PENSIONS MELTDOWN
December 2004.
(This paper concentrates on the situation before the Accession of the 10 new states).
1) How did we get where we are now?
I’m told that the first pensions were paid to Roman soldiers who retired after twenty years in the legions. The Romans must have been quite keen on the idea of pensions as ‘certain professional ladies’ also received pensions on reaching age 35.
The earliest record of a pension being awarded in the UK was when; in 1375 the Guild of St James decided, “to provide for a brother who had fallen into such mischief that he had nought for his old age”.
We have to jump to 1685 when, on the 10th March, a certain Mr Martin Horsham became the first recorded pensioner. He did so by selling his job to a Mr Scroope in exchange for an annual income of £40. In fact this became the pattern for most people fortunate enough to have a desirable job.
It wasn’t until 1712 that the first Superannuation Fund appeared. It was established to provide for London Based Customs and Excise Officers who were “worn out in service”.
By the time that non-contributory pensions were extended to the rest of the Civil Service, in 1834, the age of 60 had been chosen as the retirement age. Full service could be attained after 45 years and provided a pension of 2/3rds of final salary.
For the rest of us it was the benefits, if any, of ‘The Parish’ as provided under the “Poor Laws”.
That was pretty much it until 1908 when Lloyd George introduced means tested pensions for the over 70s.
Lloyd George was probably a bit miffed that the populace weren’t over enthused with his generosity. Perhaps something to do with the fact that life expectancy for men at the time was only 48.
It was the turn of Neville Chamberlain to make the next change and in 1925 he introduced the Widows, Orphans and Old Age Pensions Act, which, amongst other things reduced the State Pension age to 65 and introduced Widows Benefits.
In 1928 the coalition of Churchill, Chamberlain and Baldwin did away with means testing.
As though we didn’t have enough to think about in 1942, the Beveridge Report laid the foundations for the Welfare State. No action was taken on it until peace was secureD and in 1946 and the National Insurance Act was passed and came into being in 1948.
The value of pre war pensions had been eroded by the conflict, but wages and welfare had to take a back seat during the period of post war reconstruction of industry. In fact competition for skilled labour meant that some employers improved pension benefits for workers, the concept of taking modest wages now and deferring part of their income until retirement.
But this didn’t help existing pensioners and there was widespread poverty amongst them. The introduction of National insurance funded pensions offered a low flat rate pension which, then as now, was below subsistence level but could be topped up with means tested “National Assistance Board” relief. In spite of pensioner poverty the Treasury was seeking to reduce its payments to supporting the State scheme.
The Labour Party included in their manifesto for the 1959 election, a National Superannuation Scheme to create a compulsory earnings related pensions scheme that would invest contributions in equities under State management. There was concern about this as many thought that it was a means of ‘back door’ nationalisation as the State investment board would be controlling an increasing number of shares in quoted companies.
There were also worries that the huge amounts that would be available for investment each week, through incoming contributions, would distort the stock markets and if the benefits appeared too generous would lead to an exodus from employers schemes.
The ruling Conservative government were aware that the population demographics meant that between 1960 and 1970 there would be a doubling of State expenditure on supporting pensions and at the same they wanted to cut back on that support from its level of 33% to 14%.
So to counter the Labour Party proposals they launched the much-heralded Graduated Benefit Secondary State Pension Scheme. In fact it was never designed to pay out pensions that the contribution levels warranted, but the premiums did help them to shore up NI imbalances in pension support in the 1960s. The concept of “contracting out” of the state secondary pension was also created by this act in that it allowed employers to contract out of handing over to the Treasury the pension portion of the National insurance payments if they set up a scheme of their own which guaranteed, as a minimum, to pay the equivalent pension that Graduated Benefits would.
As a result by 1967 more than 50% of all employees were members of an employers scheme.
During the 1950s and 60s the trade unions had been accepting lower wage increases in exchange for better pension benefits for their members, particularly in the Nationalised Industries. So when the incoming Labour Government of 1964 wanted to extend those benefits to everyone the plan was vetoed by the TUC, as it would erode the differential accumulated by their members who had sacrificed wage increases earlier.
After the 1966 election and because the of the sterling crisis, caused by the devaluation of the £, any thoughts of the revision of pensions was put on hold. However, the government did increase “Long term unemployment benefits and pensions.
Minister Richard Crossman sponsored a bill to review pensions in 1970 but the bill was killed off before it reached the Statute book by Harold Wilson having to bring forward the General Election. The 1973 Social Security Act closed Graduated Pensions, they had served their purpose in propping up the State Scheme and there was a danger that they might lead to the accumulation of heavy state liabilities.
There were also renewed discussions on the concept of the funded State Superannuation Scheme. But this was effectively killed off once and for all because of the fears stated above and the worry that increased NI levels would lead to inflationary wage demands, which would make our exports uncompetitive and weaken sterling.
When Labour were returned to power in 1974 they had stated an intention to underwrite employers schemes against inflation and collapse, (yeah, right!), and a plan to introduce a universal earnings related pension scheme.
Barbara Castle picked up where Richard Crossman had left off and introduced SERPS, (State Earnings Related Pension Scheme). There was a tweak in 1978 with the introduction of “Contracting Out” of SERPS, which allowed individuals, by means of a personal pension plan or employers, by way of a COMP – (Contracted Out Money Purchase Plan) - to receive from the State that portion of their NI payment that went towards SERPS to have the money paid into their own pension plan. Thus ensuring it was not at the mercy of changes of future government policy. However, this also meant accepting responsibility to replace the SERPS income it replaced.
Within the last couple of years this has been replaced by SERPS 2 which to save confusion is now known as the State Secondary Pension. The guidelines for S2P, as it is known, are so confusing in themselves that it is impossible for anybody to decide whether to contract out or contract back in. SERPS benefits have been reduced several times, first in 1986 after rampant inflation had had its effect and on occasions since basically just to reduce the State’s liabilities.
Returning to the main State Pension, whilst these secondary schemes were being messed about with a major change slipped through in 1980 when the index linking of State Pensions was changed from National Average Earnings, (NAE), to the Retail Price Index, (RPI). Index shmindex you might say, what’s the difference? Quite considerable is the answer.
In 1974 the State Pension was worth an inadequate 27% of NAE. In 2002 it was worth 16% of NAE. A fall in value of about 40%. In cash terms a single pensioner gets £79.60 per week and a married couple get £127.25 per week. Had the link with NAE remained they would receive £103.36 and £165.41p respectively.
In 1998 the concept of a Guaranteed Minimum Income, (GMI) was introduced. This provided a means tested top up, (a step back to Lloyd George’s concept of 1908), which lifts single pensions to £105.45 and married couples to £160.95. GMI was renamed MIG in 2002, (same words just in a different order), and changed again to The Pension Credit in 2004. The only reason I can see for the name changes was to give the impression that the government of the day were doing something about pensions.
Now anybody reading this who has an ‘O’ level in maths may have noticed that the GMI, sorry that should be MIG, whoops Pension Credit amount, (and you think you’re confused), actually raises the total payable to the sum that the link to NAE would have produced. So why bother with what appears to be an unnecessary complication?
Well firstly, the average amount paid under the Pension Credit scheme is £42.00p a week. It is claimed by 3.1million pensioners but another 1.2 million who are eligible don’t claim it. (Seems to me that if the government can put a number on those that don’t claim then they must know are eligible so why don’t they just pay it to them anyway). Still there’s a nice little saving for the exchequer there.
Secondly, the means testing takes into account your income sources, including any savings over £6,000 which are assessed on a notional interest rate of 2%, regardless of whether your investment is making money or whether or not you are receiving income from your investment. Details can be found at: -
http://www.thepensionservice.gov.uk/pensioncredit/entitled.asp A
lthough the Pension Credit is supposed to benefit those who have made some private provision or have been prudent enough to save for their retirement. In reality it still doesn’t incentivise or reward those who do so.
