John’s Blog No. 145 – Pensions State

Of course the real problem is the State is in an unsustainable pension situation, is incapable of running pensions in a sensible and fair manner and is plugging holes in a rapidly collapsing Dyke. It needs to hand these over to existing independent bodies capable of running pension savings and meet its pension liabilities in a controlled manner. The State and Public Sector pensions, due to their nature, cannot give a good or fair return on the National Contributions made, because these contributions are not saved to accumulate and grow as in a normal funded scheme, but are spent immediately on the existing pensioners. This absurdity creates age dependency of the retired on those in work, instead of the self-sufficiency associated with each member building his own individual pension pot for his retirement. The position is set to get much worse, with pensioners projected to grow by 50% over the next 30 years, whilst those in work remain unchanged. Someone on the average wage of £500 per week, with their Employer will pay 20%, £100 in NI contributions per week, of which £80 is spent on pensions and £20 on the NHS; by 2041 the pension spend will have risen to £120, requiring NI to rise to £150. This is obviously not affordable by those in work or the State. The present measures of the single tier pension and delayed retirement will not meet this shortfall and are just tinkering with the problem, painting the cracks in a ceiling that is falling down. Change to a fully funded scheme to break the dependency chain is the only solution and the matter is extremely urgent. The existing State pension liability is the reason why this cannot be a simple or quick fix. This is now put at £3,200bn for the basic pension with a further £600bn for the second pension; although not treated as such, this is a National debt owed by the State for past NI contributions, which has been squandered by successive Governments. To put these large numbers into perspective, each person of working age 25 to 64 has a pension dependency debt of £125,000, effectively a mortgage on their future retirement, which hopefully the next generation will be able to also meet, when they retire themselves. This situation will get steadily worse as the retired population rapidly grows and this has led to pensioners being considered as a burden, yet they paid large NI contributions over their working lives in the belief that they were saving for their retirement future. It is the system which is wrong! The new workers pension (Nest) is effectively a back door method of increasing contributions to supplement the poverty level State pension. It is unfortunately based on the failing Defined Contribution Scheme, which loses money in real terms, being beset by poor performance, high charges and out-dated low Annuity returns. The unfunded Public Sector is in the same situation with liability, excluding Local Councils, being put at £854bn.Their position is in fact even worse as they have paid extra contributions to increase the State pension, but are in the same dependency situation, with the State increasing contributions to meet the problem. The real opportunity does however exist to combine all of these, with existing private schemes, in universal funded pension schemes, run independently from the State, with the conversion of State schemes to fully funded ones. This could be done by the transfer or rebate of NI contributions to these schemes over a managed transition period. Ideally if the State met its existing pension liabilities, this could occur tomorrow, but in the present economic situation the money for such a rebate, amounting to some £60bn per year, could not be readily found. It could be carried out in a virtually cost neutral manner over a transition period of 20 to 30 years. The benefits would be large, primarily securing the pension future in a self- sufficient manner; limiting rebate to a fixed and affordable proportion of NI income; giving a large stimulus to personal additional savings, if linked to these and the creation of large investment funds, which could be directed to UK business and infrastructure.

