Saturday 29 June 2013

John’s Blog No. 133 – NI Pensions


Full Employment is the keystone for prosperity and personal satisfaction and is also the basis for secure retirement. Choice is the other factor and is just as important, both are missing from life in the UK today.
We are beset by rules and regulations, many of which are petty and unnecessary and many due to penny pinching policies to save money, without bothering to think them through or considering the future effects.
Pensions are at the top of the list, with policies being pushed through on the basis of unsound assumptions and forward projections, yet the quicksand foundations of the State Pension system are not even looked at, based on  “pay as you go” approach combined with the welfare equal pay for all.
If you are saving part of your hard earned wages for the whole of your working life , you have no wish to see it spent on someone else, if you wish to donate to charity you should have the choice, whether this is fuel or other  allowances or part of your pension entitlement.
Unfortunately Pension Funds are attractive pots of money waiting to be raided and pillaged and the worst offenders are the State, using the money to juggle their accounts. A good recent example was the Post Office Pension Scheme assets, seized by the Treasury early this year without member’s agreement.
They will now become part of the renowned Public Sector scheme, whose members are unsure of what they will get or when and which gives a poor return on the contributions paid. Yet their Accounts appeared sound but were judged on harsh liability terms, which the State does not apply to its own vast pension liability.
Again choice is the key factor, it was not allowed or even considered, the same attitude has been applied to retirement age for the State and Public Sector pensions. This is being increased to 67 with the intention to increase it to 70 on the assumption that we are all living longer.
But are we, there is little evidence to support this, it is used as an excuse to save money, a panic measure due to the arrival of the WWII baby boom approaching retirement and the projected increases in retired population. Yet the average age is currently given at 80, but that for good health it is under 69, so retiring at 70 give you a possible 10 years to enjoy it, all of which could be in poor health.
Our children and grand-children probably will not be so lucky, all the medical signs are that the present retiring generation could be the healthiest and luckiest ones, even many of these do not live to enjoy the benefits of their labours and savings, the numbers are likely to reduce.
The numbers in retirement are increasing faster than those in work, the so called dependency factor, this is at present over three in work to each retired and is projected to drop to two to one or even below this  It will be impossible for this situation to be sustained, combine it with the dependency of children, students and those incapable of work, you get an impossible situation, which even the best economic measures will not fix.
The only viable solution is self sufficiency and we have a few short years to achieve this before we go into meltdown. We need to return to the old fashioned idea of everyone looking after themselves, particularly once working age is reached, keeping dependency to a minimum.
This is not as impossible as it seems, the National Insurance contributions are large and their potential wasted; a person on the average wage of £500 pw and their Employer pay £5,200 per year. If this was put into a funded well managed pension scheme it would yield over 40 years a final real term pension of some £20,000 per year.
This is much greater than the present pension, with in fact 60% of the NI income would meet the present State pension spend and the effect on the unsubsidised Public Sector pensions are even greater.
We need to return to a fair society in which people have real choice and pension contributions are their personal savings run in a group system for efficiency, but giving a fair return on their savings accumulated and invested. Not a general benevolent society for all, although some wealth redistribution could be allowed if the overall fund is strong. The welfare problem is the State’s responsibility, who should ensure or create jobs.

