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Tony Byrne: The pensions system is like a giant Ponzi scheme

The largest pensions scandal in history will become apparent over the next few decades, as successive governments are proven to have not taken any effective action to correct the funding crisis of state and public sector pensions. The current deficit for public sector pensions alone is £1.2trn.

These pensions have been mismanaged by governments of both of the main parties for years and years, and the extent of their liabilities has been hidden.

In contrast, just look at Norway, which has invested all its gas and oil profits for decades. As a result, a tiny country like Norway – a country with just five million inhabitants – now has a Sovereign Wealth Fund worth US$900bn. It puts the UK to shame.

Most government pensions are, of course, unfunded. When you make National Insurance contributions or public sector pension contributions, your money is not actually invested. It simply goes into the general pool of taxation out of which these pensions are paid to existing pensioners. So you are actually paying tax contributions, not pension contributions.

The current system of state and public sector pensions is no more than a giant Ponzi scheme. The biggest pensions misselling scandal in history.

The issue, quite simply, is that people are living much longer than was ever anticipated. Back in the day, a pensioner would retire at age 65 and die at age 68. These days, many people will retire and live full lives for decades after.

“The current system of state and public sector pensions is no more than a giant Ponzi scheme.”

Inaction stations

Retired people are making up an ever increasing proportion of the UK population. The problem is that there will not be enough people working and paying taxes in the future to fund these pensions. The dependency ratio – the number of people working compared to the number retired – is increasing significantly. Indeed, it is forecast to rise from 3:1 today to 1:1 by 2050. You can see how this would make the current system totally unsustainable.

So what has the Government done to tackle it? Well, unlike the private sector, where companies have all but given up on final salary pension schemes and replaced them with money purchase ones, the powers that be have done very little apart from some tinkering with such schemes.

The next question is what should be done? Here, the Government should pay money – real money – into money purchase pension schemes and scrap public sector final salary pensions both for new and existing members once and for all. It goes without saying that existing members’ benefits accrued to date should be ringfenced and preserved, of course.

If nothing is done to work out a solution, the burden of paying your pensions will fall largely to your children and grandchildren. And that is hardly fair, is it? That said, I for one am not holding my breath that the Government will do anything of the sort.

Tony Byrne is financial planning director at Wealth And Tax Management and author of Wealth Magic

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Comments

There are 14 comments at the moment, we would love to hear your opinion too.

  1. Sorry Tony, but this isn’t ‘News’, as those of us in ‘Pension Planning’ back in the late 80’s knew full well it was/is a ‘Ponzi Scheme’! No more no less than Gordon Brown’s raid on pension schemes & Gold in 1997, well publicised at the time, but the Executive’s response was & remains “let this blow over & they’ll all forget it!”

  2. Well in my opinion all public sector schemes should be scrapped and everyone should make their own arrangements. Public sector workers are already receiving my money via private sector tax in the form of their wages. Paying into their pensions is double bubble!

  3. Trevor Harrington 10th May 2017 at 2:32 pm

    Whilst we are all correct in our assessment of this problem, and indeed it is a problem that has been around for many decades, it is not socially viable to simply relieve everybody of their public sector pensions, just so that you can re-create the state pension – I wish it were that simple.

    If you did so, you would have an immediate general strike, probably leading to civil war.

    The only way forward is to correctly model the financial implications of various financial options (pensions) as a way forward …. and get that plan into the public domain as soon as possible, so that people can see the problem and the solution options.

    This may well include –
    A) making the maximum private pension of any type (public or private) … say £40,000 pa, above which they will be heavily taxed.
    B) reviewing all those who have taken early retirement through ill health, to see if they really are still ill – if not, their pensions may have to cease.
    C) banning all early retirement pension access under age 65
    D) eliminating indexation on any pension over £15,000 per annum

    and more importantly :-

    1) scheduling the state pension back down to age 65 and ultimately to age 60.

  4. Stiffler's mom 10th May 2017 at 2:36 pm

    Agree. Defined Benefits and mortality improvement are mutually exclusive

  5. irving struel 10th May 2017 at 2:48 pm

    cut our overseas aid would help the NHS, our education system & the pension problem & ensure the other EU members pay their fair share of 2% of GDP as we do

  6. Trevor – while some of what you say is sensible, you are wrong to suggest that getting the plan into the public domain so that people can see the problem and solutions will help. “People” care only about getting theirs, not about what is good for the country, or their children or grandchildren. As long as they get theirs, the problems and solutions are blowing in the wind. A sorry state of affairs perhaps, but the reality of the world we live in.

    • Trevor Harrington 10th May 2017 at 3:53 pm

      Afternoon Matt,

      Sadly, what you are saying about the selfishness of the voter is probably correct.

      However, doing nothing, and ignoring the enormous social problem of inequality in pensions, which is what successive Governments of all political persuasions have done for many years, is no longer an option.

      As indeed Tony indicates in the headline article, we are in danger of the pensions system bankrupting the Mother economy. which can no longer support it.

      In my naivety, I am clinging to the belief that when the problem is so severe, when the likely outcome is so destructive, then perhaps the British people just might be able to grasp the problem … and allow a move towards some sort of equality in pensions.

      Surely it is not beyond the wit of man to realise that the social division of the “haves” and the “have nots” now resides specifically in the pensions arena.

      I do not believe that even the most selfish of people can countenance the situation where people with huge pensions, many of which have not been earned or paid for by themselves, exist at the expense of others who have just had their state pension removed from them in its entirety.

  7. Trevor, the government has already introduced legislation which taxes pensions over £50,000p.a. at 65%. The lifetime allowance on pension funds is now £1million or 20 times £50,000 for final salary schemes. Any excess has a penal tax of 25% plus their normal tax (40% at this level) making it 65%. If their earnings including pension is over £100,000 they are further taxed at another 20%, so in effect they could be paying 85% tax if their pension is between £100K and £123K.

    • Trevor Harrington 11th May 2017 at 4:18 pm

      The lifetime allowance does not take into account those who are already in retirement, and as far as I am aware there is no plan to re-visit all those early retirements that have been taken on what has latterly appeared to be the false and fraudulent grounds of imaginary ill health.

      Furthermore, the lifetime allowance should be reduced to £800,000 (which I think was indeed suggested that the Chancellor might do some months ago), in which case 20 x £40,000 would be a LTA of £800,000.

  8. I have often posted or made spoken comments to the effect that to get most MPs interested in this funding deficit the government must first end MP’s current pension scheme. It would be replaced with a typical private sector defined contribution scheme or else by no scheme at all but instead an increase in their pay, with which they could make their own pension arrangements. You could say that I have been proved right, in that their current scheme remains intact and that they show little interest in discussing this subject seriously.

  9. Wholesale change to public sector pensions is long overdue but unlikely to ever happen until we literally go bust.

    No amount of logical debate regarding the unfeasibility of these schemes will prevent public sector unions from latching onto any proposed changes as a way to flex their muscles.

  10. Trevor, reducing the LTA is a retrospective tax. I, regrettably, have plowed a lot of my earnings into my pension for the last 30 years only to be taxed at a later date for being “sensible”. Reducing the LTA is already stopping people saving for pensions. After all, what’s the point if someone, like you, makes the decision in say 10 years time to cut the LTA to £400,000? A more realistic option would be to means test the state pension.

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