There are a lot of people asking me what I would do about pensions today. So here form 2010 is my answer:
Finance for the Future, a partnership between me and fellow Green New Deal member and environmentalist Colin Hines, has published a new report this weekend. Entitled ‚ 'Making Pensions Work' it explores the reasons for the failure of the UK pension industry to supply decent pensions for all when the UK's supposed economic specialism is the supply of financial services.
We recognise that the UK has a pension crisis and that lots of supposed explanations and excuses have been offered. The general assumption is that it is state pensions that are the cause of our problems. This report challenges that assumption. It shows that the problem in the UK's pension system is not to be found in the state sector, but within our private pension funds.
The findings are shocking. Using data for the most recent year available — 2007/08 — we show that total pensions paid in that year amounted to £117.6 billion. Of this sum £57.6 billion was state old aged pensions, £25 billion was state employment related pensions paid to former civil servants and other former public employees and £35 billion was private sector pension payments.
The subsidy to the UK private pension industry is bigger than the pensions they pay
In the same year the total cost of subsidies to the private UK pension industry through tax and national insurance reliefs on contributions made and from the tax exemption of income of pension funds amounted to £37.6 billion. The result was that, albeit indirectly, the entire cost of private sector pensions paid in that year was covered by tax reliefs given to the private sector pension funds that paid them. To put it another way, every single penny of the cost of UK pension payments in 2007/08 was in effect paid by the UK government.
The annual pension industry subsidy is as big as the defence budget — but no one is questioning it
Understanding this quite shocking fact changes two debates. A pension subsidy of about £38 billion represents approximately 25% of the UK government's current annual fiscal deficit, 7% of government income and 5.5% of government spending if repeated in the current financial year. To put it in context, this subsidy for private pensions is almost exactly the same as the current UK defence budget. This makes the subsidy given to our pension industry one of the biggest items of state spending in the UK. And yet, to date, no one has asked if it is justified, or well spent, or should continue. In an environment where cuts are being threatened for almost all state spending this is an extraordinary situation.
Subsidies to private pensions over ten years represented almost half of all government borrowing by March 2009
It is all the more surprising when it is realised that from 1998/99 to 2008/09 pension subsidies to the UK private pension sector cost the UK government £300 billion. To put this in context, in March 2009 total UK government borrowing was £617 billion. In other words, almost half of all UK government debt at the end of 2008/09 had arisen solely because of subsidies given to private pensions over the previous decade. Understanding this changes the deficit debate and yet it has entirely avoided discussion to date.
Simple consideration of these facts leads to the obvious conclusion that the current direction of UK pension reform is wrong. That reform, proposed by Lord Turner and legislated by the last Labour government assumed a world of ongoing economic growth and ever rising stock markets. From 2013 onwards the 56% of people in the UK who currently do not save for a pension will be heavily encouraged to do so through the NEST contributory defined pension scheme that is scheduled to be introduced from that year, with full implementation in 2016. Contributions will amount to 8% of an employees pay — which some have suggested as unaffordable as the state pensions the system is meant to supplement.
Understanding the fundamental pension contract
It is our suggestion that this scheme is unaffordable because it ignores the fundamental pension contract that should exist within any society. This is that one generation, the older one, will through its own efforts create capital assets and infrastructure in both the state and private sectors which the following younger generation can use in the course of their work. In exchange for their subsequent use of these assets for their own benefit that succeeding younger generation will, in effect, meet the income needs of the older generation when they are in retirement. Unless this fundamental compact that underpins all pensions is honoured any pension system will fail.
This compact is ignored in the existing pension system that does not even recognise that it exists. Our state subsidised saving for pensions makes no link between that activity and the necessary investment in new capital goods, infrastructure, job creation and skills that we need as a country. As a result state subsidy is being given with no return to the state appearing to arise as a consequence, precisely because this is a subsidy for saving which does not generate any new wealth. This is the fundamental economic problem and malaise in our current pension arrangement.
The reform that is needed
In this paper we set out our evidence that demonstrates the inadequacy of the performance of current private pension funds and we show as a result how misguided it would be to base the future well being of the elderly population of this country on this failed model of pension provision. We do, however, go further by offering recommendations for radical reform of our pension system.
