David Webb on Pension Reform


Doh – I sent this directly via e-mail. It was stripped out. Apologies to all, and here is the post as it should have been.

Dear Dr Gabb,

I am on holiday in China, but want to send you some comments on pension reform, but I couldn’t find a thread on the LA site to post it in. Would you consider opening a thread on this topic?

I am totally opposed to the government’s decision to force all companies with more than 50 employees to have a pension scheme and to auto-enroll all employees in it. While it is good for everyone to have a pension account, a scheme run by your company is not yours to manage and control – and in times of economic downturn it can leave companies nursing large pension deficits for people who no longer even  work for the company, requiring extra money to be put in just at the wrong time.

In Hong Kong, all employees contribute to their Mandatory Provident Funds, and I think their employers either can or have to contribute too. I would like to see a system whereby national insurance was totally scrapped, and everyone on PAYE (as long as it lasts, as libertarians would scrap income tax altogether) be required to contribute 10% of their monthly salary into their own SIPP, self-administered personal pensions. The company could also contribute more (but not be forced to), and all these SIPPs would be up to you yourself to manage. You could make the decision to invest in commodities, emerging markets or whatever yourself, and your pension scheme would be your own – and also your own problem. There would be no pension debts in company accounts (or only for already retired employees as the existing arrangements are phased out), and no public sector pension deficits either. Quite simply, all public servants would also pay 10% of their salaries into their SiPPs too.

There would be no 200k pension for ex-police chiefs – quite simply police chiefs would pay 10% of their existing salaries into their SIPPs and manage the assets themselves thereafter. For most people, the abolition of NI would largely cover this scheme, and it would eventually free up the population from total reliance on the state in their autumn years. I would not increase civil service pensions to cover the fact that they were now having to pay into their own SiPPs – the abolition of NI (which would require cuts elsewhere) would cover that – and existing pension monies, where they existed would be distributed to the pension members as contributions to their SIPPs. Quite simply there would be no pension assets other than the SiPPs, which everyone would hold.

I would then abolish the state retirement pension as an entitlement. Those after 65 whose SIPPs had not earned enough could apply for income support (a benefit, not an entitlement). Clearly we have to think about getting out of the whole social security arena, but that would be easier to do in the future when everyone had saved up a bit in their SIPPs.

I would also make pension assets fully inheritable with no inheritance tax. Currently that is only the case between spouses. I would also totally remove the requirement ever to buy an annuity, which is just one way of making sure there is nothing left of pension assets when you die. I would also look again at the 25% lump sum that can be taken out of your pension at 55. As long as the pension assets remaining after a lump sum was taken out were enough to finance a retirement, there would be no need to restrict the lump sums to 25%. Eg if you had 1 million in your pension, why should you only take out 250K as a lump sum? As 750k is more than is required to finance your retirement, assuming a 400K pension paid a 28K pension at a 7% annuity rate. In other words, I am saying anything over 400K should be available as a lump sum free of any tax. And some access to pension monies earlier than 55 years of age, eg to buy houses, should be facilitated, as long as there was enough left in the pension fund to reasonably expect to fund your retirement.

I know libertarians want to get the state out completely, but I think what I outlined above would be a good stepping stone. It would make it easier to fully get the state out later on, as people would have assets. The point about abolishing the trillion-plus public sector implicit pension debt at a stroke would be a huge improvement in our country’s finances.

