Government endorsed Ponzi pensions schemes

Ask your investment, budget, and other money related questions here
vexed87
Posts: 1492
Joined: Fri Feb 20, 2015 8:02 am
Location: Yorkshire, UK

Government endorsed Ponzi pensions schemes

Post by vexed87 »

Do you pay into your employer's pension scheme?

In the UK, public sector pension schemes are oft quoted as one of the "best you can get". For example, with my current annual earnings of ~£27,000, less some small deductions for the Cycle2Work scheme, I contribute 7.1% of my net earnings, and my employer contributes a further 14.1% (before tax and after other deductions such as C2Ww). That's a fairly substantial contribution made all the better as it's before tax deductions from net income.

My dilemma is that I share the same view as jacob:
...if you're running a pension fund, you obviously need someone to pay for all those promises in the optimistic Ponzi scheme you built a few decades ago...
I did some digging and it appears that there's no personal pension account with my name on it that will grow with compound interest until I reach retirement age... rather the funds required to meet the demands of those who already reached retirement age are being paid by today's contributors. Surplus funds from contributions go to the UK treasury which may well be invested to help meet the needs of the future but there's no transparency about this... At it's core the scheme is a Ponzi scheme through and through.

This means long term success of the scheme is utterly dependent on continued population growth, economic growth and the willingness of future generations of public sector workers to continue paying ever increasing contributions of their income into the pension fund to secure the ageing UK population. There a number of reasons why I don't think this is likely:

1. Without population growth the NHS will shrink to meet demands of a smaller population (assuming social healthcare in this country can survive a few more conservative governments!). What happens to the public sector pension fund when social healthcare is made private? The government certainly hasn't thought that far ahead.
2. Without economic growth governments can't raise enough taxes to continue to afford public healthcare, to pay the staff and organisations and by extension the pension payments for retired staff will also become unaffordable.
3. As the scheme unravels, the number of people paying into the scheme falls and which is a negative feedback loop. I can see future generations less concerned about saving for retirement as their cost of living is squeezed. I just had a conversation with a colleague who is not saving, ins't in the scheme and is complaining that they can't afford food (whilst she just signed up for a 24 month plan to get an iphone 6 plus, go figure).

I can find no recent news stories as it's not on the radar of the press at the moment, however to cut a long story short, the scheme started to unravel a few years after the recession of 2008 and there were calls everywhere that public pensions where unaffordable. As a result the over generous schemes have been changed. Normal retirement age changed from 55 to 65, contributions were increased across the board (with highest earners paying greater proportions, only fair right?) and auto enrolment of new staff into the scheme was introduced to avert impending implosion of the Ponzi scheme. I doubt auto enrolment was a act of goodwill from a government concerned about future financial security for its citizens. Rather it is highly likely a means to ensure that as the baby boomers soon reaching retirement could be paid the pension. Probably a sign that the fund is nearing its limits.

There are rumours of forced enrolment on the horizon, and further extensions to working age are inevitable as the scheme is changed time after time as the economic climate demands it. I may never see my hard earned contributions again. Should I take the hit on income tax and lose the employer contribution to a pension fund and take the money home?

I'm personally paying in £1917 of net annual income, which will soon increase to £2511 as I hit the next threshold for in the tiered employee contributions based on earnings. If I leave the scheme, I'll lose my employer's 14.3% annual contribution (£3861), but remember this isn't really going to my pension pot, rather the Ponzi fund! I'll take a hit on income tax on my contributions before it arrives in my account but I can at least manage these funds myself. It's a gamble, but I have more faith in my own financial management skills and my scepticism about the long term success of government endorsed Ponzi schemes.

There's a lot of ifs and buts about the future of the fund, the NHS, population numbers and economic growth so I know there is no right or wrong answer. Stay or go? Opinions?