Pension tax relief must be linked to real investment in real jobs and real technology and real new infrastructure
Most importantly we suggest that if those pension funds are to attract tax relief in future they must use a significant part of the £80 billion of contributions they receive each year to invest in new jobs, new technology and new infrastructure for the UK so that the wealth that is needed to grow our economy, to create jobs and to build the real capital base that must be passed to the next generation is built on the back of pension fund investment. As the report shows they do not do this at present. Most of the assets of pension funds are currently invested in short term speculation that has no impact on real growth prospects in our economy, and may actually harm it.
Pension funds must be accountable
Next we suggest radical improvements in the transparency of pension funds so that all pension investors can hold them to account for the use of the money entrusted to their care — something that is impossible to do at present.
Clearing pension deficits and mutualising ownership
Thirdly, we recommend that current pension deficits in final salary schemes be cleared wherever possible by the issue of new shares in the companies responsible for those funds. This would stop the current fruitless drainage of cash out of companies that should be used for real investment and which is instead directed via pension funds into the stock market to buy shares in other companies, the only benefit of which is to create a spiral of stock exchange boom and bust. We also suggest that future contributions to such final salary pension schemes might also be paid, at least in part, by issuing new shares in the companies responsible for those final salary pension schemes. This would free cash within those companies for real investment in real products and services that create wealth in the UK economy. The benefit of that investment in new products and services would then be shared with the people working in those companies as a result of the mutualisation of their ownership via their pension funds.
Stopping the subsidy to the City of London and investing it in jobs
Lastly we recommend that if enforced saving is to be required by the government then that government has a duty to ensure that the funds so saved are invested for the common good. Pension fund performance over the last decade has a been a history of almost perpetual loss making despite the enormous subsidies that pension fund tax relief has provided to the City of London and stock markets, all of which they have frittered away. Investment in local authority bonds for local regeneration, or in bonds or shares issued by a new Green Investment Bank and in hypothecated bonds e.g. to provide alternative funding to replace the inefficiently expensive Private Finance Initiative for funding public sector infrastructure projects would have prevented those losses — because all of these would have paid positive returns to pension fund investors. It is for exactly this reason that we recommend that such assets be the basis for any new state pension fund in the future.
The impact of reform
The impact of our proposals would be significant. At least £20 billion a year would be released into the UK economy for new investment.
People would understand what their pension funds were doing, and could hold them to account for it.
State subsidies to pension funds would produce real economic returns for the government.
And the incentive to save in pensions would be real — because people would see the benefits of doing so for their immediate well being, for their own future income and for the benefit of their children.
To date pension funds have been an almost perfect example of what Keynes described as 'the paradox of thrift' — saving that sucked demand and well being out of the economy. We need something very different now. We need pension funds that can build economic will being for the present and the future. The recommendation in this report show that sensible reform of pension funds and the tax subsidies they enjoy could make pension funds the engine for economic regeneration in the UK. No reform is of greater importance than that.
That is why we want to make pensions work right now, for the future of the elderly in this country and for our children.
Some numbers would need updating now.
The ideas don't.
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This really does deserve much wider public discussion and acknowledgement. Of course the standard reply would be ‘it wos Gordon Brown wot dun it by making them pay tax’.
These ideas were ground breaking in 2010 (and still are today!). This should be a top agenda item for civil society moving into the new year.
Calling it just an ‘epistle’ does not began to do these words and ideas justice!
🙂
It was this report that first brought me to your blog, which I have read avidly ever since. (In those days I was a pension fund trustee). As I sink into senility, I get more and more depressed that so much simple good sense is ignored, and so much nonsense and half truth is regarded as gospel. I am thinking most recently of the series of emails that I have received from worthies in the Conservative party. They succeed in massaging economic statistics to the extent that all connection with reality is extinct.
Yours and Larry’s idea sounds good to me. But I have a friend who is working on the pensions problem (amongst many other things), looking at funding through NICS on the basis that pensions are deferred wages. But his calculations indicate that adequate pensions can only be provided by contributions of the order of 30-40% of income. I hope that he has made a mistake, but it is still undeniable that the percentage required will be great. Total, employee + employer, NICS (which fund current pensions and a proportion of NHS spending) are already very high. But adequate pensions for all are essential and the bill has to be met one way or other.