Regards, DJW

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31 responses to “David Webb on Pension Reform

  1. I can’t see any post.

  2. I think SG opened the thread for me to post my article in. It follows:

    I am totally opposed to the government’s decision to force all
    companies with more than 50 employees to have a pension scheme and to
    auto-enroll all employees in it. While it is good for everyone to have
    a pension account, a scheme run by your company is not yours to manage
    and control – and in times of economic downturn it can leave companies
    nursing large pension deficits for people who no longer even work for
    the company, requiring extra money to be put in just at the wrong
    time.
    In Hong Kong, all employees contribute to their Mandatory Provident
    Funds, and I think their employers either can or have to contribute
    too. I would like to see a system whereby national insurance was
    totally scrapped, and everyone on PAYE (as long as it lasts, as
    libertarians would scrap income tax altogether) be required to
    contribute 10% of their monthly salary into their own SIPP,
    self-administered personal pensions. The company could also contribute
    more (but not be forced to), and all these SIPPs would be up to you
    yourself to manage. You could make the decision to invest in
    commodities, emerging markets or whatever yourself, and your pension
    scheme would be your own – and also your own problem. There would be
    no pension debts in company accounts (or only for already retired
    employees as the existing arrangements are phased out), and no public
    sector pension deficits either. Quite simply, all public servants
    would also pay 10% of their salaries into their SiPPs too.
    There would be no 200k pension for ex-police chiefs – quite simply
    police chiefs would pay 10% of their existing salaries into their
    SIPPs and manage the assets themselves thereafter. For most people,
    the abolition of NI would largely cover this scheme, and it would
    eventually free up the population from total reliance on the state in
    their autumn years. I would not increase civil service pensions to
    cover the fact that they were now having to pay into their own SiPPs –
    the abolition of NI (which would require cuts elsewhere) would cover
    that – and existing pension monies, where they existed would be
    distributed to the pension members as contributions to their SIPPs.
    Quite simply there would be no pension assets other than the SiPPs,
    which everyone would hold.
    I would then abolish the state retirement pension as an entitlement.
    Those after 65 whose SIPPs had not earned enough could apply for
    income support (a benefit, not an entitlement). Clearly we have to
    think about getting out of the whole social security arena, but that
    would be easier to do in the future when everyone had saved up a bit
    in their SIPPs.
    I would also make pension assets fully inheritable with no inheritance
    tax. Currently that is only the case between spouses. I would also
    totally remove the requirement ever to buy an annuity, which is just
    one way of making sure there is nothing left of pension assets when
    you die. I would also look again at the 25% lump sum that can be taken
    out of your pension at 55. As long as the pension assets remaining
    after a lump sum was taken out were enough to finance a retirement,
    there would be no need to restrict the lump sums to 25%. Eg if you had
    1 million in your pension, why should you only take out 250K as a lump
    sum? As 750k is more than is required to finance your retirement,
    assuming a 400K pension paid a 28K pension at a 7% annuity rate. In
    other words, I am saying anything over 400K should be available as a
    lump sum free of any tax. And some access to pension monies earlier
    than 55 years of age, eg to buy houses, should be facilitated, as long
    as there was enough left in the pension fund to reasonably expect to
    fund your retirement.
    I know libertarians want to get the state out completely, but I think
    what I outlined above would be a good stepping stone. It would make it
    easier to fully get the state out later on, as people would have
    assets. The point about abolishing the trillion-plus public sector
    implicit pension debt at a stroke would be a huge improvement in our
    country’s finances.

  3. Interesting ideas. I especially like the crackdown on stupidly generous pensions for ‘public servants’.

    As for the self managed pensions. I would love that, however a lot of people are scared of such responsibility, in addition there would obviously be people who were stupid or unlucky and ended up in penury. This would be used as emotional blackmail to demand ‘top ups’ and ‘guarantees’ and a creeping nationalisation of the entire scheme.

    I’m coming round to the opinion that most people do not want freedom or liberty. That they will actively fight against any attempts to give them freedom.

    BTW, the government is apparently making it so all employers must provide employees with pensions, right down to people employing a nanny. Being an employeer apparently makes someone a delegated member of the social services department, i wonder what that will do for job creation.

  4. Roger Thornhill

    We do need to back out of collective and ponzi co-outs, for sure.

    Maybe if the SIPPs were run without limited liability? Might make for cautious management, but then again that is the point, surely?

  5. What do you mean SiPPs with limited liability? I am talking about everone managing their own pension monies, as I do in fact. I have only one year’s experience of doing so, but I enjoy it and look forward to the opening price every morning. I am talking about no pension schemes whatsoever – everyone just chooses his own investments. LL doesn’t come into it.

