Normality beckons - Tube Strikes ahoy

 Cancelled this week but threatened again for the August Bank Holiday, Tube Strikes are back!

I am not sure I can be sure the RMT are on a strong wicket here, the Government are going to have to fill  TfL with a £500 million shortfall again this year due to Covid. This means they have the Mayor over a barrel and many of the long sores that have been welling can be lanced. 

One of them is the pensions for TfL staff, the final salary scheme is very generous. Staff retire at 65 on nearly 50% full salary if they have been employed long-enough. The cost of this is eye-watering for the Government and no wonder, with the private sector having ended these schemes 20 years ago now, that the Government wants to manage this for new starters at least. 

It does not surprise me the RMT want to strike over this, it is the right thing to do to protect their members from their perspective. I just don't think they can win when the Government is already having to subsidise their wages directly to say they should also keep their superior pension benefits.

However this makes a strike quite likely, but having been up to London a bit of late, I doubt too many people will notice and all the buses are empty anyway!

Are QE pension deficits a big hidden problem in the economy?

Whenever a big company goes under these days, much of the post-collapse discussion surrounds the pension entitlements of former employees. The UK Government even has a Pension Protection Fund set up to try the best for the employees who are rightly seen as victims.


Dominic Chappell, of BHS infamy, even lost a court case this week for not sharing the information on his companies pension scheme with the Protection Fund - he may even get locked up for it.


But what has worried me for a long time is the destruction of the Pension industry since 1997 and Gordon Brown's raid on the tax relief on dividends in pension funds.


Since there all the UK defined benefit schemes have closed, these were more generous and could not be sustained after the raid. Also, the pension deficits of companies have grown, long-ago now are the pension holidays companies used to take in the 1990's.


In fact, the total amount raised by the Gordon Brown tax is around £150 billion (about £10 billion per annum, twice what it was alleged to be at the time). Today total FTSE350 deficits are around £17  billion, far from healthy.


On top of this then we have the Quantitative Easing fiasco which should ended 5 years ago. Now, we a very low interest environment thank to Banks and Funds being for by regulation to by Government Bonds which have increased in price, thanks to demand, and shrunk in yield. As a result, despite investing at around 6% more each year and having Pension assets double in the past ten years, pension scheme deficits are rising.


With all the money invested into pensions schemes, companies show less profits and in turn have less money to invest. One of the drivers of the UK economy, in a negative sense, is the lack of productivity driven by low investment. Companies that are struggling end up with no profits at all, see Carillion and others - pension deficits are a key driver toward corporate failure.


QE on top of the Brown reforms has destroyed the UK pension scheme industry. Weirdly, a re-balance economy with the end of QE would quickly see Deficits fall and pensions back to health (in their new defined contribution form which is about 1/3rd as good as the old defined benefit schemes).


It is a big underlying macro-economic challenge rarely addressed and as ever was an attempted Labour reform to the private sector gone wrong!

BHS goes the way of Woolies

Despite all the hand-wringing, BHS has gone to the wall as was entirely predictable.


No one came forward with enough cash to cover the gaping hole in working capital. Unsurprising, when as a retailer you start to fail it really is a tough time, you get insurances withdrawn and credit facilities with suppliers withdrawn and from there it is a steep mountain to climb back up; most never do.


Now the Government will have its fun looking into Sir Philip Green and Damon Chappell - but who will spot the obvious business model issue as the true cause of the decline. Well, there are no grandstanding votes in that so no one will.


However, the taxpayer is on the hook for the pensions as was always likely and will most likely happen with Tata steel too. Surely not there has to be some legislation, somewhat counter-intuitive, that stops companies making pension commitments that they won't be able to keep and then get lumped on the taxpayer.


Of course, with defined contribution schemes, that is already the case. We need now though to make them de riguer in the public and private space so that the future tax burdens of the Country are not even more utterly horrendous than they are already.


Given our politicians at the moment though, they will probably decide the opposite solution is better....

Reforming pensions and demographics - No work until your 25?

I managed to get 3 ticks for a stupid post for the first time ever earlier in the week, having suggested that due to the ageing demographic crisis we need to be more radical than just axing annuities and increasing the retirement age.

There was much fair comment that losing people in the prime of their lives and losing their skills sets would be a challenge. I doubt this applies to all professions equally but clearly some, like technology, could not survive such a break. Hairdressers and gardeners, perhaps less so.

Another way of moving the goalposts is to extend childhood into the mid-20's. Anyone who has grown-up kids will know that in many ways this has effectively happened already. But for the UK we still maintain a Dickensian approach to schooling, which if reformed, might help to both improve our children's overall education and add in the time needed to help with extending working lives into people's mid-70's.