Friday 21 June 2013

John’s Blog No. 132 – Pensions – NI

The boring details given in previous blog on the basis of NI, only arises because it raises basic questions about Ni and State pensions and also indicates that the original intention was to set up a proper contributory pension scheme, which the present one is not and is descending steadily towards a universal welfare system.
The system needs to return to these original intentions and become a real contributory pension scheme, which is fully funded and gives returns related to contributions made by the members. Welfare should be from taxation and limited to ensure those receive it are not better off than those giving it.
This is basic common sense, together with the saying “charity begins at home”, although not against foreign aid, in many areas it does not seem to have advanced the well being of the population, only their leaders.
Contributory National Insurance should be exactly what it says, Insurance for those in work, in many cases this has been overtaken by events, medical care is now universal with insurance not needed (except abroad) and the only real areas remaining are pensions and unemployment benefit.
Both have been whittled away to a welfare benefit free for all, except of course for the mugs in work who pay the insurance. There appears to be a guilt complex in Politicians, pushed by the do-gooders to redistribute everyone else’s money to the “poor”.
A good example is the latest play on winter fuel allowance,  the rich don’t need it why should they get it regardless of whether they paid for it. This was introduced because the State pension did not keep up with living costs and supplementary payments were the cheapest way out.
Who are these rich anyway, they are anyone earning over £40-50,000 per year, our skilled tradesmen, professionals, your sons or daughters, in fact anyone who has shown any initiative to get on in life, work hard and make something of themselves.  The backbone of the Nation.
 They will pay some £8,000 per year in tax, £5,200 in NI with their Employer, more in some cases than the big businessmen, yet they get little return for this. It is becoming a sin to work and earn money, whilst the real sinners are those that envy their progress and position.
The time to get things back in perspective is well overdue, to clearly distinguish between welfare and earned benefits and give value for money. The unfair and unjust borderlines are already extending to child benefits, bus passes and will move soon to State Pensions.
The new single tier pension is already doing this, with the abolition of second pension and SERPS rebate, why should these people who have their large defined benefit pension need a pension from the State. Ignore the fact that they have paid substantial contributions plus NI to earn these prudent levels for elderly provision.
Let us move back to “you get what you pay for” attitude, if you don’t pay into the system you can’t draw out and ensure everyone has the chance to work. The Government has failed in its duty to do this, passing it over to business, yet failing to create the atmosphere in which it can work.
It is shedding jobs like mad in order supposedly to save money, but spends more in welfare and loses the tax revenue; the real cost of State employment is half or less of the Budget figures and when account is taken of redundancy payments, welfare administration etc, the final cost probably exceeds the original wage bill.
This is additional to the demoralising effect on the individual and the Country. Work and labour is an internal cost and should not be confused with the external cost of imports or spending money abroad, where it is small in comparison, a factor used in all the faster growing economies.
School leavers and those completing further study are the worst affected and many social problems result from this, we should introduce a National Community Service and fund apprenticeships, pay adults to stay in school and University, not charge them.
After graduation I completed National Service in the Air Force and never regretted it, learning a lot and maturing, it wasn’t the best years of my life but it was useful and I gained experience. I doubt whether it would be more costly than its welfare equivalent and certainly more productive.
Work for all should be the aim and the time for shedding jobs arises when labour starts becoming scarce, it is scandalous that well qualified students are dumped on the dole queue, when the nation needs their skills. If these are not adequate make sure the educational system ensures they are.

Friday 14 June 2013

John’s Blog No. 130 Pensions – Nest 2

In order to justify DC systems it is proposed to offer investment choice, this would only appeal to a minority and tends to be expensive besides admin cost there is also the bid –offer difference where 5% is lost. This is wasteful, let the managers manage, the main concern is the final outcome.
Although the gains may be high, speculative investment does not give a sound base over a 40 year period, in any event with such a large age range, one can afford to take some risk at younger ages from 25 to 45 say and transfer internally as the members get older.
That is the big advantage of large group pension funds, there is always a steady flow of money in and investment transfer over a wide portfolio, ending up with virtually risk free at retirement yielding lower returns. It is a living dynamic enterprise , not a stodgy savings account or annual accounting chore.
The sums of money are large, if 15 million (75%) are members with an average wage of £20,000  we have contributions of £24bn per year, which over 40 years will build up to funds in excess of  £1,500 bn with investment income meeting the major part of pension payments.
Income at £24bn each year,  if invested in the UK, would make a major difference to the economy, business and  infrastructure, think of the number of affordable homes, schools, hospitals, care homes, leisure centres etc., besides transport, energy and general infrastructure. Major projects take many years, spreading cost.
 Wealth redistribution is another aspect, unlike the present State scheme, you should get a return linked to what you put in, it is  your money and pension savings and if you wish to give to charity, you should choose
As long as a good member distribution over the wage range is achieved, solution to low earners should be possible, but wage levels below £10,000 would need to be treated as welfare. In any case they would not be able to afford the contributions, which will be difficult at £10,000 amounting to £400 per year, £8 per week after tax relief.
In the absence of any major pension reform, making the best of the present position, Nest needs to be set on a good secure benefit level, with minimum guaranteed returns in order to attract the support necessary for a stable pension future for all in work.
There are at present too many of the working population with no pension provision outside of the State NI system, times have changed, you need to take care of your own pension provision to ensure a reasonable retirement lifestyle. It also needs to expand to include social care needs, which is  possible in a good  scheme.
There is also a need for pressure on Politicians and global business to look after the needs of the working population, who supply the money necessary to keep the Country going. Modern communication makes this easier and too many people give up, do not vote or make their voice heard getting the system they deserve but does not serve them.
Of course the real solution is a well thought out defined benefit scheme integrating State, Nest and Private schemes, outside of State control and without the unfair pay as you go system stifling State provision and the current NI scheme will be considered in the next blog.

