I am not Mark Wadsworth
Right, sit up at the back there and pay attention.
Needless to say the papers are talking bollocks about all this RPI/CPI stuff. So, some background.
1. Pensions legislation is a mess. Brown not only cocked up pension funding with his tax changes but legislation brought in by New Labour just made things very much more complicated. Of course these changes were all about 'pensions simplification'..........
2. There are only two types of pension. Defined Benefit (all state employees schemes) or Defined Contribution (money purchase schemes - essentially regular investment plans with lots of rules).
3. There are two types of Defined Benefits (DB) scheme - unfunded (e.g. most state employee schemes) and funded (e.g. Rolls Royce, BT).
4. These schemes can be contracted out or contracted in from the State Second Pension. If they are contracted out there are statutory indexation requirements.
5. Steve Webb is talking about state employee schemes, and schemes rescued by the taxpayer (and from taxes on other schemes) only. He is changing from RPI to CPI. RPI includes housing costs and CPI doesn't. This is probably a reasonable thing to do as housing costs generally do not affect the retired worker. As CPI is a lesser figure (generally - but just wait until housing costs start falling) he thinks this will save taxpayers (who sub up the state employees schemes by at least 28% - or 100% if you really think about it) lots of money.
6. Personal pensions - that is not employer sponsored money purchase schemes - use the accumulated capital at retirement age to buy a pension. You can do this by buying an annuity which you may or may not chose to have indexed. Note, choosing indexation roughly halves the pension you will receive and it roughly takes 12 to 20 years for the reduced pension to grow to what you what would have got with a level annuity. Or you can chose to use a scheme that keeps the fund invested and from which you draw an income. In other words this RPI/CPI stuff has nothing to do with personal pensions.
7. Employer sponsored money purchase schemes are broadly as (6) above, but if they are of the contracted out type there may be an effect.
8. My view on the real problem? All schemes must be money purchase. State sponsored DB schemes should be outlawed. Why? Because they are entitlements that entirely separate the State employee from economic reality. There is absolutely no connection between how well UK plc does and the benefits building up / built up in these DB schemes. The State employee cares not a jot about how well the capital markets perform, he just gets his pension. For every other worker (employee / self employed) pensions are totally linked to capital market returns. If you have 13 years of New Labour whose wealth destructive policies precipitate roughly flat markets your pension is reduced. In my view all this RPI / CPI stuff is just a blind. State employee DB schemes must be closed to new members now. All existing members benefits accrued to date must be preserved and they must now save into a DC scheme. Then we'd all be in it together.
9. Do DC schemes work? Yes, on average they do. Are savers at risk from capital markets? Yes, and a good thing too. Risk is your friend. You need it to drive returns. Are DC scheme savers at risk as they approach retirement and when they take their benefits? No. Careful planning can entirely mitigate risk (if you want to) on the run up to NRA and after NRA you can have an annuity. But is an annuity guaranteed? No. (Shades of Equitable Life), but it's very rare for annuities to fail.
10. I agree with MW. The various protection schemes that are funded by levies on good schemes must be shut down. Consider, the real rate of return on the UK All Share from 1956 to now is about 6.1% per annum. If the PPF levies a tax of 0.5% on a scheme's assets, that reduces the return to 5.6%, or about a 10% reduction in returns. I'll leave you to compound that over a working life to see why it is so stupid.
Lola
12 comments:
..apologies for crap formatting...again!
I was with you, Lola, until you wrote "UK plc". I long ago decided never to read on when once I'd encountered that particular piece of drivel.
L, it's fine, thanks for background.
dearieme - it's just shorthand way of saying we are all in the wealth creation business - it's just that soem of us want the benefits with out the pain. Some of us don't want to think commercially.
Quick thoughts:
2. There are only two types of pension. Defined Benefit (all state employees schemes) or Defined Contribution (money purchase schemes - essentially regular investment plans with lots of rules)
It's worth mentioning that a lot of occupational schemes are also Defined Benefit. It's not just the state that uses them.