Ydobon
Posts: 412
Joined: Fri Aug 29, 2014 9:15 am
Location: Scotland

Re: Government endorsed Ponzi pensions schemes

Post by Ydobon »

The TL DR version of that rather dramatic post is:

vexed87 discovered that many public sector pension schemes in the UK are unfunded :lol:

I can't say that I'm overly worried (I have a small preserved pension worth c. £2k/year), but to debate some of your concerns. You need to try and remove your doom tinted glasses for just a few minutes

1) Falling population. The UK population grew by c. 1% last year (0.77% according to the ONS figures, that may or may not include illegal additions to the total)
2) Ageing population. In the 40 years 1974-2014, the median age in the UK went from 34-40. A fair change, but this has been a common change across wealthy developed nations. There's a good chance you'll be dead in 50 years - do you really think that things will be so bad by then?
3) As the scheme unravels. Again, what makes you think that this would happen over your lifetime? Also, have you forgotten that the treasury can print money to meet their liabilities? You can't make a direct comparison between a funded pension running out of assets vs. an unfunded pension run by the govt.
4) Future changes. Agreed, this is a cause for concern for all pension schemes (and ISAs and anything else that the government has a hand in).Unfortunately the government is omnicompetent (i.e. they can tear the rules up retrospectively), so not much that you can do. Is it worth taking your ball away and running home?

My thinking? 7% of earnings will not make a dramatic difference between your ability to meet ERE. Say it takes you 10 years to meet your goal and the world doesn't end - you will now have a valuable pension that will help to insure against poverty in later life. Say the world (financial) does 'end' - where will your money be safe and generate a return? It's probably no riskier than putting 7% of your salary into p2p lending ;)

Edit: my thoughts might be different if you had been able to hit a 70% savings rate for 3 years running, but you're nowhere near that level yet and you don't even have to pay the market rate for rent (not saying you're a moocher). For those of us closer to early retirement eventually than early retirement extreme, things don't work the same as the folk with awesome savings rates or $$$$$$ salaries (or both).
Last edited by Ydobon on Wed Sep 02, 2015 7:05 am, edited 1 time in total.

henrik
Posts: 775
Joined: Fri Apr 13, 2012 5:58 pm
Location: EE

Re: Government endorsed Ponzi pensions schemes

Post by henrik »

Consider it as a risk and reward scenario. The employer contribution at double what yours is an admittedly generous reward for you risking a percentage of your income. Now you just have to come up with a reliable (= believable for yourself?) way to evaluate the risk :)

bradley
Posts: 167
Joined: Sun Jan 11, 2015 8:45 am
Location: NYC Metro

Re: Government endorsed Ponzi pensions schemes

Post by bradley »

I currently pay into my employer's public pension fund in New York City (I'll have to look and see if this is optional). I do not plan on sticking around to get the full pension, but I'll probably end up working there up to year 10 (when I get vested), before I retire. That being said, as GandK pointed out, New York City has one of the largest underfunded pension systems :lol:

Image

djc2
Posts: 8
Joined: Sat Jan 21, 2012 11:37 pm

Re: Government endorsed Ponzi pensions schemes

Post by djc2 »

Each £1 contributed makes a 200% "return" immediately that gets collected after say 30 years? AFAIK uk public sector pensions are indexed to your wage so inflation protection is likely included. That return seems a lot better than the negative yields on 30 year UK indexed-linked gilts that you can get at them moment. What probability do you assign to never getting to collect the pension? If you don't take the contributions, where are you going to save the money? Any UK govt backed securities at all? What probability would you assign to the UK govt. defaulting on it's long term liabilities?

vexed87
Posts: 1492
Joined: Fri Feb 20, 2015 8:02 am
Location: Yorkshire, UK

Re: Government endorsed Ponzi pensions schemes

Post by vexed87 »

Thanks for the rational comments guys. Oh dear, I seem to have earned a doomer reputation lately...

Doom glasses off: ;)
I appreciate that the pension being backed by her majesty's government is a boon, and I understand that one option is that the government could simply print more money to pay the bills... yet we all know QE erodes the buying power of those £/$/Euros rather quickly. In knowing that, its obviously not a long term solution. Ultimately it would be the tax payer that foots the bill in the long run, enrolling in the pension is equivalent on betting that future generations are able and willing to do so long term. I see the allure of the safety net, yet I don't trust the government to save me from destitution. If SHTF, it was always going to happen regardless whether or not I had a pension or not. I think the money might be better off in my pocket now. Betting against the government and system is risky, but is it smart, I don't know. :?

Doom glasses back on: 8-)
If we get to the QE scenario before I start drawing my pension we are far more likely to see pension entitlements being eroded in the long run. If the unfunded pension really is a ponzi scheme by nature, it simply cannot go on indefinitely. We are already seeing the NHS being dismantled behind the scenes. If it's not the above QE scenario the next most likely scenario is dismantling of the states public sector, it's only so long before the pension goes down with the ship so to speak.

