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This is the second article concerning using Pension Provision Reform as a major policy tool in the UK and as previously, I am deliberately being ‘simplistic’ in describing possible solutions. As always, the Devil is in the Detail but in generating ideas, one should never be scared of being “shot down” by the naysayers and people with vested interests in the status quo, it goes with the territory.

My proposed solution is that over a period of 40 years, all UK pensions both public and private should be moved over to a “money purchase” system which whilst lacking the security of outcome that a final salary scheme delivers, is potentially both more realistic and fairer for all in society. If you like, in terms of social fairness and harmony, all the best government policies will emphasize “we are in this together” rather than the “Us and Them” mentality so sadly common of late.

It should also be remembered that whilst at their peak many employees enjoyed being a scheme member in the private sector, the majority of people in smaller businesses never had the option. Also, even the largest businesses have downsized significantly over the past 3 decades and are increasingly reliant on smaller companies to provide services once done in-house. The economy and how it is structured have altered radically but the thinking behind pensions, taxation and democracy are still stuck in the past.

Has This Ever Been Done ?

The answer is yes in Chile starting formally in 1981 but preceded by various measures that started in 1975. In detail I would suggest that trying the same thing in the UK would be handled differently not least because unlike Chile, in the City of London and across various other places, the UK has an immense investment experience advantage. However, for those who are interested in the detail, there is a lot of information available on the web, just do a Google.

For those who just like the hard facts, the following URL is perhaps one of the best from the Congressional Budget Office. It is well written in plain English with explanations as required.

http://www.cbo.gov/ftpdoc.cfm?index=1065&type=0&sequence=2

The Turner Report

The recent Turner Report on UK Pensions and recommendations can be summarized as follows:

1. Increase the state pension age for men and women to 66 by 2030, to 67 by 2040, and to 68 by 2050
2. Make the state pension more generous and link future increases in it to earnings rather than prices
3. In future, entitlement to the state pension should be based on residency rather than national insurance contributions
4. Automatically enroll people into a new low cost government-administered savings scheme
5. Give people the chance to opt out if it’s not suitable for them

The one thing he did not recommend was “compulsory pension saving” and he did indicate that taxes would have to rise to provide the benefits he had in mind. To look at this and for a very user friendly URL, the BBC is worth a look with lots of interesting links:

http://news.bbc.co.uk/1/hi/business/4482528.stm

Pension Saving and Taxation

My solution would have three key elements to it:

1. Compulsory, integrated with the Tax System, deducted at source even for the self employed.
2. No Tax Relief on Contributions, no tax free status for the Investment Funds.
3. An immediate reduction in tax paid to the Treasury.

Compulsory: I will start with a slight aside here concerning Income Tax and specifically the self employed, stick with me because it might make sense in the end.

The number of small businesses, most often one man/woman bands has grown rapidly as much due to them having no other choice as to any idea of an “enterprise economy”. The current system of Self Assessment and paying tax in two installments on the previous tax year, is a total nonsense.

It would make much more sense to pay a flat rate as they go every quarter and synchronize it with VAT periods, whether or not they were registered for VAT. In essence, it becomes on the surface a flat rate tax system set probably around the 22% mark but in reality, still related to the underlying system of allowances.

It would not be difficult to set a percentage figure against a given turnover level say 15% up to £50K, 22% up to £100K – whatever but the reality is that the Government gets its money quicker and the only businesses that will file returns are those who think they have over-paid so lots of job loss/cost savings in the Inland Revenue.

If the scheme was compulsory and set at say 10%, there would be a bit of an uprising amongst the PAYE fraternity as they lost an additional 10% of their wages. However, if that 10% was funded by diverting NIC payments, no difference to them, you don’t get tax relief on them anyway.

No Tax Relief: It has been the dream of every Chancellor to abolish tax relief on all investments, I think it was Nigel Lawson who went on about “level playing fields”. But if we look at tax relief on pension contributions and tax free growth, why were they introduced in the first place ?

Simply pensions are boring, we are all going to live forever, be forever young and successful so accountants were used to tell us “It saves you tax” to encourage us to save. But if pension saving is mandatory, why save us from our personal illusions with tax carrots ? Even the businesses where our pension funds are invested, if they are not viable without tax relief, most likely, they are not viable.

Reduction in Tax Income to the Government: On this one idea alone as I utter or write it, the cries of “Loss of Doctors, Nurses, Policemen, Soldiers, Sailors,Airmen….” the list will go on from those with vested interests. They are not wrong because there will have to be a cut in government spending because the NIC they took for granted as “theirs” by right, will have been reduced. However, my contention is that may not be a totally bad thing, as I will try to explain.

Let the People Decide

My basic contention is that the Government tries to do too much and equally that the electorate expect it to deliver things that were better done locally and by themselves without HMG interference.

But I would go much further than that, politicians with their 4/5 year horizons between elections are not the people to decide, we the electorate with our children, grandchildren and even great grandchildren have a far longer forward ‘vision’ and because of our parents and grandparents, a better grasp of history than they will ever have so, we should decide.

Yes, read the story of Chile, there will inevitably be the need to reduce central government spending and alongside that, our expectations of what can be delivered. It therefore then falls to us the people to decide upon the ‘mix’ that we expect and those local tasks that we will organize for ourselves.

Also and whilst I have said 20-40 years to introduce an alternative scheme, like Turner indicates, my personal timescale would be 40 years, a working life time.

It would be ridiculous to expect someone within 10 or even 20 years of retirement to switch from today to tomorrow, there has to be a transitional period, inevitably people will say that they were “caught on the cusp” but in terms of the “benefits”, 20 years hence is the start line and 40, before completion.

We are living in bad times where people speak of “rights without responsibilities”, I would like to see that become; “My fair dues based upon my contributions” and I’m thinking far broader than pension contributions. In my next essay on this, I will try to write about the political aspects but always remember, I have no template or formula to give, at best all I can try and do is ask you to “raise questions” about the way things are currently done.