The Government’s working group, PADA, have come up with a new name for the pensions scheme they are launching between 2012 and 2015. It will be called “NEST” rather than the working title “Personal Accounts”. The obvious reference is to a “nest egg” -which is a bit misleading. NEST will need to provide a series of nest eggs delivered to you every month from the point you reach retirement to the day you die- this is more commonly known as a pension- but UK pension people are a little ashamed of the word pension as they think it puts people off.
In Australia, they are a little more brutal. Their version of NEST is called “Superannuation” or “Super” for short. It’s a compulsory tax on earnings and is as much a part of your pay cheque as National Insurance and PAYE. Perhaps we can learn a lesson from a system that is working and stop mincing our words!
UK people don’t have much trust in pensions which is not surprising as they have been kicked about by successive Governments like footballs. You never seem know what you are going to get or when you are going to get it- even with a Government guarantee. Right now, if you are 65 you will get £95.50 pw or about £5,000 pa from the Basic State Pension (Old Age Pension as we used to call it). That’s as long as you’ve paid the stamp for 44 years.
This Basic State Pension was famously described by Michael Portillo as “nugatory” -which is Portillo-speak for being worth SFA. That’s not the case. If you wanted to buy this pension for yourself from an insurance company it would cost you about £125,000 which isn’t SFA at all.
Now most of us will get a little more than £5,000 pa when we retire, we may have private pensions, company pensions and the State Second Pension (formerly SERPS) but there is a minority, reckoned to be about 5m people in the UK, who struggle to get the full £5,000. They have to rely on means tested bail-outs (Pension Credit) and various allowances just to heat their houses, buy basic food etc. The number of people falling into this category is going to rise rather than fall because state benefits are being cut back, companies are offering less generous pensions and because people are saving less not more into private pension savings schemes.
So these NEST eggs are going to have to go some if they are going to get us out of our current predicament. If you are looking for an income from 65 onwards, the stats suggest you are looking for on average 240 monthly or 1100 weekly payments as you are likely to live till you are 85; these payments need to increase at least in line with inflation and that’s why you are going to need one big NEST egg to kick this off!
Even if you built up a NEST egg of £125,000, combined with your Basic State Pension , you’re still only on £10K pa for the rest of your life.
Back in January 1998 an organisation called DEMOS suggested that the Government has an obligation to force people to get themselves an income in retirement that would keep them from being an obligation to others. They reckoned in 1998 this would be about £8,500 pa. Today that would be about £12,500 pa. They suggested the Government introduced a national employer based savings scheme which had contribution levels remarkably similar to those proposed for NEST. You can read this report here http://www.demos.co.uk/files/reasonableforce.pdf?1240939425.
12 years on we have done little to sort this issue. The majority of lower earning households are still not properly saving for retirement. We still have pensioners having to choose between eating properly and heating their houses.
Meanwhile we see massive pension inequalities. Many low paid families are paying more (through their council tax bills) for others pensions than their own. Even then they struggle to get to work through ungritted roads because Local Government pensions are strangling Local Government finances.
It’s hard not to be cynical. The noise about NEST eggs is disguising the dismal failure of Government, the pensions industry and the people of this country to get to grips with the retirement problem.
The cost of delaying a proper National Employment Saving Trust (NEST) will be felt by its future participants for generations to come. My estimate is that to get people out of pensions poverty, NEST will need to deliver one and a half times the basic state pension. To do this, your NEST account will need to be worth (in today’s terms) just short of £200,000. Talk is cheap, achieving this level of savings is getting harder by the day.