    It would be nice to have a society where everyone was discussing investment opportunities. Taxi drivers talking about whether to invest in Russia or gold. Waiters discussing the attractions of gold vs SE Asian stocks with their customers. Someone said the average Joe would lose money, but I am not sure. The average pension fund invests money very conservatively, and could not even dream of a 50% return in one year, but I have achieved that with ease since the summer in the middle of a recession. The investment magazines around are very bad, and the stock tips in the Telegraph and elsewhere seem designed to lose you money. It would be nice to live ina UK where there were 40 million private investors and special magazines making investing easy, or explaining it in easy times, and highlighting all the good opportunties, were available. XEL may double by the year-end. GKP may quintuple by the end of next year – remembere where you heard it first. I am not a qualified advisor, so don’t take my word for it – but what I just said was an example of my dream of an England of the future. TELL SID!

  6. dj, to achieve your dream (a nice one) you would basically have to physically change the population.

    You are wanting a nation full of intelligent, engaged and self responsible people. Unfortunately i think that whatever the circumstances there is a substantial portion of the population who will always be dull, avoiding any self responsibility, filled with a sense of entitlement at other peoples expense.

    I would love to live in your vision, but i don’t think it fits with the reality of what people are like.

    I agree that the investment magazines are very bad. They seemed to act on a premise that if share prices are rising then say ‘buy, the price is rising’ whereas if the price is falling say ‘sell, the price is falling’. Frankly, looking back over several years i have never had grounds to be pleased with any advice given ever by an investment magazine.

  7. In China, many ordinary people are invested on the stockmarket, in mutual funds, property etc. Most people in the cities seem to know all about what the Shanghai Composite is doing – many university students have shares, or had them until the stockmarket halved in market capitalisation in 2007-2009. When you say there could not be such a population that I described – what about the Chinese? What about the population of Hong Kong? Ordinary retail investors rush to buy IPOs in Hong Kong. People are the product of their upbringing and culture – they have been trained to hold their hand out for subsidies. But it is not true to say they couldn’t do better than that…

  8. dj, unless you are going to replace the British people with the Chinese then no, i can’t see it happening.

    The British people are so deeply and fundamentally wed to entitlements and to evading any whiff of self responsibility. The Chinese are a different people, even fifty years of communism wasn’t able to change their nature. One of the best known sayings in China is ‘don’t work, don’t eat’. Wherever you go around the world the Chinese populations are self reliant and entrepreneurial, i think that in some fundamental ways the Chinese and British peoples have some innate differences.

    People are more than just the products of their upbringing and culture, yes, the British can do better, but no, i do not ever see a future in which all members and levels of British society happily take responsibility for their own pensions and take an intelligent interest in markets and engage in discussions with all and sundry. There are simply too many lumpen apathetic types for whom ‘thinking is too hard’ who simply want to shirk responsibility, to blame others for any misfortunes, who ascribe all others successes to either ‘luck’ or else to dishonesty and who think the world owes them a living.

    Anyway, lets just accept that you have a more optimistic view of humans and i a more pessimistic.

    So, what sort of investments do your favour? At the moment i am inclined to oil as a hedge against trouble from a nuclearising Iran and am thinking that a coming inflation will probably be good for retailers and banks.

  9. A lovely idea, but abolishing NIC is not possible as much of it goes to pay current pensions, I beleive.
    The British are indeed as pessimistically described, but it was not ever thus. DJW’s scheme could also be benificial in changing attitudes. After all, being universal, people would have to become engaged. Chicken, egg.
    50% since the summer is excellent. I was proud of my 36%, but being very near to retirement I have become more cautios in recent months.
    Given the poor opinion of share advice, rightly shown above, is it not ironic to tip oil, retail and banks? “Give every man thy ear but few thy voice”, as we Geordies say.