Thirdly, and perhaps more importantly, it is my belief that in the future when pensions increase it will be the means tested portion that does so and the ‘basic’ amount will be effectively frozen. If you would like a forecast of what state pension you can expect at retirement then check out :-
www.thepensionservice.gov.uk/atozdetailedrpforecast.asp
I’ve missed out an event that happened in Gordon Brown’s first budget as Labour’s Chancellor of the Exchequer. He removed the dividend credit that pensions used to receive and effectively has taken £5 billion a year, now nearly £6 billion, out of pension funds. (More on this later).
The 2002 Pensions Act, the result of several years of consultation and discussion, has just entered the statute books and comes into effect between April 2005 and 2006. It mainly concerns itself with Personal Pensions and Company Schemes. Although quite a few recommendations have been omitted and the chance to give a complete overhaul to pensions has been missed, all in all, it is quite a good piece of legislation that will simplify pensions and annuities.
The Turner Report has just completed a two-year study of pensions as a whole and produced a 316-page document that doesn’t tell us anything that we haven’t known since the 1960’s. But at least it sets in fine detail what we already know, that people are living too long and with falling birth rates there won’t be enough people in work to pay the pensions of those that have retired.
Turner didn’t release his recommendations for solving this problem as he says he doesn’t want pensions to become a political football in the General Election. He is expected to deliver his recommendations in Autumn 2005 which is when, as I said earlier, Tony Blair expects to be the incumbent who will announce the raising of the retirement age to 70. How do I know that this is what the outcome will be? Because that is what the EU has decided.
The three main parties are keeping pensions low key, as it’s a hot potato for any of them. Labour has made vague promises of a “Citizens Pension”; don’t ask because they haven’t got a clue what it means either. But it’s a good buzzword to use and will hopefully make people forget the Stakeholder farce. I’ve heard that it is to be based on the New Zealand model, which is based not on NI contributions but on year’s residency, a curious development.
They have also mentioned cuts in incapacity benefit to bolster state pensions.
The Conservatives are making mutterings about restoring the link with NAE, starting with a payment of £7.00 a week for single pensioners and £11.00 for married couples. The idea being that over the years this will erode the means tested “pension credit” until eventually all pensioners will be receiving the full basic pension. They are also considering ending the S2R rebates, thus saving £11 billion and propose to redirect this to the lower paid offering them a “BOGOF” deal. Seriously, “BOGOF” means ‘but one get one free’ and they propose that the government should match pension contributions, £ for £, to a certain level.
The Lib/Dems also like the “Citizens Pension” concept and are talking about a non-means tested payment of £105.00 pw which is the equivalent of today’s Pension Credit, but starting with older pensioners and gradually extending it to all 11 million
They are also considering simplified pension plans run by National Savings. One of the principals they are basing their suggestions for reform on is the removal of restrictions on any accumulated pension rights over and above the Pension Credit level. Thus, any pension rights up to that level have to be taken in line with the state Scheme, but any capital above that amount the ‘owner’ can take in whatever form of pension they want and at any age rather than at present when everybody is compelled to buy an annuity at age 75.
There are also rumblings from all three parties about the amount of equity tied up in pensioner’s houses and think tanks are devising ways that this can be released to provide income. Lets hope they don’t reach the conclusion that the State will provide an income to be repaid from the sale of our homes!
The cost of restoring the link with NAE, by the way, is £10 billion a year. If we deduct the cost of the Pension Credit, £6 Billion a year we get a net cost to us of £4.8 billion. This could be funded by an increase in NI contributions of 1.5%, which isn’t too onerous. Again, the mathematicians amongst you might have noticed that £4.8 billion isn’t a million miles away from the £6 billion that Gordon Brown is plundering. Odd that.
2) Outside the Nanny State.
So much for the State Pension, what about Personal Pensions and Company Schemes?
Well in the first place, nobody wants a pension. What we do want is income in retirement and that means arriving at that magical day with enough savings, from whatever source to fund that retirement. Between starting work and getting the golden handshake we have to make a trade off of what we want to spend now and what we want to spend then.
Trouble is we don’t know how much we will need in our retirement, how long our old age will actually be and for how much of it will we enjoy reasonably good health. A common way to accumulate a sum of capital used to be to take out an endowment plan that would mature on your chosen retirement date and then receive an income from the plan for a set number of years.
This was superseded by the introduction of Retirement Annuity Contracts, (RACS). These introduced the concept of tax relief on premiums paid. Tax relief is in fact a myth. What taking out a pension plan means is that you are deferring taking part of your income now, it is to be held in a pension plan until your retirement, when you will take it as income. Thus if you don’t receive income now, the revenue cannot charge you income tax. But, unfortunately the word deferred comes before income and on taking your pension at retirement the income is taxable. So it’s tax deferred not tax-free.
Still it’s a good concept and should encourage savers to fill their boots. Unfortunately the flaw is that although you know what ‘tax relief’ you are getting today, you don’t know what the income tax rate will be when you start receiving your pension income. I’ll make a bet with you; it won’t be a lower rate than todays. So we will nearly all end paying income tax in retirement.
Personal pension plans as we know them today were introduced in 1986 and no new RACs were issued after that date. The idea being to shift the responsibility of providing pensions from the State to the employer and employee. The 1986 Act re-introduced “Contracting Out” of the State Secondary Pensions Scheme and incidentally reduced SERPS benefits, in order to provide a foundation payment to encourage the population to add their own money to.
The basis of Personal Pensions, which are also known as Money Purchase Schemes and includes some company schemes, is that they are defined contributions, that is you know how much you and /or your employer is paying in and the pension you get is based on however much your pot has grown to.
Personal pensions, with their variations, (Sipps, Ssas, GPPS etc.), ticked along, virtually unchanged until the introduction of Stake Holder pensions, which are pretty much the same thing but with, generally, lower charges and easier access.
The main difference under Stakeholder rules being that the lower paid, the unwaged, carers etc. etc. could fund their pensions by up to £234 a month and have the Inland Revenue round that up to £300 a month, whether the plan owner was paying tax or not.
Quite a good incentive, unfortunately most personal Stakeholder schemes have been sold for the benefit of children, using the child benefit, or by grandparents taking advantage of the allowance to make gifts to their grandchildren and the non working wives of people lucky enough to be funding their own pensions to the maximum.
There was also the requirement for employers with more than five employees to put a company Stakeholder scheme in place with the threat of a £10,000 fine for any who didn’t. Unfortunately there was no compulsion for contributions to be made by the employer. As a consequence of the 400,000 Company Stakeholder Schemes that have been designated 75% of them are ‘empty’ and have not received a penny in payments. Worse still, of the 100,000 ‘live’ plans only 4,000 of them receive employer payments.
From the 1960’s employers started introducing company schemes and these fall into two categories, Money Purchase schemes, which as I explained above are where the employer pays a fixed amount of the members income into a pension plan and the costs are known. They are a form of personal pension and are usually supplied on a group basis.
The other category is called Final Salary and they are known as Defined Benefit Schemes. (For the purpose of this discussion I am ignoring variations such as Executive Pension Plans and I’m not even going to mention FURBS and UFRBS – whoops I just did!).
Let us look at those provided by Private Sector employers first.
The schemes are known as Defined Benefits because the scheme rules state the rate you are accruing benefits so you know what to expect at retirement. The cost to the employee is usually fixed at 0%, 5% or 6% of earnings. The employers contribution is assessed every three years when actuaries value the schemes assets and accrued pension liabilities. The employer then has to make a contribution to make up any difference.
There are two common accrual rates, either 1/60th or 1/80th of your final salary for every year of service.
Under a 1/60th scheme however, if you want to take tax free cash at retirement, (usually limited to 150% of final salary), then you get a reduced pension which effectively gives you 1/80th of final salary for each years service.
The other is a 1/80th scheme, which is the reverse of the 1/60th scheme in that you have a tax-free cash entitlement, which, if you give it up, effectively changes your accrual rate to 1/60th. (Pensions are easy aren’t they!)?
