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.
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