John’s Blog No. 32 – Pensions – Current Events

This has been a terrible week with events that affect pensions and pensioners both directly and indirectly.

Like many I was appalled at the senseless violence, destruction and looting that occurred in our major cities for which there was no excuse. The attitude that “what is yours is mine” and take any steps to get it, endemic in some undeveloped countries, appears to have been imported into this country and organised through the Internet.

Since early ages, humans gathered together in Tribal Societies for protection and mutual gain and accepted responsibilities and duties in exchange. At that time it was black and white, the tribe against the external threat and anyone who broke the rules was cast out.

Now the situation is more complex and we have become bogged down in human rights and a multitude of excuses for not obeying Society Law and rules, whose need is essential if we are to continue to survive. If you break the Law , it is common sense, that you should lose the protection and be cast out until reparation is made.

Human rights are part of Society and criminals should lose those rights and all claim to the benefits of Society, although they should still be treated humanely. An inherent part of social gathering or tribes is the respect for other members, their lives, property, rights and well being, whether this be in a village, town or nation.

This involves accepting the responsibility and of ensuring children are brought up with this knowledge and attitude otherwise we shall all revert to the jungle, with survival of the fittest and most ruthless. Deprivation, poverty, social position are no excuse for ignoring the basic rules and failure to instill them.

We live in a culture of violence, greed, envy, blame and competition in the acquisition of worldly goods and this needs to be controlled to minimise the threat from within. At the same time we must ensure that Society gives hope and opportunity to all, particularly the young, which appears to have been lost in the obsession for wealth.

I did two years National Service, I do not regret it and found it a good experience and life training exercise. Taking someone from the home environment, giving them independence, a basic income , training, social mixing and a sense of responsibility is not wasted time. It does not have to be in the armed forces, it can be an apprenticeship, course of education, charitable and social work in this Country or or even third world.

We need to do something urgently both in punishment and reward before it is too late.

The other event which directly affected pensions, particularly those about to retire, was the upheaval on the Stock Market, which is becoming more unstable and volatile. There must be a better way to manage Commercial affairs than this speculative free for all circus, which appears to pay little attention to actual worth but more to rumour and hearsay and the attempt at the fast buck.

The two events are connected, the latter being theft from hard earned pension savings and from wages in speculative commodity activity raising retail prices, particularly oil and gas. The Country is in the doldrums under threat by mindless hooligans and global conglomerates driven by self interest and of questionable judgement. Lost are the true investors of the 19^th century who built Britain up.

The Government needs to take control and avoid the blame game, the present recession and current social ills will only be beaten, as in the past, by growth using the Country’s assets of labour and own materials without incurring foreign debt.

Funded pension schemes offer the potential Capital to fund such growth in infrastructure of affordable housing, transport, energy and social buildings; to take youth off the street in worthwhile work. Most of such expenditure offers modest stable returns, whilst benefitting all.

Many such projects are at an advanced stage or can quickly be realised, one such is the Severn barrage which with upper dams could supply 20% of our energy needs, current cost estimates at £35bn it uses  internal supplies of mainly concrete, steel and labour with few imports. Compared with the London Birmingham high speed rail link at the same price and large imports, there is no contest, such obsession with speed offers little benefit, double the speed gives half the traffic flow due to four times the stopping distance and spacing.

All this may sound insular with buy British, but perhaps we need to be, to reduce foreign debt and influence and regain our independence, to get the nation working and growing again

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John’s Blog 31 - Pensions – Mis-information and Public Sector Pensions

Mis-information was developed as an art during World War II and appears to have been re-found by the Government, or become more blatant.

It is certainly being used in the campaign against Public Sector Pensions, particularly NHS and Teachers, who are damned if they strike to get their voice heard and damned if they don’t.

I was extremely annoyed a week ago to read the gross distortion of facts, given with the announcement of the new pension rates. This was carried by most of the media in an almost similar form and appeared to be a press release by the Ministry, being as close to the truth as the hacking scandal.

A nurse earning £30,000 a year was stated to build up an” enviable pension fund of £500,000”, denied to the ordinary worker, who would be lucky to get anything. The State publishes no accounts for these schemes, mandatory for private schemes, therefore facts are hard to come by, but one can dig and search.

GAD reports of 2006 and 2008 give NHS average salary at £23,600 and average pension at £5,400, less than 25%  of salary; at a 4% annuity this would need a pension pot of £140,000 and at 6% only £90,000.

The 2008 Blue book shows total Public Sector contributions as:-

Employers - £7.853;    Employees - £6.687;   Imputed Social - £5.119;       Total - £19.659 billion

Giving average Employer contributions at 7.3%, Employee at 6.5% and Social (SERPS) at 5.1%.