As for those Public Sector Schemes, although some are being run on a funded basis, such as the Local Government Pension Scheme, frighteningly none of them are adequately funded, most schemes are unfunded including The Teachers Scheme and The National Health Service Pension Scheme. i.e. the employee may or may not make payments into the scheme but the employer, that is the ‘Government’ in one of its many forms, does not make any actual payments into the fund.
When benefits become payable they are paid out of the contributions the employees are making and the ‘employer’ – effectively the taxpayer, pays the shortfall. These are known as pay-as-you-go schemes as although members in some schemes make contributions there is no ‘pot’ building up for the future.
As a quick aside, there is another accrual rate that applies to the Public Sector schemes for a select group of employees and that is a 40th scheme. Which means if you accrue 30 years service then you retire on the maximum allowed of 2/3rds of your final salary. Who receives this ‘Rolls Royce’ of a pension? Why MPs of course. They recently increased it from being a 50th scheme to reflect shorter parliamentary careers.
With MPs salaries currently just under £60,000 a year that means a nice £40,000 pension. Plus any Public Service, i.e. working for a council or health authority etc before they arrive at Westminster is added to their parliamentary service in assessing their pension benefits. An interesting point was that at the time that our MPs awarded themselves an increase from a 50th to a 40th scheme they reduced the Principal Civil Service Scheme from an 80th with tax-free cash to an 60th with tax-free cash.
Also, previously members did not have to make contributions to the scheme, (they could however make a voluntary payment of 1.5% of their earnings for spouse and dependants benefits), but with the launch of the new scheme contributions were set at 3.5% which is still very generous. A reminder of who are the masters and who are the servants.
The amounts the UK has in pension schemes is £1,500 billion in personal and company pensions, £500 billion in unfunded liabilities for public sector pensions and a further £1,100 billion in State Pension entitlements. Despite the efforts of successive governments, we have been quite prudent in our pension planning and this looks a pretty healthy situation so why is this piece entitled “Pensions Meltdown”?
3) From Here To Eternity.
To look forward we need to return to the 1950’s again.
Like the UK the rest of Europe had set about a programme of reconstruction of industry. There as over here social welfare needs and wage increases took a back seat. To attract and retain skilled workers employers started enhancing benefits such as pensions.
Germany was the first to act on State pensions. In 1957 they introduced an earnings related scheme and employers were encouraged to start their own schemes. The employee’s contributions were retained by the companies and used for internal investment and reconstruction finance. The employer, in most cases didn’t actually pay into the scheme fund; instead they guaranteed to pay the pensions earned.
The Swedish State earnings related scheme was next out of the blocks in 1960. Similar to the German one but the scheme was ‘centrally’ administered and featured a greater redistribution from rich to poor. Both schemes were pay-as-you-go, (PAYG), with the surplus used to finance the modernisation of the industrial infrastructure and indeed ran in surplus into the 80s, mainly due to their being few retirees in the early years and plenty of new workers joining the workforce and making contributions.
In Holland, in the 50s they established a healthy mix of private, occupational and State earnings related schemes that accumulated funds that invested in the Dutch economy until the 1990s. Holland comes closest to the UK model and has a third of the accumulated pension funds in Europe, (excluding the UK).
France was trailing behind but they extended pensions coverage in 1960 by introducing collective agreements between employers and the unions. Almost the whole working population was covered by the 1970s. But, again, the schemes were PAYG with one year’s employees contributions held as a reserve. Practically the only funded schemes are those for Public Servants or company executives.
The rest were organised mostly on industry wide basis. However, there has been considerable consolidation of funds over the years and the majority of them are now under the umbrella of two schemes, ARRCO and AGRIC. These schemes are coming under severe pressure as the population demographics change and the ratio of those in work to those who are retired has begun to shift dramatically.
Italy had widespread social benefits in place from the time of the First World War, (Most other countries did as well but these were effectively wiped out by inflation between the wars). In the late 1950s a very generous State pension was introduced paying 70% of average earnings.
Again it was a PAYG system. It was closed in 1993 and a defined contribution pension introduced. The new pension is under funded and was dogged by investment scandals, which I won’t go into here, to such an extent that the system rules had to be changed in 1999.
In all five countries the pensions were pooled on a regional or industry basis, i.e. employers in one industry or segment of industry would pool their contributions into one fund, as an example Dutch Hairdressers have their own fund as does the Italian Travel and Tourism industry. So either side of the channel we had the same basic aim with one major difference.
It is that difference that is causing the problem. By and large on mainland Europe the pension schemes were unfunded PAYG and in the UK, apart from the majority of the Public Service schemes, they were funded with employers contributions handed over for trustees to hold.
The continental schemes were great when economies were expanding and there were plenty of new joiners paying their contributions into the pot but not so good when the numbers in the workforce are on the decrease.
The result is that the assets held in pension funds, as a percentage of GDP are: -
The big four EU economies: -
UK = 74.7%, Germany 5.8%, France 5.6%, Italy 3.0%
For the others in the EU15 the figures are: -
Austria 1.2%, Belgium 4.1%, Denmark 23.9%; Finland 40.8%; Greece 12.7%; Ireland 45%; Luxembourg 19.7%; Netherlands 87.3%; Portugal 9.9%, Spain 3.8%; Sweden 32.6%. And for comparison: - Australia 31.6%; Canada 43%; Japan 41.8%; Korea 3.3%; Norway 7.3%; Switzerland 117.1%; USA 58.2%.
With regards to State pensions, the UK’s unfunded liabilities amount to 20% of GDP. The other three main EU economies all have State pension deficits greater than 100% of GDP.
So you can see that the UK is comparatively well placed.
All was going well whilst new workers were coming in and contributing but now we face the result of the post war ‘baby boom’. There are now more people reaching retirement, we are living longer and birth rates are falling everywhere in the western world.
The problem was disguised in the period of high inflation during the late 60s and 70s. This was then followed by a period of soaring equity values in the 80s and 90s but now they’ve done a head count and we face the stark reality that pensions are in trouble.
The state of EU Public Service pensions are best summed up by this report on the French system: -
“The expenses of the “fonction publique” or public service, amounted to 121 billion Euros in 2002. 27% of which went to paying public service employees’ pensions. This expense, a sum in the region of 30 billion euros, was second only to employee wages, which accounted for another 55% of public sector expenditure.
But it is pensions rather than wages that are cast in the role of “the mother of all expenses” by the financial daily ‘La Tribune’.
It is estimated that this year the cost will increase by 2,000,000,000 euros and as many as 70,000 workers will be on the public service pension payroll by 2007, about 20,000 more than at present.”
In the year 2000 in the EU 15 the number of people aged over 65 as a percentage of those aged between 15-64 was approx 24%. By 2050 this figure is expected to double to 48%. This means, there will be only 2 workers to support every pensioner. Bear in mind that in this paper I am not even thinking about other health and welfare costs that an aging population needs.
Projections by the Ageing Working Group for the Economic Policy Committee of the EU show that public spending on pensions is likely to rise for each country to, (figures shown as for 2000/2005 expressed as a % of GDP): -
Austria 14.5%/17.0%; Belgium 10.0%/13.3%; Denmark 10.5%/13.3%; Finland 11.35/15.9%; France 12.1%/ 16.0%; Germany 11.8%/16.9%; Greece 12.6%/24.8%; Ireland 4.6%/9.0%%; Italy 13.8%/14.1%; Luxembourg 7.4%/9.3%; Netherlands 7.9%/13.6%; Portugal 9.8%/13.2%; Sweden 9.0%/10.7%;
The UK on the other hand is projected to see a fall from 5.5% to 4.4%.
Overall the EU15 will have to increase spending on state pensions by 27.9%.
All in all the other EU15 countries state pensions and unfunded company pensions are in a terrible mess so what does they propose to do about the problem?
4) The Empire Strikes Back.
To address the problem the EU Council of Ministers met in Lisbon in March 2000. They laid down a ten year plan, now known as The Lisbon Agenda, and they decided that the way out of the problem was to grow the EU economy so that the increased tax take could be applied to fund State pensions and an increasing number of workers joining company schemes would, as had happened in the past, fund the pensions of those retiring.