I do not think pay As you go enough – hence my proposal
But pay as you go is better than savvy in the City and be fleeced as you go
I worked in the Railway Industry and although pensions were acknowledged to be very generous by ‘outside’ standards, Large numbers of employees died within a few years of retirement and the remains of theie contributions were absorbed back into the general pot. Given the current potential for contributors to die before reaching pension age I dont really see a problem.The problem could come because so many people are not able to find work and would be unable to contribute via NICS.
Richard
I note that in this report you are misleadingly comparing the tax relief given to pension in the year with the payments made to pensioners.
A similar thing occurred on another thread, when the current pension contributions (NI) was compared against the pensions outgo, claiming a £30billion ‘surplus’, when this is clearly a blatant lie to hide the true situation.
I guess the key question has to be:
Do you genuinely not understand the difference and why this is an invalid comparison, or are you clever enough to appreciate that this is a highly misleading comparison but assume that your readership are not?
??
Your clarification on this would be much appreciated…
I think as a measure of subsidy the comparison absolutely appropriate
Indeed none better is available
And none us more appropriate
After all, we could offer no subsidy yo savings for the well off
Indeed, the argument might be, why should we?
If you honestly think that, then you clearly don’t understand that they relate to two different things entirely, which calls into question your understanding of pensions more widely.
And you also appear to be struggling with the fact that this is no ‘subsidy’ it’s just deferring taxation to encourage individuals to support themselves rather than expecting the state (and therefore other taxpayers) to do it.
It is the ‘well off’ that are doing the subsidising for everyone else!
I assure you I have no problem with understanding the subsidy
It is massive relief now on all contribution made against maybe a little tax a long time in the future
Would you like to stop being silly here?
The inconvenient truth – I wish you would start telling the truth instead spreading misinformation. Private pensions do receive a massive “subsidy” from the state which for example ISAS don’t. Why is that? Surely and exemption from capital gains and income tax should be sufficient? The only people that really benefit are those on high income.
For most ordinary people private pensions are disaster zone subject to the usual financial sector fleecing and the tax break barely makes up for this!
The Inconvenient Truth is, I presume, an industry stooge
His (or her) many further comments are being deleted for that reason
‘The inconvenient truth’ – and countless others – would do well to heed these words of St Augustine:
‘It is easy for anyone to imagine that he has made a reply, when he has refused to keep silence. Is anything more loquacious than folly? But it must not be supposed that folly is as powerful as truth, just because it can, if it likes, shout louder and longer than truth’ (City of God, v. 26)
“Private pensions do receive a massive “subsidy” from the state which for example ISAS don’t. Why is that? Surely and exemption from capital gains and income tax should be sufficient?”
Are you sure you know what you’re talking about? ISAs receive exemption from both IT and CGT.
I happen to think ISAs a massive waste if gov’t money subsiding the savings of those who would already save
Marginal I pact = zero
Cost, more than £2 bn a year
“A similar thing occurred on another thread, when the current pension contributions (NI) was compared against the pensions outgo, claiming a £30billion ‘surplus’, when this is clearly a blatant lie to hide the true situation.”
It happens to be true!
I well remember the furore over Browns ¨tax grab¨ of pensions:
¨His advisers said “we agree that abolishing tax credits would make a big hole in pension scheme finances” and “some schemes will be pushed into actuarial deficit by the loss of tax credits. The pensions industry can be relied on to parade these ‘bad news’ cases as proof of their arguments” as if these arguments would not really be valid¨
But then…..they charge too much, and make poor investments.
So really, he was just lowering the state subsidy to the pension ¨industry¨ ?
This is just baloney
If removal of a small tax subsidy broke the pension model it was not fit to survive
And as a matter if fact it did not break it
Retrospective changes are always unfair, and clearly the impact of the change was to increase the cost of those pensions to the tune of hundreds of billions of pounds. That’s an undeniable fact.
Clearly that had a significant impact on the viability of such schemes. However, an equal or bigger impact was the effect of increasing longevity on those schemes which meant that they became unaffordable for employers.