A nurse on £23,600 would pay contributions of £1,534, give up her right to State second pension for £1,200 and receive Employer contributions of £1,723 over 40 years for a pension little better than the State basic pension and which even with this fails to reach the 50% promised. Teachers, Police and Fire are similar

Any other worker making total contributions of £4,460 per year into an investment fund, from latest Moneyfact figures for savings of £1,000 per year over 10 years, (some 7% growth), would over 40 years build up the £500,000  fund stated. Buying an annuity at 4% would give them a pension income of £20,000 and at 6% some £30.000 per year, inflation proofed in real terms. Four times the actual. Who should be so lucky !

GAD 2008 shows NHS contributions of Employers at £5.3bn, which wrongly includes SERPS refund, indicating total contributions of £8.1bn and shows Pensions paid at £4.5bn, giving a surplus of £3.6bn taken by the Treasury to subsidise the Civil Service, (paying until recently 1.5%), Armed Forces nil and MP’s, Judges and others not known , but all presumable nil contributions.

The State runs Public Sector (and State) on an unfunded “pay as you go” basis in which the contributions are spent the same month to pay someone else’s pension, whether they contribute or not!

Any Company or individual doing this would be criminally prosecuted for mis-use of funds, even fraud, heavily fined and jailed and struck off or barred. This is clearly illegal and the law should be obeyed even by the State.

I do not deny concessions to the Armed Forces, but they and subsidised others should be outside the overall scheme, as internal Department or State costs. The NHS, Teachers, Police and Fire are hard working and pay good contributions and receive a poor pension return which would not be accepted in a private scheme. It is now proposed to increase their contribution by up to 3%, giving even less return! It is they who are cheated by the State.

The NHS could readily transfer to a funded scheme away from the State, even if they paid existing pensions, the annual surplus of £3.6bn would rapidly build up to a fund of some £50bn in ten years and £250 to £300bn over forty years, with potential investment income of initially £3bn up to £18bn per year..

Members would be three to four times better off and free of future uncertainties of increased longevity in old age. Funds could be invested in hospitals (buy back PFI), Hospice and care homes and give a good income return. If the State took over responsibility for the existing pensioners, then all four schemes could cope with the transition and even meet future new pensioner demands.

I am retired with no interest other than hard working relatives in the Police, NHS and Teaching.

The State needs to take a positive approach on PS pensions not denigrate the hard working and hard done by members , separate out the subsidised members and repay the many years of mis-use of funds. Pigs might fly!

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John’s Blog 30 – Pensions Public Sector again

Public Sector pensions continue in the news with the Government ploughing ahead with employee contribution increases and other changes, whilst “consulting” on such changes.

PS pensions are in a mess and the Government are doing little to sort it out, no accounts are published on scheme performance, although members pay contributions, which with employers and SERPS rebate amount to some 19% overall. The money goes straight into State coffers without normal accounting controls.

Any private scheme running in this manner would be prosecuted and fined, barred from running a scheme and even imprisoned for misuse of funds. The scheme is run on a “pay as you Go” basis which means there are no funds to account for, moreover some members make good contributions and will pay much more, whilst others pay little or nothing, being subsidised by other members and the taxpayer.

Yet none of this is publicised and changes have not been logically justified. NHSs, Teachers, Police and Fire pay member contributions from 6% to 11% and the scant figures available suggest pensions paid are low for the average member around 30% of average wage. The higher earners and late promotions do well, taking an unfair proportion of payments. The figures also suggest that the State pension is included as part of benefit.

As there are no funds, the scheme fails from the lack of investment income which cam meet anything from half to all the pension payments paid, making a funded scheme 3 or4 times more cost effective as the contribution work hard in the members interest.

The 2008 figures available indicate that NHS contributions exceed pension payments by at least a third, as do police and fire, with Teachers somewhat less. However they could all transfer to a funded scheme without the major problems predicted, particularly if the State met its liabilities on existing pensioners.

 There are a lot of misleading statements about the viability of PS pensions, most of which could be dispelled if the facts and accounts were published in the same manner as other schemes are forced to do.

Much is made of increased life expectancy and the need to work longer because one lives longer, but little study has been made of the over 65 population, the main area affected by these projections In fact the major impact is on unfunded schemes from demographic effects, if you are self sufficient the impact is small. PS schemes on current projections will see a one to one ratio of those in work contributing and those drawing pensions within 25 years, an obviously impossible situation when there are no pension funds to meet pension increases.

There is an urgent need for an open and frank disclosure and discussion of the problems, which affects an important and trusted part of our society, who many depend on and who are being forced towards strike action they do not want or know how to avoid.

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John’s Blog No.29 –Pensions – Elderly Care

Care needs as one gets older has become an increasing and important aspect of retirement well being and also an expensive one, with the necessity to sell one’s home to pay for it.

