary, which has all the signs of going the same way as NI, with little indication of what is going to happen to the money or any guaranteed result.
The tragedy is that when you look at the figures involved, the cost of paying all pensioners a basic pension of £142 pw is some £30bn less than the present spend on pensioners, even after excluding S2R. This would give a single person some £7,400 per year and a couple twice this and simplify administration.
The money saved could be spent on elderly care and support, or other pensioner subsidy and some redistribution between single and couples. Welfare for pensioners would be eliminated at one fell swoop.
Of course the real solution is to make National Insurance work in the way it was intended, as a contributory pension scheme in which the money is put aside in a fund to guarantee a pension outcome, which would take up 50 to 60% of the income. The balance could then act as work Insurance for full unemployment benefit and work creation.
I was appalled to hear a comment on TV referring to children as “my future pension”, such age dependency is now the norm and needs to be broken, we all need to save for our own pension as part of normal sensible future provision.
We need to break away from benefit being universal, in fact it breaks down into distinct parts of benefit earned by contributions made for those in work and welfare (taken out of taxation) for those incapable of work. The all equal grey Society is not fair or acceptable; discourages work and initiative and creates envy and dissatisfaction.
The Think tanks should start to think and become realistic, personally I am a bit fed up with the undergraduate ideas based on guilt. Although sympathetic to the problems of the starving children, ill treated donkeys, endangered species etc, the perpetual £2 per month pleas do not appear to have made much difference over the past 40 years.
Charity begins at home and Citizen’s advice, Age Concern, Salvation Army, all the medical research and support groups and individuals have a much greater impact on poverty and need. The State and Local Councils now depends on these to a much greater extent than ever before and yet increasingly reduces financial support.
We need to get a firm grip on the problems facing society today, not tinker round the edges plugging holes in leaking dykes or penny pinching savings. There is a lot of wastage in State expenditure, mainly due to policy decisions or lack of them, with no real assessment of needs, cost and what we can afford.