  10. Epictetus, i am assuming (maybe foolishly) that a Libertarians opinion is going to be worth hearing and am offering my meagre opinions up for criticism rather than as advice. (i do not claim to have any particular success or expertise in investment)

    As both you and dj claim very impressive results for your investments i’d be interested in any criticisms or comments.

  11. “Give every man thy ear but few thy voice”,

    Advice which would make for a crap discussion thread…..

  12. OK, you asked for it, as you are “few”. No criticism, your opinions are valid and I’m disinclined to be a critic. But some of my experience which you can consider as advice, but don’t sue me please.
    Most of my return came from investing in natural resources and the far east, excluding Japan. This was based on growing long term demand based on huge material aspirations in emerging countries, diminishing supplies of, and increasing competition for the raw materials needed, improving political stability, and the decline of the West.
    Point taken about the impact on discussion boards, but Shakespeare did not foresee their development. Or if he did he didn’t let Polonius in on the secret.

  13. Thanks for the interesting reply.

    I’m pretty much in agreement with your viewpoint. I think natural resources are going to be in increasing demand and limited supply and i think the West is in decline. As i am an impoverished peasant i am limited to buying a few shares on the London Stock Exchange rather than more interesting options.

    I dislike any natural resource company based in the USA as i completely distrust the US legal and political system but i do like Canada and Australia. I also like anything to do with agriculture, such as Potash mining. Rare Earth Metals interest me, but there is nothing really interesting on the London market that caters for that without being hugely speculative.

    In the past, high inflation has been associated with good results for banks and retailers. I am pessimistic about coming inflation and am looking for hedges.

    Don’t worry, i’m not going to sue you when i screw up my own investment decisions ;)

  14. In the US, the personal incomes of some 90% of the population increased greatly between 1950 and 1980. This period was characterised by social democratic government policies. Since 1980, the personal incomes of 90% of the population have not increased, but the income of the best-off 10% has increased by around 30%, with no ‘trickle-down’ effect.

    There is a good case for arguing that the share and property bubbles were engineered to provide superficial window-dressing for monetarist and neo-conservative political measures which failed to provide widespread real economic growth. Now market forces are readjusting the bubbles. There was in reality little widespread and sustained economic gain from Thatcherism and Reaganism.

    Yet people are expected to work out how to secure personal pensions under these conditions.

    Tony

  15. Tony, if you really think that ”Since 1980, the personal incomes of 90% of the population have not increased ” then i have some shares in a cheese mine on the moon to sell you.

  16. I have already stated my view that the best opportunities are Xcite (XEL.L), which has found oil in the North Sea, and may double in value before the year-end, depending on flow rates. It is stated to have a 70% chance of success. The oil is there, but all depends on the flow rates. XEL can be put in an ISA (it is AIM-listed, but also listed on Toronto, so can be put in an ISA). The ultimate best opportunity of the decade is Gulf Keystone Petroleum (GKP.L), which can’t be put in an ISA until it migrates to the FTSE main board, but can be put in a SIPP. It is way undervalued because it has found billions and billions of barrels of oil, but in politically unstable Iraq. Assuming the government doesn’t cancel their contracts, this share could multiple by 10 in value over the next year, the chief difficulty being fending off a hostile takeover bid before it reaches full value…

    NIC can be abolished. NIC raises around £100bn a year, but it is not going in a dedicated fund to pay pensions. There is no actual National Insurance fund – it is just another tax. I believe that with public spending at 40+ % of GDP, it could be halved (from around £700bn at present) – and in fact still be above the Hong Kong level, and long term, if we restored the minimal state of the late 19th century, we would be looking at a state spending 7% of GDP. So what makes you think expenditure couldn’t be cut by one-seventh in order to abolish national insurance and allow everyone to invest in their own pensions?