Here again the State does not take the matter seriously, without doing the simple sums to find the costs or properly assessing the needs to establish what is affordable and the best way of meeting it. As a result the improvident flourish and are looked after by the taxpayer and the prudent are left to fend for themselves.

Of course what has this to do with pensions you may well ask? Only that self-sufficiency and pension savings could offer the funds, income and method to provide a real and long term solution, with the State offering the medical care and welfare aspects.

Care in old age should be separated into dependency regions ranging from full hospital needs down to the minimum social contact and activity requirement of old people living alone. At present it is all or nothing with charitable groups trying to supplement the nothing, but care could be phased in more effectively.

In general, needs increase from age 75, possibly earlier with someone living alone, social contact and activity the main ones and these were provided by luncheon clubs etc, which unfortunately have been steadily reducing over many years due to spending cuts. A false economy.

Sheltered housing meets the next phase where a warden or live-in couple keep an eye on residents, with communal recreation rooms, guest bedrooms, and possibly meals supplied and this can extend over a long period and for some all that is necessary.

Residential homes are next, where intermittent medical care and help become necessary, usually with a resident nurse and doctor on call and then finally hospice or hospital care., which is the expensive stage.

Cost steadily increase as you go up the chain and this is made worse by stringent regulations, often resulting from odd incidents, specifying staff patient ratios, 24 hour and medical attendance etc., all of which become unaffordable.

This is made worse by commercial exploitation, as witnessed in recent events, where homes are bought or transferred  to a management company and then leased back at high rents and maintenance charges, similar to the situation in PFI for hospitals and schools.

Pension funds could offer investment funds at reasonable rates to meet property needs and could generate sufficient funds to meet costs at the high dependency end. The lower levels need greater planning and use of resources.

There are a large number of experienced unemployed, housewives and early retired who would welcome part time work running day centres and organising activities. There are also a large number of halls, leisure and recreational facilities and even pubs and hotels that are under-utilised which could be readily organised for meetings and daily outings.

How to pay for it is the next question; at the intensive care end, the State must be responsible, but could assist and save itself money by supporting charities and part time wage bills. Management charges in retirement apartments range from £1- £3,000 pa  outside London, depending on level of service, partly offset by reductions in personal insurance and maintenance costs.

Many hotels, who meet fire and other regulations, offer short breaks as low as £20 per night half board with good staff and back up services, so it should not be unreasonable for minimum residential care centres to start around this level, increasing with level of care. This may require changes to different homes or wings as conditions deteriorate. Minimising upset where possible.

A review of numbers and needs would be required, but this is in any event overdue, together with a common sense approach to regulations. State estimates of cost suggest individual payments of £20,000 and annual expenditure increases of £2-3bn, which is a small part of current pension costs and fund values.

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John’s Blog No.28 –Pensions – The Future

The Pension future is looking dire; if Charles Dickens was writing Bleak House today, it would be about pensions and in workhouse terms.

The State is projecting the retired population doubling over the next 30 to 40 years, with the working population hardy increasing, which makes its own contributory unfunded pension schemes unsustainable, with not enough in work and paying taxes to support the retired.

Yet it is tinkering round the edges and going in the wrong direction, refusing to consider changing to a funded system in which people clearly make their own self provision. Retirement is delayed and taxes increased with NI moving to a universal grey pension at poverty level, regardless of contributions, effectively a welfare tax.

At the same time the successful defined benefit schemes are being forced out of business by taxation, levies and regulations, which the State does not apply to itself in the State and Public Sector pension schemes.

The alternative Defined Contribution scheme, in which all the Commercial risk is borne by individual members, is not fit for purpose, and in its own DWP report shows that it does not even return members contributions, losing some 3% per year in real terms.

The latest proposals for a single tier State pension of £140 per week, would phase out the State second pension and SERPS rebate putting even more pressure on private schemes and increasing their contribution levels. The State contributory pension is not good value for money and with Employer NI contributions are almost at 24% of gross wages, effectively giving basic tax levels of 44%.

The State spends roughly half NI revenues on basic pension; at £53bn per year this should give £100 per week to all pensioners, the same as the £102 currently paid to the three quarters or less of actual contributors. The State says that the minimum income for a single person should be £132.60 per week and this is the basis of the welfare Pension credit, plus other benefits, mainly Council Tax, which add a further £20 pw.

The £140 PW therefore does not even bring pensions up to the welfare poverty level and other changes of reduced contributory years makes the basic pension a welfare one, with contributions a farce and meaningless.

Next year the State brings in the Nest automatic pension scheme with individual contributions of 4% plus 3% for employers and tax rebate (State) at 1%, with much less publicity than the Olympic Games. Effectively this supplements the inadequate State pension and cynically could be seen as another form of taxation.