That same factor impacts the state pension and public sector final salary schemes, yet you frequently deny that these need to be adjusted…
Interesting that you have no such concern about spec hanging state pensions
It us just private pensions that you wish to see protected from change
How very odd
So was the removal of the subsidy toward a private pension a discouragement to people providing for their old age,and perhaps not a good idea when people are living so much longer? Did it cause a decrease in the uptake of private pensions – number and/or amount invested? I would infer from your comments,that it did not.
I think it was overall pretty immaterial
And at the time pension funds were in surplus – and employers were taking the surpluses – a fact people forget now
The mismanagement of pension schemes, public sector and private goes a long way back. I recall in the 1970’s coming to the view that was being done then in various tinkering and using scheme funding and entitlements as a sop to wages policies was all too likely to lead the deficits of one kind or another. A lot of it seemed a nice idea but unless corrected was unsustainable.
But there are some big issues here. Contributors get tax relief on the deduction, as do the pension funds that make use of the money. All pensioners then get taxed on their pension income. The subsidy is arguably no more than trying to balance that ultimate taxation. If there was no “subsidy” then levels of contributions will be lower (so possibly higher demand on State provision in retirement), especially if the pensions continued to be taxed.
There is clearly an argument on the levels of any deduction, either in a further reduction in the cash limits or in terms of the rate of tax. But the contributions now are surely not the same as the payments now.
They’re not
But they are the cost now
And read what I have written – the cost is also always a current one at the end of the day
One thing that has not been mentioned is the swindle of annuities. Aged 70 the best I could get was 6%. Simple arithmetic shows that with no interest, taking 6% a year would keep me going until I’m nearly 87. Add 3% interest and I will be kept going until I am about 95. But the pensions industry does its calculations with the expectation that I will turn my toes up at aged 84, which indicates that annuities are highly profitable.
My simple calculations indicate that I would be far better at managing my pension than the crooks who are licenced by the government to steal it from me.
Do I sound angry. Yes. The money men in the city are ripping off people like me who have struggled to put together a meagre pension pot only to have it spirited away into their fat salaries and bonuses. This is done with the governments blessing, and there is nothing we can do about it.
Pensions crisis caused by an aging population? It seems to me that the only crisis will be that the money men can’t stand the thought that their bonuses will have to be reduced.
You have hit the nail on the head
The pension crisis is largely about how to shovel more at the City
NEST is a great example
David, I was just about to write an almost identical comment. I agree with every word you’ve written.
One issue you don’t address in your ‘contract’ is the aging population.
In 1945 there were 10 workers for every retired person. At the moment there are about 4.5 and by 2050 it is estimated that there will be 2.2 unless the retirement age is greatly increased.
You say that the ‘younger’ generation should support the older. Easier when there are 10 working to support 1 rather than just 2.2.
It seems that presenting an ‘answer’ to pensions without addressing this is pointless. So what are you suggesting regarding the retirement age?
The ageing population does not imply all can work longer
We are one of the richest nations on earth
Are you saying we cannot afford our old people?
What are you suggesting?
Why is your comment so aggressive?
Surely Chris has a valid point regarding the relation between those in work & those retired.
What is your proposal for dealing with this issue?
Answered already today
I’m suggesting that you haven’t addressed the question of an ageing population in your supposed ‘answer’ to the pension situation and I’ve asked you to give a view on what you think should happen to the age at which people get a state pension.
I’m suggesting any analysis of the pension situation that ignores longevity is absurd.
Pretty simple really. Does your solution envisage a later retirement age or the current retirement age? If later, when? Or do you expect the ‘younger’ generation to support retirement of the older generation when, on current actuarial predications, we could be looking at an average retirement of 25 years when 50 years ago it was 7 years.
You often use the expression ‘get real’. My question deals with reality.
Answered on a later comment
“You say that the ‘younger’ generation should support the older. Easier when there are 10 working to support 1 rather than just 2.2.”
I’m sorry, but is it seriously being suggested that in 50 years time, there is only going to be 2.2 workers (how can you get .2 of a worker?) per pensioner?
Pensioners are going to live to am average of 100? (something to be celebrated, surely?) or there is going to be a catastrophic collapse in population?