At the conclusion of the summit President Madame Fontaine announced that it had been a “ground breaking Council”. She then expressed a hope that the new initiatives would be executed quickly and not held up, as the EU company statute giving workers the right to participation in management had been, for thirty years.
The economy was to be expanded, primarily in the information technology and service industry sectors, the EU was to become the most competitive and dynamic knowledge based economy in the World by 2010.
"If the measures set out are implemented against a sound macro-economic background, an average economic growth rate of around 3% should be a realistic prospect for the coming years.”
The targets were fixed at an annual growth rate of 3% in GDP for ten years; to achieve full employment – with an interim target of 70% employment by 2010; to raise the numbers of women in employment from 51% to 60% .
The EU15 employment rate at the time was 61% and the unemployment rate 10%, the equivalent of the combined populations of Holland, Ireland and Belgium. So, how did this absolutely crucial plan progress?
In February 2001 the Internal Market Commissioner, Frits Bolestein warned in his speech on “Defusing Europe’s pensions time bomb”, that:-
“Pensions payments could easily turn into a vicious circle. If pension spending were not reformed, but led to higher deficits, some countries would not respect their obligations under the Growth and Stability Pact; which in turn could lead to inflationary pressures; which in turn would result in the European Central Bank having to set higher interest rates with negative impact, not only on investment, but also on growth and employment, which are the basis of substantial pension systems. Clearly the reply to these questions – pay more, work longer, get less, is not an easy message to sell” .
Pat Cox took over the Presidency of the council after Lisbon and his speeches at subsequent meetings during 2002 to 2004 repeatedly reinforced the need for action. At the end of his Presidency in June 2004 he expressed disappointment that no progress what so ever had been made.
In December 2004 Wim Kok, the ex-premiere of Holland delivered a report entitled “Facing The Challenge” to be considered by the Spring Council in March 2005. The report sadly states that halfway through the ten-year programme no progress has been made. His report has been heavily criticised by just about everybody.
A group called The Lisbon Council For Economic Competitiveness on the 3rd November released a response entitled “A VICTORY FOR BUREAUCRATIC INTERESTS” and their conclusions are quite worrying: - “ The report – with its weak conclusions, and clear bias towards well organised special interests – is a vivid example of why we never get anywhere, why our society is plagued by sky high unemployment, a decaying social system, pensions that are vanishing, scientists that are leaving and more. “
“Drafted in secret and clearly subject to mysterious rewriting from deep within the European bureaucracy, the dark forces that oppose reform have re-asserted themselves in this report – using their institutional powers to re-claim the right to dictate policy to the rest of us.”
“Specifically, a recommendation on page 29, which gives new power to the European Social Affairs Council, made up of Social Affairs Ministers from the 25 EU states, to supervise European employment policy. The ministers of this committee have personally done more to destroy jobs in Europe than probably any other body. Giving them more power over employment policy is a stunning setback for European reform.”
“This report was supposed to break the gridlock surrounding reform, not make it worse. Whatever his intentions were, Mr Kok has clearly been outmanoeuvred by the bureaucratic interest that helped him draw up this report. It is a stunning setback and major defeat for the reform cause."
The recommendation Mr Hofheinz referred to was not in the early drafts of the report. The provision appeared for the first time in the final version, which has been widely reviewed and re-drafted within the EU bureaucracy.”
“Executive Director Ann Meetler had similar feelings: “I am outraged to see that the Lisbon Agenda has apparently been turned into a rehabilitation programme for the so called “Social partners” – the ones who have done so much to block reform in the first place. The report proposes this undemocratic, unrepresentative consultative body an astonishing 11 times as the ‘key actor’ to advance the Lisbon Agenda.
On page 39 for example, the report says that the Lisbon Strategy’s execution will require political leadership and commitment of the highest order, along with that of the social partners whose role the High Level Working Group wants to sustain”. “The problem is, the social partners and their views are not representative of European society at large. But they and their representatives fill the majority of the 13 seats on the undemocratic committee that drafted the report. Its high time that the other actors be brought in to these discussions – entrepreneurs, scientists, young citizens and the millions of us who want to see a healthy economy capable of generating and sustaining full employment and sustainable economic growth.”
“Trade Unions in particular are haemorrhaging, losing more and more members by the day,” she adds, with the report’s emphasis on building a knowledge based economy and against the backdrop that virtually no knowledge based workers are organised in unions I am stunned to see that blue-collar or civil service unions are being given a privileged role in the effort to take European workers into the 21st century. This is an unworkable solution, which will only lead to more gridlock. It is a sad defeat for Europe’s progressive mainstream.”
There is more condemnation from the Dutch Economics Minister and current chairman of the Competitiveness Council, Laurens Jan Brinkhorst, recently echoed these sentiments in a speech he gave to the Lisbon Council, where he said on the issue of vested interests: -
“It is possible that – with most leading positions in society filled by the “baby boom” generation – their vested interests are over represented at the expense of younger generations! And is this not especially true of the social partners? I am sure of it. And I also feel that as important stakeholders in shaping a new European social contract, they should be at the forefront – together with the European leaders – taking responsibility for the future of both current and future generations”.
So, the Lisbon Agenda has no realistic chance of achieving it’s aims.
The employment rate in the EU climbed from 61% to 63% in the period, but is falling again; GDP is expected to be 1.7% in 2004; 1.8% in 2005 and 2.1% in 2006. Well short to say the least. However, there is one country that has exceeded the Lisbon Agenda targets. The UK.
Employment, albeit with huge additions to the Public Service payroll, has reached 74.6% and GDP is expected to run at between 3.0% and 3.5% growth for the next two years.
For the rest of the EU15 there is only bureaucracy bound failure. Five years have been wasted and the prospects for the next five look grim and the baby boomers start retiring then and the nightmare is upon us.
But, you might ask, if the UK has achieved the growth rates that Lisbon aspired to and has such a great amount in funded pension assets and has only a liability of 20% of GDP in unfunded pension liabilities, why is there a problem for us?
For the answer we need once more to go back a few years, to 1996 in fact, the year before Gordon Brown started stripping £5 Billion a year out of our pension funds.
The House Of Commons Select Social Security Committee on “Unfunded Pension Liabilities in the EU” meeting in 1996 stated;
“The UK’s current National Debt is equivalent to about £5,000 for every man woman and child in the country. If we add on the burden of our unfunded pension liabilities the sum would increase to approx £9,000 per person. If we make a further addition for the liabilities of unfunded pensions in the rest of the EU then the per capita figure for the National Debt would exceed £30,000. The adoption of a single currency would entail the adoption of a single balance sheet, but the extent of unfunded pension liabilities in certain of our partner countries casts serious doubt upon the long term sustainability of their finances”
Further on the same committee reported;
“As the UK's outstanding public pension liabilities are substantially below those of other EU members, There would be a risk that if the UK joined a single currency British Taxpayers could be called upon to help finance the ‘pay as you go’ pension obligations of the EMU members, or suffer the consequences of being tied to interest rates on the single currency that were forced upwards by the market pressures of financing certain countries’ inherited pension commitments”.
The Treaty of Maastricht states that no country can be forced to bail out another. However, if we have tax harmonisation – and if we have full integration we have to have tax harmonisation as to allow otherwise would give one country a competitive edge over the others – then those tax rates will be set to take into account the unfunded pension liabilities of the rest of the EU.
In 1996 the Select Committee told parliament there was a big hole, in 1997 Gordon Brown set about making it bigger.
As the National Association of Pension Funds commented when they published a survey of employer’s schemes in December 2004: - “The Government does not emerge from this with any credit. Having burdened occupational pensions with an additional £5 billion annual deduction since 1997, the government has compounded the problem by failing to boost incentives for scheme providers, failing to reduce red tape, and failing to offer any long tem vision for the future of pension provision”.
“The picture that emerges from today’s survey is one of firms struggling to maintain a commitment to providing decent pensions for their staff, while policy makers, far from supporting their efforts, impose further burdens. In imposing those burdens, they are threatening millions of tomorrow’s pensioners with the prospect of breadline retirement.”