@djc2, yes the pension is inflation adjusted. I think I would keep the funds in Harry Browne's style permanent portfolio which should negate the effect of negative gilt yields, these funds would sit right along side the rest of my capital. Chances of me touching the pension before 65 = 0, chances of the UK changing the retirement age before I reach 65 (38 years from now), quite high!

Choices, choices! I don't need this money now, but with tiered contribution meaning I'll be paying more very soon it has prompted me to think about long term viability of the scheme.

cmonkey
Posts: 1791
Joined: Mon Apr 21, 2014 11:56 am

Re: Government endorsed Ponzi pensions schemes

Post by cmonkey »

I suppose the view I take on public funded retirement options is that it should be back of the mind focused. If you get to enjoy them someday, icing on the cake...but don't count on it or make it a large (or even small) part of your retirement. Only include things you directly control as part of your retirement strategy (savings rate, expenses, investment accounts/assets).

If you can opt out of that pension system, I would or minimize your exposure to it. We all know that they have to break someday. I don't have a choice with US Social Security/Medicare (the only public schemes that I contribute to).

I think it all comes down to whether you have faith in the folks managing our financial systems? Do you think they know what they're doing or have control of everything?

GandK
Posts: 2018
Joined: Mon Sep 19, 2011 1:00 pm

Re: Government endorsed Ponzi pensions schemes

Post by GandK »

vexed87 wrote:I did some digging and it appears that there's no personal pension account with my name on it that will grow with compound interest until I reach retirement age... rather the funds required to meet the demands of those who already reached retirement age are being paid by today's contributors. Surplus funds from contributions go to the UK treasury which may well be invested to help meet the needs of the future but there's no transparency about this... At it's core the scheme is a Ponzi scheme through and through.
Yeah. This is how America's Social Security works as well, along with most of our state and local pensions. Here, private companies are required to fund their pensions, effectively creating personal accounts, and to report the funding percentages to oversight boards annually. They can be punished severely if they fail to adequately fund the pensions, OR if their investing strategy causes the fund balance to fall below certain levels. This situation has made existing pensions more secure but it has also contributed to the death of those pensions and the rise instead of the self-funded, self-directed, private and portable investment account, known here as the 401k.

But our federal/state/local governments have no such requirements to fund themselves. When their budgets are tight (almost always), they can choose not to contribute to pensions, and may fiddle with their future assumptions instead, e.g., "let's assume 9% annual growth after 2020 instead of 8%; this makes our numbers fall back into line even without these contributions." Maybe that happens across the pond as well. :(
vexed87 wrote:There's a lot of ifs and buts about the future of the fund, the NHS, population numbers and economic growth so I know there is no right or wrong answer. Stay or go? Opinions?
Are you already entitled to it? If not, how long will it be until you are (vesting time)? I stayed at my final job until my annual private pension from that job reached $14k/year, which is very close to the amount I'm scheduled to receive from Social Security. The two of those combined would certainly cover my required expenses in retirement even if there's a 25% cut in SS, as the doom and gloom news stories imply there could be. Can you either ensure your retirement or make it more secure if you stay? What do your own numbers look like? And assume you're looking at a 25% reduction, too. Would that cause any part of your retirement plan to fail?

The opinion over here is that most public pensions will be cut, but will not be removed. It's also believed that cuts will disproportionately affect higher pensions and those with other income sources. How substantial will your pension be? If it will be huge, you'll likely have a bigger target on your back than if it barely covers your living expenses.

The bigger problem IMO is the whole QE/inflation thing. As national debts continue to increase, every nation that prints money will be tempted to do so to pay off those debts. This penalizes all savers, whose pension pots are worth less with every new dollar printed, and benefits those who have debts (the theoretical have-nots), who can then pay back their obligations with devalued currency. So, does any part of your retirement scheme address inflation? And if all your tax percentages double, would you still be able to make ends meet?

To solve this problem, run some numbers accounting for substantial pension cuts, substantial inflation and substantial tax increases, all of which are highly likely. Then look at those numbers and ask yourself if having this asset (a public pension, or a higher one) under those circumstances gives you what you're looking for by way of financial freedom, or if you're better off meeting these challenges of the future in another way.