John’s Blog No. 144 – Pensions

Before proceeding further with consideration of NHS or other pensions, it is desirable to have a basic understanding of the nature of Pension savings and provision in a fully funded scheme. Pension are deemed to be too complex for even the experts to understand, but is this so? or just convenient for the Financial Institutions and the State to make it appear so. It was once the position with mortgages, savings, Insurance and recently energy bills and housekeeping, but all are becoming manageable. Pensions follow the same simple arithmetical rules as these, with the main complexity being the long time scale, some 40 years, in which the main objectives tend to get lost. It is essential to understand these basic rules to ensure value for money and final goals are met. They are personal savings, which should accumulate for a minimum of 30 to 40 years to build up a Fund that can be drawn upon through retirement as a pension income. If you save £1,000 per year for 40 years, this fund will accumulate to £40,000, if you then withdraw money from this Fund at say 6%, £2,400 per year, you would have made an overall annual factor gain of 2.4; £2,400 for every £1,000 saved. At any time, this Fund has a commercial value and can grow by suitable investment, it is also eroded by inflation and charges and these factors occur through both savings and retirement. If wages and hence contributions keep pace with inflation and the Fund grows by a similar amount, then the factors above apply in real spending power terms. Charges are more insidious, values of 1% are being quoted, but these are based on the whole fund and not just a commission on contributions and therefore can be quite substantial and unfair. Well managed Pension schemes have administrative costs a tenth of this of 0.1%, with investment costs twice this, most Investment trusts quote growth after costs. Growth has averaged 5% during the recession, with ten year or longer reaching twice this; at 5%, yield factors in real terms are almost twice the inflation minimum at 4.5. Pension payment levels in all major schemes, the State and annuities also take into account population survival. Life expectancy, at 20 years is the time taken for the population to halve and this allows payments to be made at much higher rates, one person’s death is someone else’s gain. Funds can therefore sustain inflation proofed payment levels of 6% with quite modest investment incomes at 4%. We therefore have some basic guidelines, rules and values on which to base pension yields and requirements on funded schemes, which although not applying to the unruly unfunded State schemes can indicate what is value for money. The minimum level, below which they lose money in real terms is 2.4 over 40 years. If your projected pension is not at this level, then the scheme is not performing and this ratio can be adjusted for shorter saving terms; so for every 10% of wage saved, you should see 24% of final average wage as a pension after 40 years. All but the best schemes fall well below this, with the norm for DC schemes at 1.8 due to poor outdated annuities. Consider NHS, assuming Employer is still at 7.3% (in doubt), Employee is now at 9% and SERPS is at 4.9%, (soon to be unfairly abolished), we have a total of 21.2% contributions, which should give an inflation gain of 50%. However deceptively the State pension is included to inflate final pension to these levels and SERPS is also included to inflate Employers contributions. This was illustrated in the State comment of the Fire Brigade pension strikes this week. A fireman earning £29,000 per year was quoted as receiving a pension at 60 of £19,000 per year, a large gold plated return which does not justify strike action. The Gad 2006 values showed average salary at £29,600 but average pension at £7,600 some 25%, it is difficult to understand the rapid rise since then, if it occured? However another report quoted this at £12,000 with the State pension bringing it up to £19,000, a completely different picture; using NI and Public Sector personal extra contributions of 21% or more, some £6,000 per year, this is a poor factor two loss-making return on lifetime savings. The action in any event was over the large reductions made for forced retirement at 50 or 55, due to inability to do the job. Combine this with rising contributions, particularly with the abolition of SERPS, the diminishing returns, uncertain retirement dates and the capability to carry out the work after 50 and beyond, one cannot understand the State’s reluctance to provide accurate and true information or to discuss the matter