    A middle way would be to abolish employees national insurance, allowing them to invest in their own pensions, but keep employers’ national insurance. This would require a smaller reduction in state expenditure, but don’t you see – for Pete’s sake on a libertarian site, don’t you see? – there shouldn’t be employers national insurance either? It is just a tax on job creation…

  17. “As battle cries go, the Tea Party’s “Take our country back” is a pretty good one. It’s short and punchy, and it addresses a very widespread sense that the nation that Americans once lived in has changed, and not for the better.

    When the Tea Partyers get around to identifying how America has changed and to whose benefit, however, they get it almost all wrong. In the worldview of the American right — and the polling shows conclusively that that’s who the Tea Party is — the nation, misled by President Obama, has gone down the path to socialism. In fact, far from venturing down that road, we’ve been stuck on the road to hyper-capitalism for three decades now. The Tea Partyers are right to be wary of income redistribution, but if they had even the slightest openness to empiricism, they’d see that the redistribution of the past 30 years has all been upward — radically upward. From 1950 through 1980, the share of all income in America going to the bottom 90 percent of Americans — effectively, all but the rich — increased from 64 percent to 65 percent, according to an analysis of tax data by economists Thomas Piketty and Emmanuel Saez. Because the nation’s economy was growing handsomely, that means that the average income of Americans in the bottom 90 percent was growing, too — from $17,719 in 1950 to $30,941 in 1980 — a 75 percent increase in income in constant 2008 dollars.

    Since 1980, it’s been a very different story. The economy has continued to grow handsomely, but for the bottom 90 percent of Americans, it’s been a time of stagnation and loss. Since 1980, the share of all income in America going to the bottom 90 percent has declined from 65 percent to 52 percent. In actual dollars, the average income of Americans in the bottom 90 percent flat-lined — going from the $30,941 of 1980 to $31,244 in 2008.

    In short, the economic life and prospects for Americans since the Reagan Revolution have grown dim, while the lives of the rich — the super-rich in particular — have never been brighter. The share of income accruing to America’s wealthiest 1 percent rose from 9 percent in 1974 to a tidy 23.5 percent in 2007.

    Looking at these numbers, it would be reasonable to infer that when the Tea Partyers say that they want to take the country back, they mean back to the period between 1950 and 1980, when the vast majority of Americans encountered more opportunity and security in their economic lives than they had before or since. Reasonable, but wrong. As the right sees it, America’s woes are traceable to the New Deal order that Franklin Roosevelt, working in the shadow of the even more sinister Woodrow Wilson, imposed on an unsuspecting people.

    In fact, the New Deal order produced the only three decades in American history — the ’50s, ’60s and ’70s — when economic security and opportunity were widely shared. It was the only period in the American chronicle when unions were big and powerful enough to ensure that corporate revenue actually trickled down to workers. It marked the only time in American history when, courtesy originally of the GI Bill, the number of Americans going to college surged. It was the only time when taxes on the rich were really significantly higher than taxes on the rest of us. It was the only time that the minimum wage kept pace (almost) with the cost of living. And it was the only time when most Americans felt confident enough about their economic prospects, and those of their nation, to support the taxes that built the postwar American infrastructure.

    Since the ascent of Ronald Reagan, though, America’s claim to being a land of opportunity has become a sick joke. Unions have dwindled; colleges have become unaffordable; manufacturing has gone abroad; taxes on the rich have plummeted; our infrastructure has decayed.

    But the country the right wants to return to isn’t the America that the Greatest Generation built. Judging by the statements of many of the Republican and Tea Party-backed candidates on next Tuesday’s ballots, it’s the America that antedates the New Deal — a land without Social Security, unions or the minimum wage. It’s the land that the Greatest Generation gladly left behind whey they voted for and built the New Deal order. All of us should want our country back, but that country should be the more prosperous and economically egalitarian nation that flourished at the time when America was not only the world’s greatest power, but also a beacon to the world.”

    meyersonh@washpost.com

  18. Tony, why are you cutting and pasting irrelevant rubbish about American politics into threads?

  19. CH Ingoldby:

    You disputed my assertion that real incomes of 90% of Americans had not increased since 1980. Viz:

    “Tony, if you really think that ”Since 1980, the personal incomes of 90% of the population have not increased ” then i have some shares in a cheese mine on the moon to sell you.”

