John’s Blog No. 117– Pensions – Defined Benefit 2

There is little doubt that funded schemes are the best form of pension provision for the individual, particularly when supported by the Employer, who matches your own contribution and uses reliable providers to manage the overall scheme well.

The heady days of the property boom, when you could build up your own “buy to let” portfolio to secure a good income for retirement are past; ISA savings now offer abysmal interest returns and the Stock Market requires a lot of time and energy and the knack of seeing a good deal.

There are Investment Funds offering good returns over 10 year periods, but the 5% bid/offer price makes it expensive to change schemes to reduce risk and the tendency is to leave them alone, possibly to stagnate. If you run your own business, your commercial property is worth buying and putting into your pension scheme, but again can be uncertain when you retire and need the money.

Large group schemes have many advantages, particularly if they run continuously through work and retirement, once established with large fund build up, investment income equals or exceeds contribution income and can meet 75% of pension payments. Existing assets can therefore be bought and transferred without charge within the group using the new income from contributions, giving a stable continuity to assets.

The other major advantage is the shared mortality risk in retirement, which allows a given fund to pay out at a higher rate, meet the needs of dependent relatives and also allow for increased life expectancy. Contributions levels are therefore lower, outcomes more reliable and benefits higher. 

Any funded scheme, also allows flexibility in retirement, if you want to work longer or retire earlier, you have complete freedom of choice, providing your accumulated fund is adequate to support you, however DB schemes outperform DC ones and give a more secure outcome..

The problem with DC schemes is that they are run at members risk, the managers, usually Insurance Companies, therefore have little interest in making the money work hard and even if they do, without any incentive to pass the money on. As a result charges and costs are high and returns poor.

The end results are also dependent on the out-dated annuity market, also run by Insurance Companies, with their uncertain outcome and in general schemes tend to lose money in real terms.

The only best buy is therefore a well managed defined benefit scheme and this needs to be made available to all. It is unlikely that the State will offer this chance; the current new workers pension scheme is based on DC and ill defined. Of course a good State DB scheme could make a vote winning manifesto.

There is a great opportunity for a major body, Institution, Building Society, TUC or Mutual Pension Society to take up this challenge. They could guarantee outcomes much better, more flexible and secure than the new State workers scheme, existing DC schemes and even Public Sector schemes, attracting opt out and transfer, particularly for those under 45, who are faced with ever increasing contributions and reducing benefits.

The present performance of existing schemes, the current levels of contributions and the poor annuity returns virtually eliminate the risk element and quite modest guaranteed outcomes would exceed those currently on offer and even extend to elderly care provision.

Housing Associations started in a similar manner and are now very successful, building up substantial housing stocks with modest rents on a mutually run basis. Pension Associations would present lower risks and create large investment funds, without borrowing needs and if entry was limited to the age 25 to 44 would have 20 years to build up adequate Fund levels.

There are successful DB schemes in existence, run on this basis, with low running costs and good guaranteed returns, in the USA the local Government and Public Sector schemes are run this way, showing high consistent growth and investment levels over 25 year periods.

It just needs the initiative, commitment and vision to proceed.

John’s Blog No. 116– Pensions – Defined Benefit

Defined Benefit Pensions are where the Company or pension group guarantee a return based on the final years of salary, which are built up on the basis of the number of years of service in the scheme; effectively earned benefit dependent on total contributions made.

They can be extremely generous with Employers matching or exceeding Employee contributions and as a result of good investment management and low running costs, unfortunately they have been in decline due to a number of different reasons, with Companies viewing them as a liability.

Funds are invested with varying degrees of risk and are therefore subject to market fluctuations, becoming subject to State demand on adequate reserves, however no one defined adequate and assessments were made at market lows, with insistence that Companies make up the difference immediately.