John’s Blog No. 143 – Pensions –NHS 2

The State and Public Sector pensions are in crisis, due to the present unfunded “pay as you go” system, this outdated and archaic system in which today’s pensions are paid directly from the contributions of today’s working members would take top prize for idiocy, if it was not so serious. With anyone else it would be a criminal offence of misuse of funds and subject to a long prison term. All pay substantial NI contributions for a State pension, which has now reached poverty level and less than the welfare pension credit, being treated as a benefit largesse from the State (see previous blogs), ignoring the many years of contributions for a very poor return, which is scheduled to get worse. Public Sector Pensions should be a completely different matter, involving a supposedly defined benefit scheme in which contributions should accumulate and grow to give a secure outcome. These are personal savings taken from hard earned wages for the personal benefit of the member in their own pension pot Fund. Except they don’t exist, only as vague IOU’s from the State, which could be smoothed away all the time contribution income exceeded pension payments, however the rapidly rising over 65 population is upsetting this balance, known as the demographic change of an ageing population. For every pensioner there were over three people in work supporting them, income exceeded expenditure and successive Governments gleefully pocketed the difference. However this is changing reducing towards two to one creating a shortfall, which is being proclaimed as a taxpayer’s subsidy. Hence the current mis-information policy on gold plated pensions and attempts to cut back on pensions, increase contributions to balance the books on a biased and flawed system. It gets worse for the pensions of Civil Servants (2% contr’n); Armed Forces (nil) and Ministry personelle (unknown) are subsidised, whilst NHS, Teachers, Police and Fire are not, with Local Government run as a funded scheme. It would be less unfair if kept separate, but all are lumped together as losing money, including subsidies. In fact the main four are healthy and in surplus, but being penalised as the easy way out. The basic problem is that State budgeting can not allow for savings and deals only in income and expenditure and is therefore not suitable to run a pension scheme, which requires a Building Society/ Investment attitude, combine that with poor accounting and you get the present chaos. No real detailed information on Public Sector pensions has been released only overall in the general accounts which are incomplete and vague, the latest for these showed average Employer contributions at 7.3%, Employee at 6.5% and Social (SERPS) at 5.1%. The GAD 2006 report gave 208 projections, which combined with above give NHS contributions at Employer £3.12bn; Employee £2.78bn and SERPS at £2.18bn, giving a total of £8.08bn, pensions paid are at £4.5bn, giving an annual surplus of £3.58bn. It gave active member numbers at £1.6mn and retired £0.7mn, with average salary at £23,600 and pension at £6,000 (some 25%). The NHS is therefore in a strong position, in spite of the liability burden of existing pensions; although this may have increased, so have contributions, now at 9%, which should have improved the overall strength. Yet the position on NHS pensions is steadily getting worse, it is the strongest of the Public Sector pensions, but one giving the worst returns, with average pensions of only 25% of wage, requiring State pension to give a living income. These are simple housekeeping sums, possibly overwhelming, but showing a straightforward position which all the NHS representatives should be arguing with the Government, but don’t appear to be doing. If your home budgets showed a surplus of 40%, you would be laughing all the way to the Bank. It would be a very healthy funded scheme and could stand alone, even with the £4.5bn existing pension liability, which should be the main thrust for change, giving the pension scheme back to members in an independent managed Funded pension scheme and this will be considered next time.

John’s Blog No. 142 – Pensions –NHS

This week a diversion. John’s Adventures through the Looking Glass – (apologies to Lewis Carroll) The adventure began at midnight one Sunday night when I awoke with difficulties breathing; if you want a good time to be ill, then this must be one of the best. Things got worse and I had to dial the Emergency Services. Of course I did not dial the right magical numbers and was directed to a call service. Several minutes answering general questions, left me breathless and exhausted, transferred and repeated again to a nurse, who decided on an ambulance, with the right magic numbers, I should have started with 999. They arrived promptly, had me settled, checked and monitored, with oxygen for the one hour journey to A & E. My wife, who does not drive, was invited along, but declined due to no guarantee of getting home, and rang round the family to let them know. The ambulance men missed their turning or went through the wrong looking glass, for I found myself, not in the Nasty Horrid Service portrayed by the Knaves of media and journalism, but one of TLC. No long wait on arrival or in corridors, but straight into a cubicle, with nurse attention doing checks, tests, medication and tea, although the harassed doctor was busy dealing with more urgent cases, with final transfer to a ward where the adventure continued. It was an unreal, uncertain land, divorced from reality, which should have been depressing, except that it was full of cheerful people, who’s prime concern was your welfare and spared no effort to achieve it, from consultants, doctors, nurses, orderlies, even down to the cleaners. A colour guide to uniforms would have been useful to decide who was what, light blue dark blue, green, white, you name it and sort out consultants from doctors, nurses etc. etc.; some with name badges, some without, although the big chiefs did stand out. The dictatorial Queen and her army of bureaucrats were there in the background with volumes of rules and paperwork and an atmosphere of deference associated with human rights and the blame game. “Do you mind if I listen to your chest”; of course I mind that you asked, that is what I am here for, your medical expertise. Then of course we had the mad hatter’s tea party, if you changed wards or beds, someone else got your breakfast, which you had ordered in advance and the food ranged from excellent to mediocre, but generally good, although limited to what was felt nutritious and healthy. Stay in hospital is not a pleasant experience or one to book up for, but the nice hospitable service I found was not like the reported one, not quite 5 star hotel but getting close, with much more attention. Patients are well informed of their state and treatment, possibly overly so. One querulous patient almost reduced a young nurse to tears, with his insistence that she had not given him his medicine, when the careful records and physical checks showed otherwise, she was to blame for his memory failure, a growing attitude. The Wonderland of medical care and technical advance is starting to be taken for granted; only several years ago, going into hospital was a serious event with an uncertain outcome; now one expects to come out fit to run the marathon or will complain if this is not so. The Imperial Minister and his Management army need to be very careful in their cost cutting changes, to avoid damaging a very fragile and successful service; Pay freezes and unreasonable changes to terms and conditions, particularly pensions are undermining morale at all levels. The Ambulance man had his eagerly awaited retirement plans shattered, when he was told he could not retire on full pension until 67, he paid in fully and expected age 60 and why not, anyway how was he going to lift patients at that age, when he would probably need that service himself. It is crazy bureaucracy. Plain commonsense appears to have been lost altogether and needs to return urgently in all aspects of the NHS before it descends into the nasty horrid service in the other looking glass world. (NHS pensions next week)

