Tag: pensions | David Coveney

The great pension scam, how people were conned, and how young people fixed it

In my previous post, I discussed the importance of separating wealth from income, and to stop beating up a chap called Rob Barber who made the mistake of having a high income but not feeling rich. I get exactly where he’s coming from because I’ve been in the same position. In fact, it was more dangerous, because I made the mistake of thinking I was rich before having a sudden epiphany.

In the hazy distant past of my life, I worked at ICI from 1987 to 1997. It was a good ten years, in many ways, because although it started skint I acquired the skills and knowledge to make life a lot better for myself. I didn’t appreciate it as much as I should have done at the time, but in part because being skint at 18 is equivalent to trying to get out a pool of oil. Slippery and error prone.

In that time at ICI, and in the years when I left to become an IT consultant, I worked on payroll software and corporate financial software. When you code something into software, you have to know the subject intimately. Everything I code, I learned about in great detail then explained to a dumb computer. Programming is a really great way to understand things – a computer is like a very patient, dim student with fantastic memory. And when you teach, you learn. You have to.

So I remember when I was around twenty-five some of my older colleagues would always go on about how they hoped for early retirement. This seemed dreadful to me, because I remember my grandmother’s retirement in poverty. But what I didn’t know was how much things had changed.

These colleagues, you see, had a defined benefits pension scheme and ICI was a company on the wane. It needed to reduce headcount each year. One way that a department could reduce headcount was to retire people early, as young as fifty. Today I’m fifty and the idea of retiring and not being poor just isn’t there. I’d be quite hard up. So how could these guys get excited at the idea?

Defined benefit (DB) pensions vs. defined contribution (DC) pensions

All those guys retiring in the nineties onwards were born around 1940 onwards. They started work sometime around the early to mid sixties. And they won life’s lottery big style. They had two key things going for them. 1: the economy of the country was growing fast after the war, so there were lots of opportunities for work, and 2: because of a difficulty in hiring people, firms needed to find ways to attract and keep staff that was cheap at the time and hopefully kept wages down a bit.

At ICI, we were all on what’s known as a “defined benefit pension.” That means that the pension you get is defined according to a set of rules. If I remember rightly, the rule at ICI was quite simple – you got 70% of your final salary. This kind of final salary scheme exists today in only a few legacy situations or with older staff in some firms.

I remember thinking how it was crazy that a 50 year old with thirty years of experience could then look forward to another thirty years on 70% income. Given the reduced costs of retirement (no commute, no need to keep smart work clothes, etc) it was almost like having a full salary. Not only that, many would take a consulting or part time job and be on substantial incomes. They would earn more money in retirement than they would during their working careers!

I smelled a rat! The maths didn’t work out. As I then worked more and more on corporate finance I got to know a lot of accountants and some financial directors. I asked about this problem and they all said one thing: “Those pensions were promised to people by directors who are long gone, and mostly now dead. Totally unaffordable and the company now has to make up the gap… or go bankrupt.”

If you’ve ever wondered why so many of the giant companies of the UK that existed in the sixties are no longer with us, then that’s one key reason. Pensions. At one point, Rolls Royce was putting over a third of its gross profits into pensions. British Airways was once described as a massive pension company with a small airline attached.

This problem was known about in the seventies, but few people discussed it. It was brushed under the carpet. If you have some time, I highly recommend reading this 1975 letter from Warren Buffet on the subject of pension funds and likely shortfalls.

Moving on to your situation today – now you have a defined contribution scheme, if you start a pension scheme. It’s generally a good idea to have a pension scheme, especially because the UK government encourages it with generous tax breaks on contributions. Both you and your employer can contribute, within limits.

A defined contribution scheme (DC) is based on the money you put in, and that’s it. In many ways, that makes more sense. But how does saving a portion of your salary get you close the pensions your grandparents or parents got from large employers like ICI, universities, and the public sector? A hint… it doesn’t.

The great wealth shuffle

What’s happened, and it’s absolutely not the fault of the benefactors, rather than of cynical weasels that are long dead, is that wealth has been shuffled to the older generation in a very effective way. Not all older people, sadly, but those who had decent jobs in decent employers and owned their own homes did best, whilst those in more casual employment, rented their homes, and didn’t realise the importance of savings are left with nothing more than a state pension… so they did the worst and can still be in relative poverty. Unfortunately, if you’re not thinking and acting carefully today, your retirement, even if you work in a good employer, could be a lot more like that poor old person’s than you think and a lot less like your grandparents with their motorhome and three bedroom house.

So, I like charts, right? Remember this one from the last article?

That shows my wealth including the value of my property, savings and other bits and bobs like a car up to the age of thirty, with a different line for a middle class person with the same career.