Ydobon
Posts: 412
Joined: Fri Aug 29, 2014 9:15 am
Location: Scotland

Re: Government endorsed Ponzi pensions schemes

Post by Ydobon »

Vesting isn't common in the UK, vexed would be entitled to whatever share of his career average pension that he has already accumulated.

Agree with cmonkey that treating these sorts of pensions as the icing on the cake/potential upside (even a type of insurance policy imo), is a good idea.

DSKla
Posts: 248
Joined: Wed Dec 24, 2014 11:07 am

Re: Government endorsed Ponzi pensions schemes

Post by DSKla »

My employer's ponzi scheme is mandatory. No opting out, and as of recently, no choosing which funds your money sits in. They take it from your check, invest it how they want (read: wild, speculative investments to try to stave off the massive deficit they are running, no total stock indexes allowed), and you can't have it back until 31 days after you quit, at which point you can roll it over to a personal IRA, but you do not get to keep 1 cent of the employer's contribution, only your own (unless you retire after 35-40 years).

Oh, and it's 7% of your check and has been rising almost every year.

henrik
Posts: 775
Joined: Fri Apr 13, 2012 5:58 pm
Location: EE

Re: Government endorsed Ponzi pensions schemes

Post by henrik »

DSKla wrote:you do not get to keep 1 cent of the employer's contribution
That's not really a contribution then, is it?

saving-10-years
Posts: 534
Joined: Thu Oct 31, 2013 9:37 am
Location: Warwickshire, UK

Re: Government endorsed Ponzi pensions schemes

Post by saving-10-years »

@Vexed ... can you backtrack to this statement ...
I contribute 7.1% of my net earnings
One of the appeals for me of investing in the university sector pension (which I now draw as an early retiree) was that my contributions came out before tax. So perhaps you _might_ feel better if you did the tax calculations behind the 7.1%? Assuming you are paying tax at 20% that's 'only' 5.68% of your income that you are foregoing (they would take the tax anyhow) and your employers are matching with 14.1% 'before tax' (i.e. equivalent to adding 16.92 to your gross salary). This does not affect your sense of risk about whether you will eventually get a pension and I agree with others here that relying solely on a pension is not a great idea. However one of the things that is changing in the UK is the ability to cash in pensions and get access to the cash. So you may be able to access this money sooner if you wish and although the book value will be discounted you have a huge head start if you are putting in a relatively small sum (around one quarter of the total contribution).

Ydobon
Posts: 412
Joined: Fri Aug 29, 2014 9:15 am
Location: Scotland

Re: Government endorsed Ponzi pensions schemes

Post by Ydobon »

Vexed has misunderstood how the deductions are taken/has made a typo. It's 7.1% of *gross* earnings (information on NHS pension contribution bands published online).

So tax should be taken off as a minimum, possibly NI contributions as well (although his pension deductions may not be structured that way).

In any case, he's paying less than 6% of his gross salary for what may well be a valuable pension policy. If you'd like to swap Vexed, you're more than welcome to the proceeds of my 6%/6% match funded pension with Legal and General in exchange for your gummint one? ;)

JL13
Posts: 640
Joined: Sat May 17, 2014 7:47 am

Re: Government endorsed Ponzi pensions schemes

Post by JL13 »

Hope for the best and plan for the worst? Continue contributing, and pretend it isn't there. Make your financial plans as if it doesn't exist, and if it's still there when the time comes, you'll enjoy a windfall.

Alternately, from a portfolio perspective, you could consider it the 'aggressive' portion of your portfolio. As someone else said, you're getting 200% returns. Discounted by the probability that the scheme fails, it would take a pretty steep discount to get that down to 7% (the next best alternative, presumably). Even if your 'gloom and doom' scenario is 95% likely, you're still looking at 10% expected returns.

Plus you have the power of the crowd on your side. Millions of other pensioners protesting in the streets on your behalf. It's risky to do exactly what everyone else is doing (only contribute to pension, no personal savings) and also risky to do what no one else is doing (skipping the pension).