John’s Blog No. 141 – Pensions –Pensioners 4

Of course pensions are made complex to confuse you, but all you need to know is the pension replacement or yield factor. For every £1,000 per year you save over 40 years, how many 1,000 will it yield in pension payments when you retire: DC schemes are quoted at a low 1.8, giving £1,800 pension per year in real terms. If your wages and contributions keep up with inflation and the Fund grows to also keep up, then over 40 years the Fund will build up to £40,000 in real terms, with payment drawdown at 6%, this gives £2,400 pension, a factor 2.4, which is the minimum in real terms, without losing money. Even with the worst 65+ population projections this is sustainable in a group scheme and is the Revenue recognised drawdown rate. Managed modestly your Fund should grow much faster, 5% is currently reported, with some rates even higher, this would double the expected returns. You should also have the choice of when you retire, if you have built up an adequate fund, this could be any time after 55, or if you prefer to work, delayed later, but your choice. Life expectancy is another confusing and vague area, it is generally assumed to be the time you have to live from that age, which is wrong. It is in fact the time taken for the numbers to halve from that age, you have an even chance of living that long or of dying any time between, at age 65 it is 18 to 20 years, you might live to 66 or 85, some of you will but it is an individual thing. Health and the quality of life is another asspect you may be alive, but can you do all the things you want to, currently we are healthier and more active at 65 than we have ever been and record numbers are surviving to 65, but the latest healthy living age is just under 69. Eight years from age 65 is the average time given as free of disability, it obviously depends on lifestyle, fitness and activity, but ageing inevitably takes effect some time and you do not have the ability or urge to do all the things you want to do or planned to do. Active life starts leaving you behind and the pace gets slower. This raises the question of retirement age, the mantra “live longer, work longer” is not proven or justified and it is criminal to force people to lose enjoyable retirement years to save small amounts of State pension money. It should be a matter of personal choice and whether you have contributed enough to support yourself. Some people have no life outside work and others little within it, bursting to do all the things that work, financial and family responsibility have deprived them of. A good retirement age is 55, children will be grown up and if you planned it well the mortgage will be gone and you will have had over 35 years of savings in the pension fund, including NI contributions. You will still be active and have the energy to do all that you want and of course you can still work part time to get the best of both worlds. In any event 65 is the latest time that people should be forced to work, but it should not be compulsory but a matter of choice. We need to face the prospect of life and death positively, if we are to get the best out of life in retirement, is our living style detrimental to longevity and how can we change it? How many of our relatives and friends are dead and why? What is our family inheritance in this respect or our present health and do we want to improve it? Alternatively do we just settle down to a relaxed living, fitting in what we can and enjoy life, our children, grand-children and more if we are lucky; doing just what we want to and catching up slowly on all the things we wanted to do, living life to the full. Pension savings accountability is an important aspect of this decision, there is none whatsoever in State schemes, in spite of large contributions in National Insurance and Public Sector pensions, there is no firm and binding relationship between what you pay in and get out. Benefits and rules are changed to suit the Public Purse, without reflecting what your savings should have accumulated or earned. It is run as a benefit welfare syatem of State largesse, with ever increasing contribution demand and decreasing and delayed payment, regardless of the individual. There are alleged rules relating years of service accumulation to percentage of average wage, but these are meaningless when the goal posts are constantly being shifted, without discussion or concern for the individual. It results from the lack of individual funds and final aims or objectives, if you know that you have a fund of say £100,000 which could give a pension of £6,000 per year, then you can decide if you can afford to live on it. This is the basis of all pension Funds except the State, your savings; your money; your decision and your choice and anything different would be treated as a criminal abuse of funds. Why should the State be different, they deduct the contributions from your wages whether as NI or other and have an obligation to protect and return it, when you need it, subject to obvious safeguards, without redistribution to others or themselves. The time for a major change in attitude, outlook and treatment of such individual savings is long overdue.