If there is not enough workers to provide pensions in the future, then what is capitalism going to do about it? Are they going to let pensioners starve? Are they going to be euthanised? Are we going to pretend they don’t exist?
If we can’t afford it through a lack of enough people of working age, then the state better come up with an alternative!
A citizens dividend paid to everyone regardless of income. Paid for either by taxing the rich at a proper proportion for a change or through the government creating its own money!
How about taxing the huge earnings from the currency markets? Taxing those earnings at about 4-5% would raise hundreds of billions of pounds every year. These could be used to pay adequate pensions.
Or how about the estimated £120 billion of evaded/avoided tax every single year? Or, as Richard states, how about getting rid of the subsidy that costs the taxpayer £38 billion?
Or paying employees more so more is raised in taxation?
Let’s stop the crap! We are ALL going to be pensioners one day! We can’t afford NOT to fund decent pensions for the future!
Precisely
I think Chris is suggesting exactly that… and he is quite right to address this issue, this crisis. succesive governments have recognised it, hence the raising of the State retirement age.
It is the simplest maths of all to note that the social contract between the generations is much harder to sustain when the ratio has dropped from 10:1 to 2.2:1. We already see it breaking down: for example the cost of higher education has now been put squarely on the shoulders of the young. Would we put it back on today’s pensioners? certainly David Lucas, who wrote quite eloquently about his meagre pension pot, would struggle if it were any other way.
The simple truth is this next generation will not have it as good as the last; this isn’t open for debate. It cannot afford the cost of looking after the generation that came before it. References to us being one of the richest nations on earth are rather pointless here; pensioners’idea of what constitutes a decent pension is formed by their previous income levels and their purchasing power relative to the society in which they are living. If we are one of the richest nations on earth then our pensions obligations are increased proportionately.
Rather than hinting at Chris having some unpleasant hidden desires – “What are you suggesting?” – you could offer some thoughts on this. Certainly any paper purporting to be about pensions, but not beginning and ending with demographics is not going to taken seriously.
Demographics are a fact – or are at least likely to be
But the pension system is not
And human feature is a constant – we do care
So I have done exactly what you ask taking these three factors into account
I have assumed we will provide -,as we must
In that case I have stated based on evidence that the current model cannot provide, us absurdly expensive and us captured to benefit the City
And I have proposed an alternative that will in my opinion work
I have done exactly what is required
You just don’t like the answer. I’ve not missed anything. You just refuse to accept we can change the pension system
The problem is yours – tell me how you will keep people who have no income. I have answered that
Er no, you haven’t. In your own words: “I have assumed we will provide -,as we must”
‘Assumed’!
Your original report may deal with demographics at length, if so I apologise. Your post, however, certainly does not.
For my part I am clear; the young cannot be asked to pay for the old (the mechanism would have to be increased taxation on their earnings, unless you can think of another) and the state is already providing more simply because the state pension is provided in perpetuity. So individuals will need to provide more for themselves. This will need to be through a combination of saving more (which will put evn greater strain on their finances) and working longer.
This is fair. I know most of your commentators will disagree that ‘the rich’, ‘the 1%’; well your commentators see the world as they want to see it and have zero interest in the evidence.
I assume because I presume you will not see old people die of starvation and cold
Maybe you would
But in that case the system has to change and you refuse to engage with that which undermines your whole position
“…I presume you will not see old people die of Atarvation and cold…Maybe you would”
What a dirty thing to say; I will not honour that with a direct response.
Your second accusation though: ” But in that case the system has to change and you refuse to engage with that which undermines your whole position”, does demand a response.
Quite simply, read again, properly this time: “For my part I am clear; the young cannot be asked to pay for the old (the mechanism would have to be increased taxation on their earnings, unless you can think of another) and the state is already providing more simply because the state pension is provided in perpetuity. So individuals will need to provide more for themselves. This will need to be through a combination of saving more (which will put evn greater strain on their finances) and working longer.”
I have spoken about the excessive burden being placed on the young (by changing demographics) and the consequent need for people to save more and work longer. it might be tough and unpalatable, but there no alternative being offered. Indeed your report is essentially framed entirely – ENTIRELY – of pension funds’ investments yielding more for their members. So you agree with me, I am gratified.