It does not appear well founded; it is based on defined contributions which are uncertain and perform poorly; current Insurance providers dominate the scene, which does not inspire confidence on previous record and does not appear independent of the State. It is aimed at a 15% wage replacement, half of what should be possible.

Membership is aimed at 5 million, only a quarter of those in work without adequate self provision, but even at this level contribution amounts are large. At £1,000 per year (8% of £12,500 pa), this would give £5bn per year income, totalling £200bn over 40 years in real terms before growth, possibly twice after this.

Yet there is no clear investment or protection policy, possibly low risk probably gilts or bonds, which means back to the State, with the overall risk of descending into another State pension.

This would be another lost opportunity of a sound guaranteed pension scheme (as previously outlined), with funds being invested outside the risky current commercial areas in social infrastructure of affordable housing, schools , hospitals, care centres, energy and transport, all of which could give good and reliable returns.

Decisions on this and State pensions should be brought out into an open forum, the new peoples democracy and charter, being politically voiced but ignored, with policies being made behind closed doors by a selected few and only changed when subject to public opposition. Now would be a good time to start the change.

We have had many reversals recently on ill thought out and cost cutting measures, which even common sense would have rejected. We have also seen signs of the ugly side of Capitalism and not so free enterprise, with the revelation of media and Commercial influence on Government.

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John’s Blog No. 27 Pensions – Retirement Income

The options for income in retirement depend on whether you are dependent on State pensions, where they are nil, to that fixed by the employer in defined benefit schemes in terms of final salary, or in private schemes, mainly defined contribution, where you have some choice.

The majority of private schemes, and some others, depend on annuities issued by Insurance Companies who in exchange for your funds, guarantee to pay you an agreed amount until you die and is the most favoured choice. This is a form of co-operative where the survivors benefit from the death of other members, However if you are unfortunate to die early, then your fund disappears before you receive any real benefit.

You can specify a dependent, usually your partner, to receive all or part of the agreed pension amount upon your death and you can also specify a guaranteed period, usually 5 or 10 years for which payments are made. In practice this is well worth doing and the reduction in pension are usually not large.

Recently other options have become available; fixed term annuities are now available where the annuity is paid for a number of years and then renewed for a further period. The annuity amount and the surviving fund amount are agreed at the outset and at renewal, you can renegotiate or withdraw the residual fund and put it elsewhere, or if you die, to your estate. This sounds great but probably rates offered will be poor.

Drawdown is another option, but is only possible with funds of £50,000 or more, usually higher. It has to be agreed and reviewed annually with the Revenue, to ensure funds don’t run out; so setting up and running costs are high. You can delay taking an annuity until 75, with talk of increasing this age, and just take the investment income from the fund.

One of the main problems at present is that annuity rates are at their lowest rate ever and investment returns are uncertain. So the golden rule, like everything else today, is shop around, do not accept the first offer made by your insurance provider, get other quotes, go back and negotiate or argue for a better rate and check the timing.

Annuity rates vary almost weekly and so may your Fund value, therefore check what is happening; your best quote offer may be prepared to find the best time to cash in, especially if the fund is large and you could possibly manage on fund income short term.

Do not hesitate to ask for different quotes; 5 and 10 year guarantee term; with and without partner; level annuity or increasing to meet inflation at 2.5 or 5%; with and without Tax free lump sum, etc. ; ask for advice. You should also explore enhanced annuity due to medical conditions, which can increase values by as much as 20%. Also remember that the rate is based on the longest living partner.

Annuity rates are poor, ranging from 3.5 to 4.0% for an inflation proofed one up to 6% for a single level annuity and this is one of the main reasons pension performance is low. Increased life expectancy and poor Gilt returns are given as the main reasons, yet if one does the calculations on population and fund decline, one finds that even on latest population projections, a 4% investment return will sustain an annuity of 6% inflation proofed at 2.5%.

Insurance Companies appear to ignore the fact that funds have earning potential. At a straight drawdown of 6%, the fund alone will last almost 17 years, add a 4% income and this increases to over 25 years; include population decline even at a slower rate and you are moving close to a hundred and almost past caring, if alive.

An increase of 2% from 4 to 6%, increases the pension income by 50%, or reduces contributions required by the same amount. The tax free lump sum, although attractive increases contributions by a third and this money could give a better return if used to reduce debts or mortgage.

In any event, it is not a good idea to depend on this bonus to clear outstanding debts at retirement; it is more prudent to manage if possible this reduction from 50 or 55 on, leaving this as a contingency amount for location or other costs or investment. A good area at present is the Feedback tariff on renewable, especially solar, which can give an 8 to 10 % return guaranteed for 25 years, plus the free energy generated.

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