Apart from the Chancellor’s greed for revenue, the big pension funds were an easy target and it was a simple tax to collect, why would a government set out to destroy pensions? If we had continued, as we were, with an extra 3.5% GDP funding we would have been quite comfy.
We would also have been unwilling to do anything about pension problems in the EU. We would have been outraged having been prudent to have to pay for those who had enjoyed ‘joie de vivre’ and ‘la dolce vita’ and not been as thrifty as us in the UK.
It is an irony that over the past 20 years or so, European pensions have been held up as examples to us, especially the extremely generous Italian state pension. It now transpires that these systems had been bankrupt all along and we now face the obscene prospect of UK pensioners being taxed to maintain these continental monstrosities.
But by deliberately worsening our situation and spreading more doom and gloom that is needed, (we still aren’t too badly off), the problem becomes a European wide problem that we all share as citizens of the EU and all need to pull together and put our hands in our pockets to solve.
There are other developments that are extremely concerning.
The EMU is under severe pressure at the moment to hold together. France and Germany breached the Growth and Stability Pact for the third year in a row, despite Germany not including the cost of its Health Service obligations.
Greece got caught out by not including the cost of the Olympics as they thought that as it was a one-off expense they didn’t need to include it in their calculations of government borrowing.
Italy just scraped home - sold off state assets and called a tax amnesty - until somebody realised that they haven't been adding up the right numbers since 1997 so they've been in breach for 7 years. Their finance minister resigned earlier this year by the way, said he couldn't manage an economy with the third biggest debts in the world, (106% of GDP).
Belgium came close to a breech and Portugal nearly breached for the second time. To avoid breaking the rule limiting government budget deficits to less than 3% of GDP, Belgium took over the liabilities of Belgacom and BIAC, (Brussels Airport) and in return received the fund assets. In the same vein, in Portugal the government has accepted the assets of four schemes in return for the responsibility of paying the pensions when they fall due.
That’s six massive schemes that no longer have assets, just state IOUs.
With the likelihood of states breeching the Growth & Stability Pact next year there is an increased danger that we will see more governments taking over pension scheme assets. Thereby increasing the State’s PAYG liabilities. The figures quoted by the House of Commons Select Committee in 1996 could turn out to be extremely modest.
Legislation has been just been passed in France to allow the French pensions reserve fund, the’ Fonds De Reserve Pour Les Retraites’. This will provide an injection of 3,000,000,000 euros when it takes on the assets from France’s utility firms. The pension obligations of EDF and GDF will be integrated into the State old-age pension fund. Thus the state borrowing requirement is reduced, giving France half a chance of not breaching the Growth and Stability Pact next year by the influx of assets and the liabilities added will fall due when they will be the problem of the United States of Europe, not the individual countries.
There are interesting developments in Italy too. Gianfranco Cerea of the University of Trento told a conference of the European Institute of Public Administration in October 2004 that:- “The regions must prepare to be ‘on the frontline’ to face the consequences of pensioner poverty brought about by welfare reforms.” “The regions will have to increase their social expense in a scarce-resources environment.”. “Italian workers tend to be confused by the uncertainties on pension laws but the Regions could become promoters of ‘second tier’ pensions, encouraging it’s development and awareness amongst workers. Workers cannot be left alone with a decision like pensions. It is a no going back matter.
Other ‘quick fix’ solutions that are being widely promoted include increasing State retirement ages to 70, thus the State benefits from longer contributions from citizens for the same pension payments which will be paid out for a shorter time as we’re all going to die on our sell buy date.
Another wheeze is to encourage the immigration of young workers to increase the workforce numbers. It was hoped that in accepting the 10 Accession states this latter idea would be partly addressed. Unfortunately, they have discovered that their populations are older than ours and the problem has been exasperated.
The current population of the EU25 is just over 400 million and an EU study has reported that we need another 700 million immigrants over the next 50 Years! These are expected to come from Turkey, North Africa and the Middle East.
In the UK alone, a report by the Cass Business School, puts the figures on needed immigrants at 10,000,000 by 2025. Which is the reason that the Government are desperately intent on building 2,000,000 new houses over the next 20 years. So what is the solution for the UK? 5) Elementary Dear Watson.
If we remain in the EU and ratify the Constitution, then that means full integration including, Monetary Union and the harmonisation of taxes.
I’ve already referred to this but, for those who believe that the Maastricht Treaty offers the protection of the so called “No bail out” clause, Firstly, there is a separate clause which can be used to bail out member states in trouble. In the Treaty of Nice this article was brought under the Majority Voting Procedure.
Article 100(20) TEC: -
“ Where a member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council may, acting by a qualified majority on a proposal from the Commission, grant under certain conditions, community financial assistance to the Member State concerned”
Secondly, the so called “no bail out clause” itself contains a bail out loophole: -
“Article 103 TEC, Part 1)
“The Community shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments etc, (as above), of another Member State, without prejudice to mutual etc, (as above).
Part 2): If necessary, The Council, acting in accordance with the procedure referred to in Article 252, may specify definitions for the application of the prohibitions referred to in Article 101 and in this Article.” When Part 2 refers to Article 252, this means the Qualified Majority Voting Procedure. So how the article is applied depends on Part 2, which comes under the Majority Voting Procedure.
This would allow member states in trouble, (in this case virtually all of them), to outvote member states opposed to paying for other members pensions. Our only hopes would be that our economy and that of the EU states could be merged without problems and that the Lisbon Agenda could be miraculously achieved by the rest of the other 24 countries of the EU very quickly.
On the 29th November 2004 former EU Commissioner Chris Patten said that there is little political debate yet at the European level about demographic ageing and warned that the crisis is not a good basis for European integration. “There is no real sense yet in our political debates of the scale of the demographic problem confronting Europe.”
The EU’s former External Relations Chief said. “Europe has a falling and aging population,” he added, “ Alongside the rise of India and China, this will ensure that we have a smaller share of world GDP. This is at the very least, not the basis of superstatehood”.
The next day the World Monetary Fund published a report by it’s managing director, Rodrigo De Rato, which said that the Euro area was growing much slower than the global average and deep-seated problems, including population ageing, faced the majority of the EU. He said,
“Looking beyond the near term, deep seated problems are facing the older members of the EU. Jobs are scarce for many… (and) the tax burden in many countries is large, yet fiscal positions are not sustainable. Population ageing will put further pressure on already strained welfare systems”.
Plenty of warnings but as we have seen, no meaningful action has been taken to redress the problem. If we remain in the EU then the problem becomes ours. We will have even less room to manoeuvre when our economies are cobbled together.
The two economies, (UK and EU24), are too diverse. Even looking at some of the basics: -
The UK has the highest levels of outstanding mortgages as a % of GDP; of mortgages on variable interest rates; employment ratio; of pension funding and private sector financial assets. We have the lowest share of public spending against GDP; of gross public debt; of taxes and Social Security funding as a % of GDP and the lowest level of State support of manufacturing.
As De Gaulle said in 1963: -
“ England is insular. She is maritime. She is linked through her trade, her markets and her supply lines to the most distant countries. She pursues essentially industrial and commercial activities and only slightly agricultural ones. She has, in all her doings, very marked and very original habits and traditions. In short, England’s nature, England’s structure, England’s very situation differs profoundly from those of the continentals.”
The Institute of Directors in a paper published in 2002 put the cost of full integration and monetary union, included unfunded pension costs at £168 Billion!!!
Using the example above made by The House Of Commons Select Committee, if we again translate this in terms of National Debt per man woman and child terms this means: -
Current liability £6,700 (You may notice that as a result of the miracle that Gordon Brown has worked with our economy the figure has increased 37% since 1996), adding in our unfounded pension liabilities the sum is £10,700. If we again apply the EU's unfounded liabilities and the cost of full membership, AND remember this is before the ten new countries joined – and how much are the next round of entries going to bring to the table - adding the EU’s liabilities will mean a National Debt figure, per head of population of £69,000!!!!!!!!
