Sunday, 26 April 2009

Pensions

As you may know I work at the sharp end of retail financial services. As part of that we do pensions work.
Now, we all know by now that the various schemes in which state employees (including especially the BBC) accumulate their, generally, unfunded entitlements are bust. Or rather we - taxpayers - are bust because of them.
These schemes are all of the defined benefit (aka final salary) type. The final pension you get is linked to your pay and length of service. This is lovely for those on these schemes as it is easy to work out what you'll get and when you'll get it. But it is very difficult for members to work out just what these benefits cost, or what they represent in capital terms. At the same time the cost of the pensions wipes out the income tax notionally deducted from the state employees. That 'tax' is of course nothing of the sort. It is just a rebate to the rest of us in the wealth creating sector.
Furthermore there is absolutely no connection whatsoever between the level of benefit enjoyed by public servants and the success of UK plc at creating and preserving wealth. That is there is no clear and obvious incentive for any state employee to do anything that improves the chances of the UK plc's wealth creating process. There is a complete disconnection between benefit entitlement conferred and wealth created.
It may surprise you to learn that as a financial adviser I am rather anti pensions of all types. I am though very much pro capital accumulation. The reasons for this are various but one of them is what I have termed above, 'connection'. If you have managed to accumulate a good pool of capital invested sensibly in shares, bonds, property and cash, and you can actually see it and what it will pay you as an income, then you will be very keen to see UK plc do well so that your capital at least maintains its value or preferably grows and certainly pays you an income.
But at the same time I recognise that many less clever, lucky or fortunate people do not have the ability, opportunity or personal circumstances that make such capital accumulation easy. And this is where an employee sponsored and contributed to pension scheme comes in.
At the same time the rest of us can play our part by permitting pension contributions to be treated as deferred pay and not taxed until the benefits are taken. (Please note Gordon Brown) and (Yes, I also know that in my ideal world there would be no income or capital gains tax not to not tax).
The economic and fiscal catastrophe that is New Labour has more than ever exposed these inequities. The public will now exists for reform which gives a political opportunity to lance this boil once and for all. We have a once in a generation opportunity to reform these profligate, disconnected and wasteful state employees pension schemes.
Here is my outline recipe.
1. Make all final salary schemes illegal. Or rather withdraw all their tax and other privileges making them not at all viable.
2. Close to new members all state (including all quangos and the BBC) final salary schemes.
3. Freeze the benefits of all existing members of these schemes, but for equitable reasons allow the accumulated benefits to grow in line with pay until the member retires and then honour the promised - and contractual - increases. In other words honour the contract.
4. Instigate simple money purchase schemes (personal pensions) for all new members and deferred existing members.
5. Contributions to be capped at 10% employer and 20% (I am happy to allow larger one offs) employee.
6. Outsource all the work connected with the money purchase schemes. (I'll do it, and I'll do it very well and very cheaply). There would be no charge caps or any other price controls as they never work, but as there would be a lot of people (Hallo! me too) bidding for this work the price would settle at a market price.
7. The fund choice would be entirely open and each member would be expected to take advice. This advice could be paid for by an employer or costed within the scheme.
8. Retirement ages - that is minimum age at which you can draw your benefits would be 50. If you'd accumulated enough capital for you to live on then as its your money you should be absolutely entitled to take it and go.
9. All add on benefits DIS, ill health etc must be costed and paid for within the contribution limits set above and would be menu driven.
10. Keep the existing rules on the manner in which benefits can be taken, that is annuity or fund withdrawal, but do away with compulsory vesting at age 75 and allow the full fund (if not vested in an annuity) less a tax charge equivalent to basic rate income tax to pass to your beneficiaries on your death. (There will of course be no IHT or CGT by the time I instigate these reforms and flat income tax will be heading towards 10%).
You could also, of course, link in general ill health claims. For example if someone needed health care at a young age they could draw on the fund to augment the health care wealth re-distribution vouchers that I may allow myself to be persuaded to introduce.
The purpose of the above is not just to control costs. Its main purpose is to connect everyone to the process of wealth creation. It will encourage all public servants to think very carefully before they introduce policies that destroy wealth.
What's not like? Have your say, please.
PS. I would scrap all pensions for MPs. Make them all self employed contractors, and shut down all the expense and allowance scams and treat them like any other s/e person.

1 comment:

Boombastic said...

Sensible ideas - outsourcing the admin of money purchase schemes is very cheap and could in effect be done on a minimal commission basis that would be profitable for all concerned.