What to do about Pensions?

At 16 years old the last thing I cared about was saving for retirement. 

I’m guessing I wasn’t alone in that! But in 1966, few people were worried about the cost of supporting an ageing population.

Today, the scene is very different and tomorrow it will be worse. Our population is ageing and that means fewer tax payers in the work force to contribute towards the costs of caring for the elderly and it means significantly more people will need that care. With medical advances, life expectancy will continue to increase and so will the average age in our population.

There is only one realistic way to solve this problem and successive Governments from both sides of the political divide, have dodged it. However unpopular (and it would have been with me), everyone needs to contribute a realistic amount to a State pension scheme from the very first day they become employed.

The current level of contribution to the State pension is unrealistically low and the enticements to adopt personal pensions have failed to encourage enough people to make proper provision for their old age. In the current economic climate, who can blame them?

Why a State scheme?

Because the private sector can’t be trusted with future well-being of our population. We’ve all seen how greed weaves its way into every corner of a sector dominated by the pursuit of both corporate and personal profits. We should expect this behaviour rather than be surprised by it, after all it reflects the very nature of our Capitalist economy.

But there’s another equally compelling reason for a proper State scheme. It’s because we live in a society where not everybody has the financial expertise to make the required judgements about where to invest. Individuals with the expertise and disposable income to invest beyond the statutory level required can do so as they wish. This may sound a bit ‘Nanny State’ but the fact is the State picks up the tab already when people don’t have enough to live on because (rightly in my view) we don’t let people starve to death in our society. Wealthy business people may feel completely comfortable balancing their investment portfolios, but not everybody is wealthy enough to take the inevitable risks and not everybody understands the options available.

How can a Public fund be any safer?

The UK Government issues Bonds (Gilts) to raise money for essential (well they’re supposed to be!) projects. They offer a return consistent with a realistic market value, otherwise nobody would invest in them and no money would be raised. Even in the highly turbulent times we’re experiencing with foreign Governments (including the US) on the knife edge of default, there are some safe investments albeit with minimal returns and Gilts are one such investment. There are others, take for example the construction of a toll bridge or tunnel, huge sums need to be raised and the returns can be very long term. But the returns do come and rather than handing them entirely to the private sector, often foreign companies extracting the profits, the Government should go into partnership and retain at least part of the future income stream. There are many other examples but a Government that seeks less engagement in the economy may struggle ideologically with so active a strategy. That would be fine if they had a better idea on offer.

The challenge is to adopt a financial management system that puts the security of the fund at the centre of it’s strategy, rather than the profit for shareholders or the bonuses of executives. The Treasury and the Bank of England are capable of devising such a system and manning it with executives who know what they’re doing. The key, of course, is to devise a management system and not rely so heavily on highly paid executives.

Although nobody wants their take home pay to be any lower, I suspect many would feel better about it if they knew their money wasn’t just going on taxes but to a fund from which they would reap the benefit. A fund which made visible their own increasing investment over the years.

I also suspect a great many people would be relieved to invest, at least part of their hard earned money, into something which they knew would never decrease in value or worse still go bust, leaving them with nothing at the end of their working life.

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