In many Countries, such as Sweden, Switzerland, even China, kids do not start primary school until they are 7. In the UK they start at age 5. As an adult and having worked with people extensively from all of these Countries I would never know the difference. Perhaps though there is some as they learn creativity and play for another 2 years? The studies into this suggest this maybe the case but are inconclusive.

Moreover, in the US, where I went to University, all Uni courses are a minimum of 4 years and some are even 5 years. Scotland too has 4 year courses.

Just changing our system of education to this model would add 3 years onto the time until full work was started. Children could do primary school to 13, secondary school to 19/20 and then University or apprenticeship training until 24. Thus only entering the full world of adult work at 25ish.

Some of issues around children staying at home have been defeated in recent years by the sheer cost of housing forcing them to stay with parents in any event when having small salaries. In London  by way the average age of house buying is 35!

Finally, none of this should impact on the State negatively. Children staying at home until 7 means no overall increase in school time and extending university or apprenticeship training again has minimal impact on the National Budget.

"Pensioners The Biggest Winners" !?!

Property prices stirred up the comments in no uncertain terms  - so how about another incendiary topic:  the Bank of England thinks that pensioners are the biggest winners from QE.

Discuss, as they say.  Or, in the vernacular - WTF ?

I'll start the ball rolling with a modest kick.  At a basic level it is surely obvious that pensioners (and savers generally) have been, and will continue to be, afflicted by dreadful depredation as the can is booted ever further down the road.

However ... the fact is, pensioners as a class are generally the least-well placed to survive a serious outbreak of social breakdown. Imagine, for example, how granny will fare as she wheels her trolley out into the supermarket carpark when the anarchy really starts. Or when the shelves are actually bare ...

So - to the extent that pensions and savings are raided and raided again to keep the show on the road, rather than confront the Dreadful Truth in a decisive showdown (as some C@W commenters advocate) - perhaps it is in the old dears' best interest after all.  

What do we think ?

ND

New Government Pensions to rip off low earners

Really you could not make this up. The Government, concerend that medium and low earners are not saving enough, decided that what was needed was a mega project to make people save. The idea of perhaps tax cuts to provide people with more income was not even considered.

Now however, the system is all set to go; and guess what? It is really expensive, becuase the payments in are small there is little scalable savings. As such the administrator is putting a 2% fee on all joiners to help cover costs. So if you are joining say 5 years before retirement this will be quite a chunk of your money.

The Times has a good article with an excellent quote from pensions expert Ros Altman:

“The idea of taking away 2 per cent of people’s money before they even start saving strikes me as high, but of course the costs of administering tiny pots of money for decades is also high. Call me cynical, but this scheme has disaster written all over it.”

My bet is that this whole thing is wound up within 5 years and a huge write-down is taken by the Government to refund everyones money.

Labour Minister Angela Eagle's view is funny too:

“Market failure for low and moderate earners means they have not had access to a suitable low-cost pension scheme and have not been able to save for their retirement. Nest will put this right.”

For market failure  read lack of saving by the people, plus no economic way of creating a return plus Government State pension being the direct, free competition. But now the Government are wading in to turn this around for the better....

FTSE100 Pensions in Crisis; half the story

The huge falls in the stock market have really hit the FTSE100 pension liabilities. Ever since the controversial accounting regulation, FRS17, came into being, FTSE 100 companies have had a hard time showing any profits in their pension schemes, although they did collectively at the top of the boom.

Now they are £100 billion in debt which means the remaining defined benefit schemes are going to be closed, like Barclays.

Luckily for the Government, there is no FRS17 for the public sector. Here the unfunded liabilities run out into the far future with £100's of billions of debts. A far worse crisis than the private sector and one that the next Government will have to finally face up to.

Oddly there is a relatively easy solution to such a huge problem, shift the retirement age to 70.

Final Salary Pensions? Only in Parliament

In a truly awful weekend for the UK; Government paralysed, celebrities like Suralan given jobs in Government, the Prince of Darkness promoted to be the real Prime Minister. There is another longer running story that is very bad news.

This is that many companies are using the recession to end their final salary pension schemes, even to current members. I know, pensions is not the most exciting subject, but this is sad news for all the generations of this country.

I am saving for a private pension, by my own reckoning I will end on about one fifth of my final salary is I save 10% a month of my salary. Final Salary schemes on average are 4x as generous as this. It is a huge pay-cut too all staff who are taken out of such schemes or whose companies close them.

Even worse, the reason they are closing is because companies cannot afford them at the moment and the Government has robbed with taxes the other types of pensions savings.

Only the Public sector and MP's will soon be left with such generous pensions provision. And this is payed for by the put-upon private sector who will have to find new ways of reducing employee wages in order to pay taxes and try to make profits.

The situation is untenable and will come to a head one day in a political crisis that will make today's events look like a mild disagreement at a dinner party.