4. These schemes can be contracted out or contracted in from the State Second Pension. If they are contracted out there are statutory indexation requirements
If a DB scheme is contracted out, then the member has an entitlement to GMP (Guaranteed Minimum Pension). In addition to this, there are statutory indexation requirements for any benefits accrued in a DB scheme from 1 January 1985 as of the Social Security Act 1985 (google "anti franking" for more details). The Social Security Act 1990 changed this so that anyone leaving a scheme from 1 January 1991 would receive indexation on all of their benefits (not just those accrued from 1 January 1985). The indexation on the benefits other than GMP was set at the lower of RPI or 5%.
This has now been further amended, so that benefits accrued from 6 April 2009 may (if the scheme rules have been changed to allow for it) revalue at the lower of 2.5% and RPI.
5. Steve Webb is talking about state employee schemes, and schemes rescued by the taxpayer (and from taxes on other schemes) only. He is changing from RPI to CPI. RPI includes housing costs and CPI doesn't. This is probably a reasonable thing to do as housing costs generally do not affect the retired worker. As CPI is a lesser figure (generally - but just wait until housing costs start falling) he thinks this will save taxpayers (who sub up the state employees schemes by at least 28% - or 100% if you really think about it) lots of money.
That's not quite how I read it. The key bits of his speech are:
"Consequently we intend to use the CPI as the basis for determining the percentage increase in the general level of prices for the 12 months ending 30 September 2010 when preparing the order required under paragraph 2(1) of schedule 3 to the Pension Schemes Act 1993 in relation to revaluation and indexation of pension rights in defined benefit pension schemes, ..." That sounds to me like he means any DB scheme, including the occupational ones in the private sector.
"... and the order made under section 109 of that Act in relation to increases in guaranteed minimum pensions paid by contracted-out defined benefit schemes in respect of pensionable service between 1988 and 1997;..." A quick aside: GMP accrued from 6 April 1978 (when it was first introduced) to 5 April 1988 doesn't receive any increases in payment from an occupational pension scheme. This is because the government adds any increases that would be due to the member's state pension. The GMP accrued from 6 April 1988 to 5 April 1997 (when it ceased) increases at the lower of 3% and RPI. Any increase to RPI in excess of 3% is added to the state pension (and hence paid for by the government). Changing to CPI would likely mean that they have to pay less as a result of this. This will also affect people in occupational schemes if they were contracted out.
"... and amend legislation to enable CPI to be used for relevant increases in respect of the PPF and FAS." The PPF and FAS increase benefits in deferment by RPI - sounds like they want to change that to CPI.
8. My view on the real problem? All schemes must be money purchase. State sponsored DB schemes should be outlawed. Why? Because they are entitlements that entirely separate the State employee from economic reality.
I hope you mean "All state schemes must be money purchase.", in which case I agree - if a private sector employer wants to make big pension promises, why stop them?
Rational Anarchist
Thanks for doing that extra technical background - I thought it was just too much detail at the time I did my post.
In re (8) Agreed - what I meant.
In re (2) yes, I know, missed out an "e.g."
I'll be interested to see how they apply the CIp/RPI switch, as as you say it looks like they will apply it to all schemes. But my experience is that you only find out really what they meant when the rules are actually published.
Thanks for adding all the extra stuff about GMP which I didn't do as it would have made the post a bit excessive.
Rational Anarchist
Thanks for doing that extra technical background - I thought it was just too much detail at the time I did my post.
In re (8) Agreed - what I meant.
In re (2) yes, I know, missed out an "e.g."
I'll be interested to see how they apply the CIp/RPI switch, as as you say it looks like they will apply it to all schemes. But my experience is that you only find out really what they meant when the rules are actually published.
Thanks for adding all the extra stuff about GMP which I didn't do as it would have made the post a bit excessive.