Ydobon
Posts: 412
Joined: Fri Aug 29, 2014 9:15 am
Location: Scotland

Re: Government endorsed Ponzi pensions schemes

Post by Ydobon »

It's risky to do exactly what everyone else is doing (only contribute to pension, no personal savings) and also risky to do what no one else is doing (skipping the pension).
Well put, that sums matters up nicely.

vexed87
Posts: 1492
Joined: Fri Feb 20, 2015 8:02 am
Location: Yorkshire, UK

Re: Government endorsed Ponzi pensions schemes

Post by vexed87 »

Ydobon is correct, I meant to say *gross* income not net (take home pay). Thanks for all your input guys.

@saving-10-years, that's a great point about getting more freedom to access pension funds in the future. However there are currently no plans for this access to be made available for public sector pensions, presumably because the scheme is unfunded and by very nature of the scheme there is no money there for the future and it is needed to fund those already retired (hence Ponzi scheme!)

I think those that are suggesting treating the pension scheme like a safety net ultimately win the day, particularly if the 7% makes no major difference to my ability to hit ERE . I could simply chase higher earnings to make up the difference if it were a game changer, but it isn't really ;)

As per @J_L13's summary above, I agree, that seems to be the crux of it. By taking retirement into our own hands, we limit the risk of being destitute in old age due to failing finances of the state (to some extent) but get to reap the rewards if successive governments keep things ticking over long enough.

It's risky to leave the scheme if ERE becomes impossible (due to poor future returns on investment?), however there's also a risk that I'll never see those contributions again. It's a tough call, and a bit of a gamble, but I guess I should at least stick with the scheme in case I blow my ERE savings on a Lamborghini :lol: ... or lose every penny due to market volatility.

saving-10-years
Posts: 534
Joined: Thu Oct 31, 2013 9:37 am
Location: Warwickshire, UK

Re: Government endorsed Ponzi pensions schemes

Post by saving-10-years »

@Vexed In the interests of making you feel a tad better about this pension 'investment' note that by 2018 any worker will have to put 4% gross into a pension scheme. https://www.gov.uk/workplace-pensions/w ... rnment-pay

Most of these schemes will be nowhere as good as the one you have.

Ydobon
Posts: 412
Joined: Fri Aug 29, 2014 9:15 am
Location: Scotland

Re: Government endorsed Ponzi pensions schemes

Post by Ydobon »

Despite the fairly high cost of living, the stolid nature of the UK makes it well suited to ERE. Significant social upheaval seems to have been replaced with a weary political/social consensus where very little of substance changes.

There's every chance that your pension will be watered down and tinkered with 100 times between now and your state appointed 'retirement' period, but I would be seriously surprised if it disappears altogether.

The fact that you will have other savings and investments is a good thing. Ydobon surprise can be cashed in for exactly £0.

Ydobon
Posts: 412
Joined: Fri Aug 29, 2014 9:15 am
Location: Scotland

Re: Government endorsed Ponzi pensions schemes

Post by Ydobon »

saving-10-years wrote:@Vexed In the interests of making you feel a tad better about this pension 'investment' note that by 2018 any worker will have to put 4% gross into a pension scheme. https://www.gov.uk/workplace-pensions/w ... rnment-pay

Most of these schemes will be nowhere as good as the one you have.
Very true. NEST pensions look to be quite a poor attempt by the gummint to get everyone investing for their future. The amounts involved have been set far too low to make any meaningful difference, puny compared to schemes such as KiwiSaver that they are seeking to channel.

A relative has been opted in to NEST. A generous career average scheme wound up and replaced with something that will generate something like £40/year based on current contributions.

On the plus side, automatic enrollment might push up the price of equities for the rest of us....

Lemon
Posts: 227
Joined: Sat May 30, 2015 2:29 am

Re: Government endorsed Ponzi pensions schemes

Post by Lemon »

Vexed I am also enrolled in the NHS scheme.

One thing you have missed. They changed the date of pensionable age to to 65 but to 'state pension age' which as they will inevitably increase that I think would be how they get round the problem in most likelihood.

Am I still in the scheme? Yes. As it is a back up and a nice to have if it goes to plan. The thought of it collapsing totally...well I don't see the stock market holding up well in that situation either meaning you have to fall back on 'buy a gun and some land' or accept there are risks as always.

There was a lot of controversy when they changed to the new rules from what was an even sweeter deal than now and they ended up letting all over 50s people keep the old scheme (I wonder why...) I imagine that similar things will have to happen at the next reform. Which is inevitable at some point. Although my guess would be 1 years out from now.

Post Reply