But we cannot increase National Debt because of the constraints of the Growth & Stability Pact so our Chancellor, will have to cut spending or increase taxes to 60% of GDP!
The European Roundtable of major industrialists has warned that:-
“The confidence in the Euro will be undermined if the markets fear an explosion of public debt because of pension deficits”. Also that, “A falling tax base because of falling numbers in the working population and an expansion of retired workers on pensions that are too generous with some governments spending 20% of GDP on pensions will lead to huge tax increases. If demands for higher pay result, then jobs will start to disappear”.
Inside the EU we face the destruction of our economy, severe poverty for our pensioners and the rest of us will not have the means to save for our own pensions.
It is imperative, to avoid this that we withdraw from the European Union and draw a line, once and for all under our participation in their nightmare.
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Outside of the EU we can then address our own pension problems, which are small by comparison. For starters, if we cast off the shackles of the EU we can start by reducing the burden to industry that EU regulation costs us.
The government have set up a “Better Regulation Taskforce” who reported this year that EU regulations cost UK industry £100 billion, yes £100,000,000,000, a year.
That is 10% of GDP; if we can strip out just one third of this cost from our economy then we can solve our pensions problems with this saving alone.
This avalanche of paperwork was best described up by Christopher Brooker in the Telegraph in October 2004: -
“So the tide rolls on suffocating enterprise, sapping people’s pleasure in their work, destroying one sector of our economy after another. Until the cost of regulation has become the largest single component in the economic activity of the country.”
The cost of regulation humbles Tourism which is worth £76 billion, Financial Services at £66 billion and The Health Service at £65 billion and yet, adds not a jot to our economy.
Professor Noel Whiteside of Warwick University in her paper published in May 2003 said:-
“Forecasts detailing future public liability for pension expenditure make Britain’s position appear exemplary. On paper, at least, British governments will be spending far less on pension provision that its’ European neighbours. As recently as 1994 the World Bank praised British policy on this account and suggested that it offered an example for others to follow”.
“As adequate personal pension cover peaked in Britain in 1967 and has hovered somewhere below 50% ever since, it is high time that the government abandoned policies premised on its expansion. Efforts to promote security by increasing regulation increase costs, reduce transparency and confuse the financial services industry and its customers. Greater state regulation has added to corporate financial burdens while failing to win back public confidence. As the Treasury argued in the 1960s, it discourages employers from offering pensions in the first place.”
“Whereas adequacy had developed into a major challenge over the 1980s and 1990s, financial stability appears to have been secured well into the future. Public pensions expenditure was 5.5% of GDP in 2000 and was projected by the Economic Policy Committee to FALL to 4.4% by 2050, reflecting a smaller increase in old age dependency ratios than in the rest of the EU, and, most of all, indexation of basic pensions to prices so that their value in relation to earnings will decline.
The projections were carried out without taking into account the new pensions credit and the state Second Pension that will result in public pension expenditure remaining broadly at its current level.”
Although the UK already meets the Lisbon and Stockholm employment targets, there is still room for improvement.
The average age of effective withdrawal from the labour market is 63.1 for men and 61 for women. 55% of men and 33% of women retire before the state pension age. 10% of early retirement was linked to retirement conditions of an occupational pension scheme, 30% due to ill health and 14% was employer instigated.
“As the level of expenditure on pensions is low and will, in the future, remain around the same level while the level of spending will rise in other Member States, the financial sustainability of the public schemes does not pose a problem. The strategy of ensuring the financial sustainability of the whole pension system is focusing public pensions expenditure on lower income groups and encouraging more pension provision to be funded by private savings”.
We have the opportunity, after freeing ourselves of the constraints of the EU, of not just ‘repairing’ UK pensions but of rebuilding them from scratch not just for the short term, not just for the next twenty years but also to set-up a framework for pensions that will be the foundations for all of the 21st century.
Let us look at some of the details and shortcomings of UK pensions today. Around 44% of workers are members of company pension schemes or paying into personal pensions and 60% of pensioner households have income from an employer’s scheme with 71% having investment income, (which includes personal pensions).
44% of the self-employed and 12% of employed workers are paying into personal pensions.
57% of pension income in 1999/2000 came from the state and 43% from private arrangements. But, there is scope for improvement.
The Government have undermined confidence in pensions, 54% of under 35s are not making pension private pension provision and 4.6 million workers haven’t joined employer’s schemes.
The National Association of Pension Funds reported in June 2004 that there are 36 million people aged between 16 and 65, including students, non-workers and early retirees. There are 25 million of these in employment; including 3 million self-employed and only 10.8 million are in occupational pension schemes. 14.2 million have no access to active schemes.
1,100 Final salary Schemes have closed in the last three years, with more to follow, the number of schemes open to new members has fallen 60% since 1969.
Between September 2003 and March 2004 there was a 6% fall in the numbers in live occupational schemes to 103,165. Of these 82,196 had fewer than 12 members, thus 79% of all schemes contained fewer that 1% of all members. Only 1,800 schemes have more than 1,000 members, therefore 90% of members are involved in less than 2% of the total number of schemes. Money purchase schemes outnumber final salary schemes 7 to 1.
One third of all final salary scheme members belong to just 303 schemes all of which are Public Sector plans. None of which are adequately funded.
Three quarters of all money purchase schemes have contribution levels that are unlikely to provide adequate pensions.
Between 1979 and 1996 the average net income of pensioner households rose 64% and average earnings grew 36%, but the poorest 20% of pensioners only had an increase of 30%. 8 million pensioners currently receive less than the £105 a week they would have done had the link with National Average earnings not been broken.
I think you will agree that the current situation is confusing and what the public don’t understand they ignore.
We have to engage the whole workforce in addressing the pensions problem, which means simplification of what there is now and a guarantee of fair pensions for all as the outcome.
To restore public confidence in pensions we need to involve all interested parties, the public as a whole, employers, the insurance industry, the legislators and the trade unions. I include the latter as the last time that pensions thrived was when the unions were involved in the process.
My recommendations follow, I am leaving the State pension until last.
By and large pensions as a whole follow the model set out by The World Bank, and that is a three-pillar system. A public managed direct unfunded direct benefit scheme, (the State pension), a privately managed funded direct contribution scheme, (contracting out of State secondary pensions) and voluntary privately managed schemes, (company and personal pensions).
My solution, at the end of this section, does away with the second tier as the State pension will provide, as recommended by Alan Pickering of the Centre For Financial Studies, an absolute guarantee against absolute poverty and allow employers and employees, with the participation of the trades unions to negotiate remuneration packages that contain an element of pension provision.
This will create a public/private partnership that will cater for the guarantees and aspirations of the nation.
As a very first step, we need to focus the minds of our legislators to be focused on pensions; they are our elected representatives and Whitehall officials. Our MPs, as I have already shown, have the absolute Rolls Royce of pension schemes.
As an example, but not wishing to pick on him in particular, Tom Devitt, the Labour MP for High Peak. Derbyshire had 14 years local government service to his name before he entered parliament in 1997. That local government service gets added to his MPs service so he has already, at the age of 50 built up pension rights of more than £20,000 and that’s on top of his State Pension entitlement.
What understanding can they have of the problems and worries facing the rest of us? The first thing we must do is change the pension schemes of those who frame the pension laws into money purchase schemes. This will help them keep their eye on the ball to ensure that all pensions thrive.
The second basic is that no employer, and I include boards of directors, can make any sort of pension provision unless they offer their workforce the same benefits under the same conditions as themselves, this is the rule in the USA there is no reason why it shouldn’t be implemented here. There will be no separate schemes for higher paid employees or executives.
Furthermore, no employer can take pension benefits or transfer their pension to another scheme, unless their company scheme is funded to within 90% of its obligations. I would also add a further caveat, that no employer can be a member of the scheme unless at least 75% of his employees are also in membership. This, whilst not imposing compulsory contributions by the employer, will ensure that there is active encouragement of employees to become members.