Let’s see how that changes if we take into account the defined benefit pension scheme I had at ICI. I then didn’t contribute to a pension scheme until I was in my forties, mainly because I had other priorities and, well, I knew what I was up to. But for most people that would be terrible advice. Don’t do as I did!

Take a look below:

Now, do you see the change? In fact, for one glorious year in this story I was ahead of the middle class chap called Julian from the previous post! It wasn’t to last, because we’re assuming he worked in the same way I did and had the same sort of career, just a few years later.

Just so you know, I worked out the pension wealth on a simple basis – it was worth, based on my leaving salary, the equivalent of £100k if I tried to buy an annuity, because today, to give the benefits I can still expect from my pension, I would need about a £200k or so fund in order to buy an income equivalent to my defined benefit. I hope that makes some sort of sense. In essence, I count my pension scheme as being a £200k bit of wealth that I don’t think about.

Defined benefits pension schemes made people who started work before the mid-nineties surprisingly wealthy. It’s just not fungible.

What does fungible mean when it comes to assets? It means that the money isn’t readily available. A bicycle is fungible. You sell it for cash, and can sell it quickly. A house isn’t terribly fungible, but still better than a pension scheme because the pension scheme is sort of a bet. It can release some money to spouses, but doesn’t necessarily have to – that depends on that defined benefit.

So my ICI company scheme increased my effective disposable income in those years by more than 100%. I never even realised it at the time, because I only really learned properly about money in my early thirties.

So now you know how that sweet little old lady with the poor education, who worked at a factory, has managed to afford a decent pension with three annual holidays and a mobile home near Carnaerfon.

So this is good, right? We made older people richer!

It is fantastic that older people were made richer. The only slight fly in the ointment is who paid. And why. And why it could be better.

First of all, remember above I pointed out that companies had big shortfalls in their pension funds? Well, if they had to find £5,000 for each year that I worked extra, that had to come from somebody who currently works at the company, and from the dividends. But if all big firms cut dividends, all pension funds (which hold shares in big firms) would have had even bigger shortfalls! And share values would have gone down, making these firms vulnerable to aggressive takeovers.

Reality is, and this is all a layman’s explanation without too much detail, that younger people paid to make older people richer, but without having the same future benefit for themselves. The older generation, realising the problem, and now running companies, took away those benefits wherever possible.

Pension funds also being large shareholders and needing their income, also pressured companies they held shares in to return greater profits! So that meant that younger people’s incomes were pressured in another way!

At least young people have avocados now?

Well yes, they have access to avocados. But not houses – they’ve become more expensive, because with people living longer, and fighting any development that may affect them and their neighbourhood, young people can’t afford houses. A starter home in my home town of Widnes is around £200k. That’s a *lot* of avocados you’re going to need to cut back on to make a dent in the wealth differential. Relatively speaking, my grandmother bought a brand new starter house for £17,000 in 1984. Which is about £55,000 today. Good luck buying anything other than a tiny ruin in Widnes today for that sort of money.

Houses and pensions have led to the following interesting chart:

Now, this chart has its caveats, and I recommend reading the full article here, but let’s face it, with these sorts of gaps, Rob Barber is going to have to earn £85k (a lot less after tax) in order to catch up with a well established boomer. And let’s not discuss how much harder it is if you’re working class and end up supporting the boomers that didn’t do so well on the pensions lottery and had more casual jobs. Life is harder if you started poor.

Photo credit: Photo by Matthew T Rader on Unsplash

Our office cleaner doesn’t vote. I think I know why.

Ever noticed that there’s a group of people who don’t vote? Good people, by and large… but they don’t vote. Eventually, I think I worked it out.

Ever noticed that there’s a group of people who don’t vote? Good people, by and large… but they don’t vote.

I noticed this during post-referendum chats with our office cleaners. Almost all of them said they didn’t vote. One said she voted for who her dad told her to vote for. I was a bit taken aback.

“But surely if you don’t vote, your interests won’t get looked after?” I asked.

One looked at me and snorted, “Like that happens! Doesn’t matter who gets in, they’re all the same!”

Sounds like a stereotype.

At the time, I wasn’t politically active. Now I am. The time before June 2016 is simply stated as “before the referendum” around here and with most people I know. As referendums go, it dwarfed all others. The Referendum, it should be. Because at that moment, a lot of things changed.

And, unusually, a lot of people voted. They voted for a change, and they were told it would make the NHS better and leave the country with more money.

I was deeply upset. I kept arguing with the hardcore Leavers, and then, in private, a friend sent me this message:

I’ve read a lot of what you have shared about the referendum, and as I leave voter I now fear I have made the wrong decision. I didn’t envisage the racial attacks that have since occurred, and did not vote out on the basis of immigration. I come across some of these people in work, and you then realise these are just normal and friendly people on the whole. I don’t have a great knowledge of politics and this is dangerous, as we all have the option to vote. I almost never voted, as had no strong bias to either side. I guess I’m trying to say your passion for remain has made me sit back and look at things from other people’s views. I can see you want the best for people. I wish I realised sooner, although it wouldn’t have changed the result.

