Biscuitman

As this is a lengthy paper, too big to post in one go, i'm splitting it INTO phpbb_several parts. The first two I'm posting today and the rest I'll put up later in the week.

PENSIONS MELTDOWN

By David Lamb. December 2004.

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 phpbb_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. (We will come pretty much full circle in the autumn of 2005 when Tony Blair announces that the retirement age is to be increased to age 70).

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 secure and in 1946 and the National Insurance Act was passed and came INTO phpbb_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 was 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 appearedtoo 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 claimants 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 Secondary 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 phpbb_their own pension plan. Thus ensuring it was not at the mercy 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.

SEPRS 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 phpbb_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/...t/entitled.asp

Although 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

http://www.thepensionservice.gov.uk/...rpforecast.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 phpbb_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. However, 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 416 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 years 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 Credi, 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 where 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.

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IF THE EU WAS THE ANSWER, IT MUST HAVE BEEN A STUPID QUESTION!