This resulted in excessive extra Company contributions at the worst time of high cash flow pressure, creating the impression of loss making pension schemes and a mass exodus to lower cost defined contribution schemes. The position was made worse by taxation on dividends, the introduction of a pension levy to cover failed Companies in default and large remuneration rises before retirement not covered by contributions.

There have been several studies in the US on this that show DB schemes well out perform DC ones, even more so with the collapse of annuities, with positive effects on cash flow and large benefits on Employee goodwill and loyalty. It represents a major worthwhile investment for both employer and employee.

Recent rises in the Stock Market has resulted in a major recovery in Pension Funds, with many holding their own  with modest growths of 5%, long term growths as high as 8.8% over 25 years have been reported. At this level even with modest contributions, good performance is virtually guaranteed.

This is the advantage of DB schemes, which makes them the best way forward for all concerned and a sound insurance against all future trends. Instead of being the privilege for the 10% minority, their excellence should and could be available for all to enjoy, it just needs the will and foresight.

The real advantage is that of self sufficiency and security, part of the overall Fund is yours and providing the contributions are maintained for the specified period, the outcome is guaranteed. Of course there have been rogue employers, who have used Funds for their own benefit, but the majority are independently managed. 

This is more than can be said for the State schemes, who are one of the worst offenders; contributions have not been put aside, the money has been squandered and is now no longer available for those who paid in for the whole of their working lives.

The week saw an announcement that the State had a positive balance in its Budget, pat of this was due to the closure of the successful Post Office Dined Benefit scheme and the transfer of its assets. A good day for the Treasury but a sad day for Post Office employees who saw their pension future disappear into the chaos of Public Sector Pensions. It died without a murmur of complaint or good reason.

John’s Blog No. 115– Pensions – Comment

 The horse meat scandal leaves me bewildered, after going through BSE, the EU ban on all our meat, with our farmers having to track their meat through to consumer with identity chips and mounds of paperwork, we still do not know where our present food comes from and what is in it.

Roumania, Holland, France, Ireland, you name it; shut your eyes and stick a pin in the map, think of the filthy places, the possible lack of hygene and munch away at your beefburger, lasagne, sausage or whatever; enjoy!

The blame game has started, with anything to divert attention from the main cause, the lack of control over our food sources, investigate all horse traders, arrest minors whether guilty or not, etc.

Of course it is the fault of the Supermarkets and the processors but nothing to do with the fact that the EU Commissioners can’t enforce regulations, if they have them at all. We should have immediately enforced a ban on all European imports until they sort it out, but that is only a one way option, valid for our exports.

Meanwhile our farmers steadily go out of business or give up with livestock, as it is easier to let the land go wild and claim the associated grants. We have all gone mad, land is left to waste, good fish is thrown back into the sea and bureaucracy reigns supreme, but only where people care, the majority rest do as they like.

Another piece of idiocy, is the statement on school sports and exercise; after selling off all the school playing fields, closing the swimming pools or stopping them and other activities for health and safety reasons, we are now surprised at the growing obesity in children and schools are told they should do more.

All they have is hopscotch in the playground, with even skipping banned as unsafe; the adventurous ones improvise, many have nothing to do even that with and all lack the money to do anything. All the Olympic good intentions have disappeared and only the successful get the grants.

There was a lot of money made from the Olympics, which was very successful, some of it needs ploughing back to the schools, sports centres, communities and local facilities combined with the time and expertise of athletics, trainers and organisers to ensure it works.

 The hospital care scandal continues, which follows the use of non medical managers to organise care for people, but basically to save money, another target not met, they cannot even organise bulk buying or medical records, let alone understand the complexities of medical science.

Another area where expert knowledge is ignored is with the benefit payments to the disabled; the people who spend most time with them, like GP’s, consultants and care workers are replaced by DWP experts, whose mandate appears to be if breathing they can work.

This is now extending to the Disability Living Allowance, which is under the “expert” eye, these are in fact private Companies, paid by DWP, without apparent medical or social qualifications to send out forms, sift out replies and man call centres, whose main aim is to act as scrooge and be blamed when things go wrong.