    In reply, I posted Meyerson’s article giving the numbers, and setting the point in context.

    Perhaps empirical refutation is something your mind translates into “irrelevant rubbish.” That is hardly my fault. I’m a Critical Rationalist. You?

    Tony

  20. Tony, if you think that cutting and pasting a random assertion from a random person counts as evidence then you are not a ‘critical rationalist’ you are an irrelevant idiot. Your idiotic cut and paste had absolutely nothing at all to do with the discussion as well as being self evidently stupid and wrong headed.

    Next time you make a comment, how about it actually has something to do with the discussion taking place and isn’t just a cut and paste job. If you’re such a ‘critical rationalist’ (what a pompous title, anyone calling themselves that is prety much guaranteed to be a self regarding fool) then how about coming up with some ideas and opinions of your own.

  21. Now you’re just being insulting. You’re so immersed in your own point of view that you become incapable of intellectual discussion.

    “Critical Rationalism” is the name of a philosophy exemplified by Karl Popper. If you want to call Popper a “self-regarding fool”, you’re talking to yourself (and any Amen Chorus you may have). If you have to be ignorant at least be polite with it. Okay?

    Tony

  22. Tony, i see no reason to be polite to you are you are the one who chooses to deliberately derail intelligent discussions by posting complete irrelevances.

    I very much doubt Karl Popper would have resorted to simply cutting and pasting other peoples opinions so for you to compare yourself to him simply leaves you looking extremely stupid.

  23. Oh, and Myerson is hardly just any old scribbler. He’s a columnist with the Washington Post.

    Tony

  24. C H Ingoldby:

    Your idea of “intelligent conversation” seems to be limited to those who agree with your misconceptions. Sorry and all that.

    Tony

  25. Tony, my idea of intelligent conversation is where you express ideas that have any relevance whatsoever to the topic under consideration. It is not so much that your ideas are wrong, but that they are completely irrelevant (and not your own ideas anyway, but rather those of a hack at a Washington newspaper)

    So, do you want to actually make any comments that have any relevance to the matter under discussion? No? I didn’t think so.

  26. C H Ingoldby:

    Your idea of “intelligent conversation” seems to be limited to those who agree with your misconceptions. Sorry and all that.

    Tony

    PS: And I pretty much agree with Myerson. The idea that we have a fine future in the 19th Century past is preposterous. Classical Liberalism failed in competition with State Socialism because it refused to offer both negative and positive liberties. You lament the folly of the British public for being unlikely to accept your ideas, and you insult them for being (genetically?) unwilling or unable to accept your stunted world-view and your ill-informed recipies for their future.

  27. Since Myserson didn’t say anything remotely relevant to the subject of this thread your raising his opinion again just highlights how ridiculous you are.

    How about coming up with an actual opinion on pension reform? That is the topic of this discussion afterall……..

  28. The point I make is that the future is so uncertain that making decisions on pensions is very difficult. Most of the so-called ‘reform’ is just the same old political prejudices dressed up as “futureology.”

    Tony

  29. Thanks for the informative information this blog every time provide latest news on politics and other issues i like this blog good work keep it up.

  30. The greed and refusal to take responsibility for oneself in society today is clear from this: http://i.dailymail.co.uk/i/pix/2010/11/01/article-1325489-0BDB4432000005DC-173_468x216.jpg

    The woman said she was angry, having paid taxes all her life, that dentists refused to treat her for nothing. Why don’t these people just drop dead? The taxes don’t pay for dentistry anyway…

  31. dj, that article pretty much sums up the problem entirely.

    The ‘i’ve paid my taxes’ attitude that then gives a total sense of entitlement to everything. A sense of absolute impervious belief in the moral right to whatever they want and a sense of genuine moral outrage when they aren’t given what they demand.

    Very depressing.