Read the paper
You cannot save out of this
It is a macro issue – the young will have to provide
You cannot eat money
Now deal with the macro facts or please desist from posting because so far it is very clear you have not read a word I have written but what you have written is based on the absurd notion that saving for pensions works – when it is just cash and without investment in worthwhile capital that cash will prove to be worthless
That is my proposition – read it and comment on it, or I will delete your further comments
The idea of a ‘liability’ of state pensions is based on the notion that, if for some reason “UK=PLC” goes broke they will be left with trillions of pounds of pensions obligations stretching into the future for the next 30 years or so.
While this is possible, it is possible I may well be hit by a falling meteorite and killed outright tomorrow morning. It is a possibility, but extremely unlikely. Central banks can issue bonds or print money anytime they like, in fact, it is unfunded money, money created essentially out of fresh air, that is propping up the banks, who are likely to sink under the weight of their own debts without government support. The fact is, even during the cataclysm of the credit crunch, nobody stopped buying treasuries, in fact they are one of the only safe bet, They guarantee a payout.
Therefore, the so-called “liabilities” of state pensions are purely theoretical. They are based on what MIGHT happen, rather than what WILL happen.
As to the “demographic time bomb”, I am not entirely convinced! This seems to insist that increasing numbers of pensioners will live longer while the workers supporting them will become fewer and fewer. There will be a smaller workforce? The population is experiencing a spurt of growth at this moment. There are around a million young men and women languishing on the dole! Also, a growing population of immigrants adding to the workforce also do not seem to have been considered.
Certain other things have not entered the equation either. The destruction of our manufacturing base; the outsourcing of jobs to other countries; the sell off of national assets, putting the money that was previously given back to the state into the pockets of shareholders instead; to say nothing of the tens of billions evaded and avoided in tax each year!
And if old people are forced to work longer, how many are going to employ an older person entitled to full increments over a youngster that they can legally pay far less?
As stated above, their needs to be investment in real wealth; infrastructure; housing; transport. Nationalise the railways and the power companies and give the profits back to the taxpayer rather than to shareholders. Invest in sustainable energy and above all, either end the subsidy to private pensions or demand that a significant part is used for investment into the real economy.
There is no good reason why we cannot provide good state pensions. It is a falsehood to suggest otherwise!
Sorry Richard, i ahve read it…and re-read it.
The only difference you are proposing to the present system is, in order obtain tax relief on its members contributions, a fund will be required to invest in things you choose. These things are; “new capital goods, infrastructure, job creation and skills that we need as a country” and “new technology and new infrastructure for the UK” and ” real investment in real products and services that create wealth in the UK economy” and “Investment in local authority bonds for local regeneration, or in bonds or shares issued by a new Green Investment Bank and in hypothecated bonds e.g. to provide alternative funding to replace the inefficiently expensive Private Finance Initiative for funding public sector infrastructure projects”.
And I wrote “your report is essentially framed entirely — ENTIRELY — (in terms) of pension funds’ investments yielding more for their members”.
I ask again, and invite all offers to explain it to me, what is the difference?
Others can see it
If you can’t then so be it
But I can’t be bothered to debate with the wilfully blind
How about a state bank, such as a infrastructure bank or a bank modelled on the Bank of North Dakota, where state monies are deposited into the bank by law, providing a deposit base for loans to the state. Instead of interest going to shareholders, after costs are deducted for admin and such, the interest earnings are ploughed back into the community.
Another idea worth considering is copying the model of the Roosevelt-New-Deal-era Reconstruction Finance Corporation. This corporation issued bonds and used the money for loans on infrastructure projects such as bridges and hydro-electric dams. These loans were self liquidating as a toll on a bridge or a charge on electricity delivered by a power station would help pay off the loans. Tens of billions of dollars worth of infrastructure was paid for in this way without government borrowing from or taxing the population. The government apparently even made a profit on the deal!
Though important infrastructure projects should probably be funded interest-free, where interest is charged, a good proportion of it should be diverted into a fund for future posterity…for example, towards pensions!
Debt could be used for the benefit of everyone rather than just the banks!