John’s Blog No. 140 – Pensions –Pensioners 3

Pension systems in general are not fair or reasonable or give good value for money, unless of course you are one of the lucky ones who have never paid in. The State goes to a lot of trouble and expense to ensure we do not get ripped off by shops, Banks, energy suppliers etc. but does not bother with pensions.

Yet it is the greatest rip off ever with the State as the biggest offender, where else can you pay out for over 40 years without any guarantee of getting anything in return and when you do it is less than you paid in. the amount is dependent on what your children or grandchildren can afford to pay in contributions or taxes.

The money you thought you were saving has already been spent, without even time to touch the ground, it has not been prudently put away to accumulate and grow into a good pension fund for your benefit, but has been lost in the system, grabbed by a greedy Exchequer for their own purposes.

Of course, it is supposed to be put into a protected fund, but all Government Departments only work year to year and are therefore are unable to even envisage savings, yet alone manage them.

Public Sector pensions are even worse, reputedly gold plated, they are nothing of the sort to the majority average member in the NHS, teaching, police or fire, who pay large extra contributions with poor return. Of course the elite part who pay little or no contributions are well off and subsidised by the other members, whose contributions rise to meet the unfair imposition.

Company and other private schemes are run well and give a good return, but their income is taxed by the State and they are being forced by stringent liability demands out of business or into defined contribution schemes. These only have the contributions defined but not the final outcome and lose money in real terms, the pension forecast declines rapidly as you approach retirement, with original projections meaningless.

Unfortunately, retirement when it comes cannot be delayed, you can’t sit on your pension Fund and wait for markets to recover, in fact annuity values can change dramatically within the time taken to have funds transferred and you can guarantee your existing provider will give you the worst deal.

Annuities are out-dated and not fit for purpose, any system that converts pension savings into a final guaranteed income has got to be stable and deliver the same return over a fixed period of time, otherwise they are pointless.  The basic investment in Gilts were supposed to have done this.

The money is there, good market or other investments are there, so what is the problem. The main one is how long will the member live and need to draw that pension? How much can you afford to pay out without the Fund dying before the member?

This is a straight forward calculation, comparing payment levels, population decline, possible investment returns in actual cost terms to find the Fund v payment solution in final real terms. In spite of pensioners living longer, a 4% income would allow a 6% to 8%payment in real terms, some twice existing levels.