Next, I don’t want to see the state retirement age. (SRA), raised to 70 as all and sundry are suggesting, but there should be no compulsion to retire at 65, people should have the choice.
However, the current SRA was set when the average lifespan of a worker was much less due to poorer health conditions and that the majority of the workforce was employed in heavy industry. The intention was that the State should support those who lived beyond the age that they could work to support themselves.
Times have changed and the typical pensioner has gone from being bemuffled flat capped whippet owner waiting to die to a denim clad ‘silver surfer’. The State pension should reflect these changes in society.
Gradually raising the SRA over the next twenty years would certainly ease the pension problem, but we can manage without doing so. The choice should be with the public so we will have a referendum on the matter. With consideration being given to those that have to retire early on the grounds of ill health.
Fourthly, with regards to public service pensions. These have always been generous and you will recall that they were introduced to provide for “those worn out in service”.
Times have changed. And as Darren Behar pointed out in the Daily Mail, in December 2003 under the headline :- “The pensions divide will hit millions: Bleak Times ahead for private staff as the public sector cashes in”.
“Pensions are turning Britain into a divided nation, with public sector workers enjoying gold plated retirements while many others struggle. Within a generation only those in the public sector, such as civil servants, teachers, nurses and policemen, will benefit from traditional pensions linked to their final salaries.”
“Some 4 million public sector workers have a pension. Widely regarded as the most generous in Britain, they typically offer a pension worth two thirds of their income on retiring. At the same time millions of private sector workers have seen their final salary schemes axed. The Association of Consulting Actuaries conducted a survey of 459 firms each with fewer than 250 staff, a sector that employs 14 million workers. The study found that fewer than 1 in 3 small companies still offer a final salary scheme.”
“Only one ninth of schemes are open to new staff because many have closed their doors due to rising costs. Experts predict the demise of the final salary scheme within 20 years.”
This situation cannot continue. There will come a point where the taxpayer will refuse to pick up the tab. It was all well and good a century ago when public sector workers suffered poorer wages for the benefits of security in old age but that is not the case today.
We need to differentiate between the different jobs in the public sector. Does a lifetime working on a hospital’s wards merit the same reward as shuffling pieces of paper around in some non descript government office? The public sector pension scheme needs to be segmented with the rewards commensurate with the service provided to the public.
Public sector schemes need to be switched from defined benefit to defined contribution to quantify costs. The employer’s, (that is tax payer’s), contribution is approximately 20% of salary at the moment and this I would suggest is the contribution that would continue to be made by the employer into money purchase schemes.
This however, would be the maximum with lower paid employees in vital jobs not having to contribute unless they wanted to, voluntary contributions would be as well as the employer’s 20%. In other cases the employer’s contribution would be scaled down with the employee making up the differences and again paying more if they wanted to.
Point five; personal pensions. The Pensions Act of 2004 has gone a long way to addressing the problems with personal pensions. There are still further changes required but until the provisions of the act are enforced and we can assess the impact then I would propose not to make any further changes at this stage except one.
That is that 40% tax relief be withdrawn, on the basis that higher rate tax payers are more likely to arrive at retirement with more assets than the lower paid and already have an incentive to make adequate provision in that they have better lifestyles to maintain in retirement. We may however, consider enhancing the benefits of other investment vehicles, such as ISAs.
We need to motivate those who would struggle to even save £5 or £10 a week into a pension plan.
My suggestion is that those earning up to 150% of the Minimum wage that for every £1 saved into a personal pension then the State will add a £1.
We would discuss with, not impose upon, the insurance companies an extension to Stakeholder Pensions whereby there were three funds available to the investor, one that invested in cash, one in cash and bonds and the other in cash and equities which reflect different attitude to risk without climbing too high up the risk spectrum.
We would introduce these pension plans being on a pooled basis into one scheme. The insurance companies would then be invited to tender for the management of parts of these funds. Thus maintaining competition in performance and costs.
The essence of these schemes would be simplicity. Save a pound, gain a pound. Chose your fund from one of three and to keep things simple there would be no income tax on the income of these funds.
Once the 2004 Act has been fully implemented then we would consult with workers, employers, unions and product providers on simplifying the legacy regimes and preparing the way forward for simple and efficient savings vehicles.
Point six; Employers pensions outside of the Public sector: - The basic changes were outlines in my second point, but given that most final salary schemes are in demise.
There are huge dangers of schemes closing and the employer going out of business and being unable to make up shortfalls or being taken over by another concern who refuses to accept the responsibility for the pension fund.
here have been many examples of the former over the last 18 months with one high profile case where employees retiring, some after a full forty years qualifying service found that, because of a shortfall in the funds assets, that the trustees were unable to accept any more liabilities, their prime obligation is to existing retirees, and so there was no pension for those reaching retirement. (In final salary schemes you have no guaranteed pension, during your working life you only receive ‘indications’ of what you have qualified for. The scheme fund does not have a ‘purse’ earmarked with your name).
In the other scenario in the last year we have seen the take over of Marks & Spencers and WH Smiths derailed in part because of deficits in their pension funds.
To address this the government have set up, under the Pensions Act 2004, a Pension Protection Fund, (PPF). This is a fund that will make good any shortfalls in schemes that ‘go bust’. They have committed £400 million pounds to starting up the fund with further amounts to come from levies against healthy funds. (A bit unjust – you run a good scheme and have to pay a surcharge because of the misdemeanours of bad funds!).
This has hit a snag straight away in that Gordon Brown’s £400 million is going to be given over a period of 20 years and the first scheme in the queue, Turner & Newell has a deficit because the parent company Federal-Mogul has had to file for bankruptcy protection in the USA. It is up for sale and the prospective buyer wont accept the responsibility for the pension fund deficit of Turner & Newell, which amounts to £875 million.
This means that the PPF will kick off its existence nearly £500 million in deficit.
The recommendation is that, after consultation with employers, employees and the trades unions, that employers sponsored schemes be changed to defined contribution with minimum contributions being set at 15%. The split will be 10% from employers and 5% from employees with no compulsory contributions from the lower paid, that is those earning less than 150% on the National Minimum Wage.
I have chosen 15% as the contribution rate as the average contribution into an employer’s final salary scheme is 15.8% as opposed to the average into a money purchase scheme, which is only 2.4%. This is to be the minimum and provides the base on which employees and employers can negotiate to improve terms.
I would also recommend that studies be made on the viability of organising funds on a pooled industry wide basis, thus removing the application of Accounting Standard FRS17. (I’m not going to explain what FRS17 is, but trust me it has added pressure on employers schemes and whether it is beneficial or not is debateable). The University's Pension Scheme operates quite successfully on this basis and manages with over 360 establishments pooling contributions.
Pooling would have the additional benefit of simplifying the transfer from one employer to another.
A further consideration would be of taking on board some of the features prevalent in Australia. That is, when first starting work the employee signs up with the pension provider of their choice. They are issued with an ID number, like an NI number. Contributions are made by the employer into that plan and when the employee changes employment the plan goes with him and details are handed over to the new company.
Point seven:- The Dividend Credit Tax. A major bone of contention has been Gordon Brown’s decision in 1997 to remove the dividend credit. Prior to then pension funds had been able to reclaim the tax on dividend’s paid from the equities they owned, the principal being that pension funds grew free of tax.
The pretext for removing this credit was to encourage companies to pay lower dividends and thus retain profits for growth and internal investment and reduce their borrowing.
This clearly hasn’t worked and the average holding of pension fund assets is only around 54% in UK equities anyway. I see no reason why overseas equities should benefit from UK tax subsidies so I would propose that the Pensions Credit be restored to investments in UK Equities.
Final item :- The State Pension.
My thoughts on this have changed during the course of the period that I have been researching, preparing notes and crystallising my thoughts in this paper. At fourteen thousand plus words it may have seemed an epic journey to you the reader, but I could have written five times more and still not covered everything. I have tried to reduce the subject as much as possible to focus on what is crucial.