Friday 7 June 2013

John’s Blog No. 129 -Pensions

Unfortunately this was deleted in error and is therefore republished
This week we shall be realists and look at how pensions are rather than what they should be, although we always live in hope that common sense will prevail.
Returning to basics, we ask the question what is the minimum pension level and what do we need to save to achieve it, how long is a piece of string comes to mind, but we shall ignore that.
General figures of £10 to 12,000 per year have been put forward, some half of the average wage, with people above this managing comfortably; it is below this that the problem arises. However there is room for some wealth redistribution within the pension system, particularly if State pension is brought into the problem.
The new single tier pension effectively guarantees an income of £144 per week or £7,500 per year, which is at basic poverty level, the new worker pension scheme Nest is intended to bridge the gap.
Good defined benefit contribution schemes report 5% growth, even over the recession and have been  9%+ over a 25 year period. At 5%, final pension should be four times annual contributions over 40 years; taking this as a basis, we can arrive at the expected pension outcome.
The new worker pension scheme Nest has automatic enrolment with total contributions of 8% , made up of 4% member, 3% Employer and 1% tax relief, which over 40 years should yield a pension of 32%of wage in real terms of today’s prices..
An annual wage of £10,000 is probably the minimum viable entry level, higher if tax allowances reach this figure. Contributions would therefore be £800 per year giving a pension of £3,200 and a final pension of £10,700 with the State basic pension.
This rises at £20,000 to £6,400 +£7,500, giving £13,900 per year which is comfortably above the recommended levels and therefore a good pension income in real terms.
Currently there are some 20 million people in work but with no pension provision outside that of the State NI system, the new scheme is a back door method of increasing contributions to give better pension provision. It is in everyone’s interest to support the scheme, it is better than nothing and without major changes the State cannot afford more.
However the new scheme needs changing, it is based on defined contributions and outdated annuities and is not fit for purpose. Pension scheme need good firm foundations, DC schemes are building your fortress against pension poverty on shifting sands.
They  are unreliable, lose money in real terms and with the present annuity position give uncertain outcomes, which are liable to change; having saved diligently for forty years you find yourselves subject to market fluctuations outside your control and too late to make changes or wait for better times.
Pension management needs expertise outside the grasp or knowledge of ordinary people, they are the professionals and paid well to do their work effectively, so why should the risk be transferred to members, who do not have the experience to manage it.
There is a reluctance to guarantee outcomes, hence the aversion to the defined benefit schemes even though they are economically more efficient and being managed well elsewhere. Even avoiding this there are still major benefits in group schemes which run through both work and retirement.
Risk can also be reduced, the days of the fast buck are over and investment should be in the UK, where it is sorely needed and although returns are more modest it is still possible to get 4 to 6%or higher and average out at 5%, which can reduce to 4% for the retirement fund portion where the major fund accumulation has occurred, once the scheme has established
To be continued next week..

John’s Blog No. 131 – Pensions - NI

During a search on the web, a 2013 Parliamentary report on National Insurance was found, which gave the basis on which it was set up and the basic rules to be followed, which together with the latest DWP report on State pension expenditure made interesting reading.
In spite of the general understanding, NI contributions are required to be kept separate in a fund, whose use is strictly defined with any surplus protected. It would probably take an army of lawyers to find out whether this has been strictly adhered to.
It arises because of discussion and consideration being given to merge tax and NI to simplify administration, such a move could of course be political suicide, but the gnomes have not thought that far. Basic tax levels at 33%, with higher rate at 53% plus a 14% tax on Employers would not look very attractive.
These levels are only tolerated because National Insurance is linked to Pension provision and this is already being undermined by current proposals on a single tier pension, greater redistribution of NI wealth and delays in retirement age. The powers that be are already treading on tricky ground.
Rather than merge tax  and NI, which makes NI firmly a tax and unpalatable, why not separate Ni completely from the present tax and welfare system to make it fully work related to the original intention. Set up as an independent body or Trust for the benefit of members. 
Ni contributions are projected for 2013-14 at £107bn with £21bn to NHS and £86bn to pensions. There was no indication in the report of why NHS was involved or reference to work related benefits. Surplus has occurred since 1990, which amounted to £50.6 bn in 2009 but then dropped to £39bn because of the recession, due to investment in Gilts/ Bonds, that is borrowed by the Government and linked to market fluctuations.
The number receiving State pension, discussed in a previous blog, equal the total UK population, making it a universal welfare, in spite of the pretence of a Contributory system and the single tier pension makes even the final monetary return universal. The numbers do not make sense!
 We have a modern day “Roin Hood” situation, except the rich are replaced by the working middle class, who  themselves are now becoming the poor. Yet all agree that the only solution to present economic problems is to ensure work is available to all and restore the incentive to do so.
Welfare costs need to be reduced and universal work is one part, implementation of the failed European universal welfare system is another negative factor. Why should we make payments to anybody who has not contributed to the UK, we need to become more insular and look after ourselves, Europe can’t do it.
Social and citizen rights should prevail over human rights, all other major Countries do this, visas are short term unless residency can be proved or granted and this is strongly related to welfare, self sufficiency and being British.
The same attitude applies to National Insurance, it must be kept independent of the welfare system, some degree of wealth redistribution amongst members is needed as part of the Insurance aspect, but this is possible in a well run scheme.
Of course the existing mess has got to be sorted out first. The present system has led to a large pension liability, which overwhelms NI making it not viable. However the legislation apparently exists to run it as a separate entity, which needs to be done. The State has squandered the NI money and should help sort it out.
To be continued.