There is a lot of money being spent on NHS, schools, benefits and the needy community, which is putting major strain on the economy and also taxpayers who foot the bill. We need to approach the problem logically, assess the needs and sort out priorities on what we can afford and eliminate waste.

Can we afford to be a major world power, if indeed we are, separate out internal economics from external overseas purchases and spend and achieve a neutral balance of paymnets, which is our real National debt.

John’s Blog No. 114– Pensions – Comment

There has been quite a lot happening in the past few weeks which are worth commenting on outside the area of pensions, which has been quiet.

The extension of HS2 to Manchester and Leeds was announced at a cost of £34bn, which one presumes is additional to the London to Birmingham section costing some £32bn. One can think of much better ways to spend £66bn to promote growth and improve infrastructure.

Both routes are going to cause major disruption and damage  to Local economies and people and for what, to cut 20 to 40 minutes off journey times, which could be more readily and cheaply saved by reducing waiting and feeder journey times at departure and arrival.

The dual track will be dedicated to high speed trains only and would not allow slower traffic, in addition because braking distance increases fourfold at twice the speed, frequency is halved giving little benefit in capacity. It will be out of date before the first train runs.

China is proceeding with a vacuum train, which they aim to have running in ten years, this will run at speeds of 300 to 600 mph, be super green with little fuel costs and could run underground or above and screened  to virtually disappear from view.

We have advanced low cost gas pipeline technology, which could be applied to a car or container module at a small fraction of the cost. If applied to freight traffic between main storage and distribution centres, a 12,000 mile dual tubeway spinal network covering most of the Country would cost some £9bn.

This would reduce congestion on motorways and railways, fuel costs and emissions would be negligible being super green and they would be invisible underground. The 197 mile Milford Haven to Gloucestershire pipeline cost £700 million to build and is now no longer visible. This is the transport future for freight and even humans.

Marriage also hit the headlines, developed over time by tribes and social groups to ensure stability and continuity of the human species, it was embraced by religious groups and society for this purpose and should be respected as such. If we all became gay or lesbian then the human race would be extinct in a generation.

They are a minority group, who have a right to their choice, but already have the legal security of civil ceremony open to all couples so why waste Parliamentary time and upset traditional beliefs.

Then we have the Stafford Hospital scandal, which should never had happened but was inevitable with the economic, bureaucratic and target culture. I have only had to spend one night in hospital, it was a revelation and I have complete sympathy with the overworked nurses and doctors.

There was one trained nurse and a green assistant looking after at least three wards holding 15 to 20 patients each, a staff level we would not allow in our schools, there were also harassed doctors  rushing to and fro. The Manager was locked securely in her room and came out occasionally to give orders, but never ventured into the wards. There were groups of chatting cleaners who pushed debris around the floor at times.

One couldn’t help remembering, from my father’s time in hospital, the hospital hands on matron who ran everything efficiently, who knew and talked to the patients, helped out when necessary and ensured their comfort and met needs. Thankfully they are returning.

Those were the good old days before Managers tried to run hospitals like a supermarket or major business. Essential staff have been cut to save money, but up to half these wages goes straight back to the Treasury, the rest circulates with a large part also returning there. The real cost is probably not much more than benefit for the redundant.

Finally there is the GCSE U turn, we are continually changing methods and like the Hospitals suffer from too much interference and half baked ideas, let us leave the very professional staff to do the job properly. I had a good balanced education at school and home in the 30’s and 40’s, reached University from a working background with State grants but little interference.

We do not want to go back to the past, but we should learn its lessons and hang on to the good bits. There is a need to bring back common sense and humanity to our lives, and assess carefully changes to century old traditions, which were based on these.

Too much time is spent running around chasing our own tails, worrying about money and keeping up with the neighbours, both household and Nationally and also finding someone to blame when things go wrong.