Sorry if I come across as a bit pedantic. I work in pensions (in the private sector) and it always surprises me how many rules there are, and how complex it can be. I really don't like the way that the government keeps changing the rules (and as for "pension simplification" - you have to be kidding me. When they first brought that in, the retirement packs that we sent out went from about 6 pages long to 15 pages long. We've brought it down a little since, but it's still a mammoth waste of paper).
I'm trying to work on my ability to explain things - they say the true test of whether you truly understand a subject is by whether or not you can explain it to the average person :-)
RA, it is nigh impossible to discuss the thousands of pages of rules and regulations without being pedantic :-)
But as to your point 4, the govt has only reduced the minimum rate by which pensions must be uprated to qualify for all the favourable tax and NIC treatments; there is nothing to stop employers promising and paying a higher rate.
So what's the difference between Graduated Pension and GMP?
I've not dealt with any Graduated Pensions personally, but I understand they're something akin to what SERPS was prior to 1975.
Looking at the documentation that we have here, it seems that if you were contracted out prior to 1975, you accrued an EPB (Equivalent Pension Benefit) in place of the Graduated Pension that you would have had if you were contracted in. The EPB was required to be equal to or greater than the maximum Graduated Pension that could be earned from the same period of employment, but these benefits were not subject to indexation. As such, I think the highest EPB it's possible to have is in the region of £58.90 per year.
SERPS and the GMP legislation were (I think) due to be brought in in 1975, but for various reasons it was delayed until 1978. At that point they brought in the GMP legislation, and the GMP was required to be indexed (at 8.5% p.a. compound). This has subsequently been revised downwards (leavers today get 4%).
So, back to the original question, Graduated Pension should more accurately be compared with SERPS (or S2P, whatever it is these days), and the EPB with GMP :-)
Rational Anarchist - Me too, working with pensions that is - in the retail advice end. And I have not found a way of explaining all the rules simply. I don't think one exists. Not only do people get confused in the accrual/benefit accumulation phase of epnsions planning they then have to take on board the various ways they can take their benefits.
Best really not to discuss all the legislation with anyone, especialluy not 'pensions simplification' (Hah!). As as the lay person is concerned just stick with the broad concepts and only involve them in the detail when it affects them.
My business is based on simplifying everything and making it more transparent - retail financial services that is - which is one of the reasons for why I strongly advocate outlawing DB schemes - even for private employers/employees.
Part 1 of n
What a disturbing read; the considered opinions of Lola. I can but speculate on how her lifestyle is funded and the personal wealth/security from which this vitriol against Public Sector workers emerges.
What trite idiocies "risk is my friend" and the opinions that savers should be at risk from markets. Does she really not understand after these past few months that these "markets" are nothing of the sort - they are bent betting shops. We cannot win - as a group. Some citizens may get lucky, most will loose. Except of course from those "inside" skimming money in "management fees", and bid/offer spreads and all the other small print. The bankers. Ask yourself this - if they are so great why can't I give them money and get guaranteed returns? Why is the only thing that is certain their fees...seems the real guaranteed return right now is the 0.5%ish - that you can get on your savings. .
She says state employees are disconnected from economic reality. Tosh. Do you want to live on a Nurses wage in central London and try to bring up a family? Why should we all be MADE to buy into capitalism red in tooth and claw?
I'm not in the Public Sector - just for info. But this rampant jealousy (and that is what it is) is sick. People like nurses, teachers etc ELECT to work in those jobs providing services. They therefore KNOW they will never have the earnings, the company cars, the private medical scheme etc of so many Private Sector people. And of course those bonuses. Never forget we are where we are because those arrogant bankers and their acolytes CALCULATED they could make bad bets with impunity. They could take their massive unearned bonus immediately, no government could ever recover it, they were so inside as "advisors" with government (corruptly giving out all those lovely directorships etc) they could pervert/dilute legislation anyway, they knew globalisation was the key - governments could be played against one another too. In all this they were proven correct. Capitalism just does not work; they are inside - you are actually "outside".
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