Many Group schemes keep Fund continuity through work and retirement, which allows funds to work more effectively whilst minimising risk, giving greater returns due to the higher income achieved, with greater continuity of investment. Income can meet over two thirds of pension costs.

Therefore some form of defined benefit scheme, where minimum outcomes are guaranteed is essential to plan any form of reasonable retirement, to decide how much to save and for how long to get the final income you need and deserve. It is your money and should be made to work as hard as you do to earn it.

We need to return to the sane pension world, where contributions and Fund are allocated to you alone, working for your benefit, so that you retire with a pension Fund adequate to meet your retirement and elderly care needs, with firmer guarantees on what it will achieve over your working life.

John’s Blog No. 139 – Pensions –Pensioners 2

The question arises of whose money is it, it apparently no longer belongs to you; NI contributions are treated by the State as tax income; there is already a move in hand to do this, effectively to cancel the National Insurance Act. The single tier pension at or below welfare level is the first step towards this, All are equal, regardless.

Of course a basic rate of tax at 43% would be extremely popular! I don’t think, particularly with no firm return of pensions, unemployment benefit, job creation, etc, Why bother to work? The only ray of hope is the forthcoming general election, it would make a good platform for defeat.

There is a common attitude with many pension providers and administrators, who treat contributions as their money to be played with on the markets, but pass on the losses to members, which is the basis of defined contribution schemes. Annuities are even worse, are subject to daily market fluctuations, making it a gamble when you retire.

They were supposed to be tied to a stable Gilt and Bond base, with the State guaranteeing the outcome, but were then thrown into the market casino and no longer give good value for money or reflect the diligent years of saving. They are basically out dated and need replacing by a group scheme alive and active through work and retirement.

The basic problem is that pensions are no longer your personal entitlement, earned from many years of prudent saving, but a largesse to be dispensed unwillingly and begrudgingly, as from a charitable fund. No care is taken with your money, in fact it is no longer yours, but belongs to a faceless group or the Exchequer.

If you have the audacity to ask for a statement, you need to check it like Bank or Credit cards as mistakes are often made, the rules are changed without consultation or agreement and forward estimates decrease as retirement approaches, too late to correct.

The State is the worst offender, both in State and Public Sector pensions, you have no rights and should accept without question the “benefits” the State provides. The main aim is to reduce the amount paid out to prop up a failing system, which successive Governments have mismanaged and abused.

Careful plans, made over 40 years,  to retire at a given date with an adequate amount to enjoy the active years of retirement are thrown into confusion; the date is delayed by two years and the amount reduced sometimes halved. Pensions are an area where choice no longer exists, you are urged to choose doctor, hospital, schools etc. but not retirement; fairness has also gone out of the window, when you are better off on welfare.

Let us face it at 65, or is it 67, you are a liability; the system has squeezed out all the juice and wants to discard the shrivelled remains. Yet you are a force to be reckoned with and need to voice your displeasure, so they sit up and take note and improve the system.

Pensioners are now one sixth of Population and are the largest proportion who bother to go out and vote in an election, with the low turnout numbers that occur today, they are the majority. In spite of the low pensions, they are still a major spending power and with time on their hands they are an influence in the local community.

So sit up and take note and show a little respect to the old fogeys, who are not yet over the hills. In addition all in work, see their future in the pensioners and it is in their interest to see they get a good deal. In any case they earn their meagre State pension, paying substantial contributions.

A person in work, on the average wage of £500 pw, with their Employer pay 20% of that wage as NI, with 80% of the total income collected paying the State basic and second pensions. If you put that 16% into a good funded scheme you would expect to receive a pension of half that wage, not the measley fifth (20%) the State pays out.

The single tier pension announced and accepted by the experts as a great step forward, replaces all other State pension provision including the second pension and SERPs. In exchange you will get a large increase in your basic pension, bringing you up to the welfare Pension Credit level, without of course all the side benefits.

You know it makes sense, bringing all up to the democratic Socialist ideal of equality for all, regardless of whether you contribute or not; we all starve together and work hard to ensure it.