Back in part one I pooh-poohed the talk of a “Citizens” pension. Partly because the word itself is an EU word and partly because it just sounds like another ‘groovy’ phrase spun out by New Labour. Doesn’t matter what it means it’s just a good phrase to throw out in sound bites. However, there have been several reports from different institutions in favour of it and I’ve done some research on the New Zealand scheme it is modelled on.
It works and, if we come out of the EU, it’s affordable and none of the other parties have started promoting it yet as none of them will have the means to provide it given that they are going to be handing over billions to the EU for their pensioners. It is simplicity itself.
The state secondary pension was first introduced in the form of Graduated Benefits, which died the death and was eventually replaced by SERPS. Successive governments have effectively reduced SERPS benefits by almost 20%. Very few people under 45 believe that there will be a state pension when they retire.
To restore public confidence and instil a sense of public engagement in the state pension all political parties with members in Westminster, possibly even extended to those with representatives on local councils, sign an agreement at the outset that before any changes are made to the principals of the scheme that there will be a public referendum, the decision of which will be binding.
No political party will object to doing this, as failure to agree would be political suicide.
Thus the state pension will be written in stone and no change can be made to the basics without a national referendum.
The basics being; the qualification for payment, the age at which it is paid, the amount to be paid and the indexation with National Average Earnings.
The current State Basic has a bit of Graduated Pension added to it, plus SERPS entitlement and then means tested benefits to take it up to the guaranteed level of £105.45 for a single pensioner and £160.95 for a married couple. (2004/2005).
This arrangement can involve 27 elements, costs a fortune to administer, and involves lots of form filling to the extent that 25% of those eligible do not claim the Pension Credit.
Another problem at the moment is in catering for those who through having family responsibilities, illness or disability have not been able to make the necessary number of NI payments to qualify for a full pension. I include working wives in this who, may have had broken careers to raise children, look after infirm relatives etc. Or indeed, may have had to settle for more menial employment, because of those responsibilities, than they could otherwise have pursued or who have worked part-time.
They have still contributed to society. They have still contributed to the economy.
It is iniquitous that they should be impoverished in old age because of this. I know of one woman whose State pension Forecast shows that she will be entitled to the grand sum of 26 pence a week at age 60.
The proposal for the new state pension, I refuse to give it the ‘Citizen tag’. (Perhaps State Superannuation Scheme, (SSS), would be appropriate, make it seem like its something worth having), is that it is based on residence anybody having lived in the UK for twenty years, five of those in the last ten would qualify for the SSS.
My recommendation is based on a report by the Pensions Policy Institute for the National Association of Pension Funds in December 2004 and I see no reason why it should not be adopted wholesale.
I would include anybody who has served in the UK armed forces, home or overseas, UK national or foreign national, (such as the Gurkahs), and those that have worked overseas in our diplomatic service.
I would also include those who have worked overseas for recognised charities or as missionaries.
In Denmark and Holland they have an element of this residence-based qualification for their state pension that involves a longer qualifying period and benefits being pro-rata.
The proposed SSS works either way but perhaps putting it out to referendum and letting the people decide will ensure its popular acceptance. It is a level benefit to all who meet the residence criteria and is paid at such a level it does away with the need for State Secondary pensions and means testing. A spin off from the simplicity being a cost saving in administration.
The amount of the SSS to be, £105.00 for each pensioner. This being 22% of National Average Earnings and that link to changeable only by referendum. Payable from age 65.
The gross cost of this will be in £ Billions in 2004/05 terms.
2006/07 19.4 2007/08 20.7 2008/09 22.1 2009/10 23.5 2010/11 25.0 2011/12 26.2 2012/13 28.6 2013/14 30.5 2014/15 32.4 2015/16 34.2
But as SERPS will be scrapped we can deduct the cost of SERPS rebates. This amounts to 1% of GDP in 2004 reducing to 0.4% in 2041. We can also deduct accrued State pension rights, and there will be a reduction in Housing Benefit and Council tax Benefit and the cost of The Pension Credit. This brings the costs down to, (where a negative figure is shown, that is actually a saving over what the present regime will cost): -
2006/07 -5.2 2007/08 -4.0 2008/09 -3.5 2009/10 -3.0 2010/11 -2.4 2011/12 –1.9 2012/13 -0.8 2013/14 -0.1 2014/15 +0.6 2015/16 +1.2
In the first 10 years there is a saving of 19.1 Billion over the current regime.
Bear in mind that the above figures are based on £105 per person.
If we adopt the New Zealand format then married couples, or two people financially dependant on each other, would receive a joint pension of 150% of a single pensions and single pensioners living with others, either family or co-habiting, house sharing, then they receive 90% of the single rate.
If we adopt this model then the cost falls within the totals tabulated above and we could afford a Single pensioner rate could be increased to 25% of NAE at £115 per week, the married rate would be £172.50 and the Living with others rate would be £103.50.
£115.00 per week is 60% of the median rate of a single pensioner in the UK today which is used as the ‘official’ poverty line I would recommend the adoption of this second option. How can we set out to pay pensioners an amount that is less than the ‘official’ poverty level?
However, I did say we had the chance to lay foundations for the long term.
The ‘baby boom’ bulge in the population reaches a peak in 2041 so we have to look beyond the next 35 years. The longer term costs of implementing the SSS over and above current state pension costs are, (without taking into account Housing Benefit & Council Tax Rebates and Increases in Income Tax revenues, -the baby boomers are going to arrive at retirement with more assets than previous generations).
Expressed as % of GDP: -
2023 +1.3% 2033 +2.2% 2043 +2.8% 2053 +2.9%
So we need to find an extra 2.9% over the next 50 years. This can be achieved by using one or more of the following options.
1) Gradually raising the SRA to 70 by 2031.
2) Switch some state spending from other areas to pensions, difficult to achieve in itself as 2% of GDP is 40% of the spend on education and 20% of that on health.
3) Raise taxes. There would need to be a gradual increase in the total tax take of 5% by 2041.
4) Restructure Tax Relief for private pensions. A change to the system of tax relief may be desirable to rebalance the current bias towards higher rate taxpayers. Such a restructuring may also reduce the overall cost of tax relief, (around £20 billion or 1.8% of GDP).
I have already recommended restructuring tax relief on pension contributions in my “Point Five” so to find it helps with funding beyond 2041 is a bonus.
In addition, of course, the NAPF did not take into account the benefit of withdrawal from the EU and savings in the 10% of GDP that regulation costs industry.
In essence; £115 a week for single pensioners, £172.50 for married couple, with others receiving £103.50 each indexed at 25% of NAE, payable at age 65 with residential qualification. These rules, such as they are, can only be changed by referendum.
In New Zealand they have found that not only is there confidence in the state system, people there actually like it. They see it as fair to all and something for those who can afford more to build on.
It gives a minimum living standard in old age that removes the need for those on low earnings to save and allows those who earn more the choice to spend now, on health, children’s education or save for their retirement.
A statement from New Zealand summed up the feeling of social cohesion it provides:-
“Older people in NZ benefit from an environment of Social Inclusion and cohesion because of the women friendly aspects and its simplicity and fairness. It guarantees security in old age without links to earnings that dilute the extent of redistribution from rich to poor.”
There is only one political party that can achieve the recommendations laid out in this paper because the other parties are going to be bogged down in the problems of an ageing European Union that is unable and unwilling to reform itself they will not have the freedom or the funds to enact the necessary changes.
The only party that can enact these changes and will is the United Kingdom Independence Party.
It only remains for me to acknowledge those who’s expertise I have drawn on.
My greatest thanks go to Steve Bee. Head of pensions at Scottish Life who has done more than anybody else to make pensions interesting, in some respects fun and in doing so has made them more accessible.
Also, Noel White, Professor Of Comparative Studies and Zurich FS fellow, Investment & Pensions Europe who gave me a three month free subscription and access to their archives, the Turner Report, Alan Pickering, the OECD, World Bank, IMF, FBS, IoD, Institute of Actuaries, NAPF, ERT, the EU itself, The Economist and almost everyone else who has published a single word about pensions in the last three months.
David Lamb. December 2004.
posted by David Lamb @ 8:47 am
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