Thing is, a lot of people realising sooner would have changed the result.

But people like me… we voted. But we didn’t try, did we? I know I didn’t protest, or man a stand in the streets. Had it too easy, you see. I thought others were doing it all anyway. Different people.

Let’s go back to our cleaner. Why didn’t she vote? Because she didn’t feel like she made a difference. Like she was going to get the shitty, difficult end of the stick either way. Not only that, but politics felt unreachable to her.

The Referendum got more people engaged, largely because a simple promise was made. £350m more for the NHS.

And people, even in post-Brexit Halton are still worried about the NHS. Here’s a local survey I did about concerns – sample size not massive at 67, but it’s enough to be a reasonable representation for the Halton area.

NHS is important. People worry about it. Because ultimately, we all get some sort of health problem at some point in our lives. Or our kids do. And we hear the stories of bankruptcies faced by US citizens due to their harsh private healthcare system.

Then Brexit and UK stability came in highly. And education. These are people’s primary concerns. I was actually surprised how few were worried about the benefits system, but then unlike the popular image of the North, most people aren’t substantially dependent on benefits. At least not in Widnes and Runcorn. So it’s not their biggest priority.

But let’s get back to our cleaner. Why doesn’t she* vote?

Unfortunately she couldn’t articulate it.

So I decided to remember what it was like when I was young, skint and facing homelessness. At no point did it occur to me to contact a councillor or my MP to see what could be done. They were distant people. Different people. Like teachers. I remember the shock and surprise when I learned that teachers had to go to the toilet! Yes really – they too need a wee sometimes. Amazeballs.

When you’re relatively naive, you don’t see the world all that clearly. Business-people are different. Asian people are different. People from the next town along… are different. It doesn’t matter. If you don’t know people, they’re different.

And most people don’t really know their local political parties. In the thirty years during which I’ve been able to vote, I’ve only heard from politicians during elections. I have never ever spoken to one on the doorstep. Except for one short period when I lived in Garston and my MP was David Alton. Now, David Alton has some peculiar views that I disagree with, but he’s a Liberal Democrat, now a Lord, and his councillors would drop in these weird Focus newsletters to the house. And I’d read them! I learned about what was going on in the area. They even had contact details so I could get in touch! They reached out… to me! Weird. But I realised, all politicians should try to do this. Push out their messages.

Then I moved back to Widnes.

And never, ever heard from a politician. Except during elections.

Sure, sometimes they’d say something in the local papers. But nothing relevant to me. Nothing that would fix my problem of living in a shitty shared house. Nothing that would make it easier for me to get a decent home. My parents had been able to get a council house, but it was denied to me. And I couldn’t save enough for a deposit on a house. It didn’t help that I wasn’t great with money either (credit card advertising has a lot to answer for!). But just being a young man, trying to run a car to get to work, renting a room, feeding myself, clothing myself and so on was sometimes tough. And nothing I ever saw from a politician made much impact on me.

Then I got older. And richer. Slowly but surely I made more money. I became a freelancer and discovered a piece of legislation might affect me – IR35. It wasn’t a massive issue, but it affected me. When politics affects you, you get to know stuff.

But working people are looked after by Labour, right?

I used to think that. Many people I knew voted Labour. Always voted Labour. Unquestioningly. I didn’t get it until I learned more about how unions work. Then I realised that unions and Labour are tied at the hip. Which is fine. The Labour Movement was what Labour was about, and it was massively important to the working man. Did a brilliant job.

Sadly, some unions got a bit giddy on power and decided to have battles to get more power. Which is a shame. They’d succeeded at getting working wages and privileges to a good point. They couldn’t see that some of those privileges were unaffordable in the long term. They simply had to keep them. At all cost.

That led to an interesting thing happening. Large organisations such as public sector, NHS and corporates started to outsource more and more functions. Our cleaners are employed by a company employed by our landlords. In many ways that can work. But truth is, that a cleaner at ICI or any other old large corporate like BA would have been exposed to unions, but our cleaners today are not. And even they were, many work for small companies disinterested in trade unions and employing fewer than 21 people. Others may not wish to join trade unions because they don’t like that they fund a political party.

So they’re not represented, really, by Labour. Labour mostly cares about people in trade unions and people who vote for them. People in unions are, for the most part, not the poorest part of society. In fact, I don’t think I know anyone in a union who earns less than about £30k a year once they’ve got five years experience in. That’s one reason why Labour are surprisingly reticent about taxing people in the OK to Quite Well Off groupings.

You could ask why the Lib Dems aren’t harder on the top 2%, but having worked with a lot of that range of people I can tell you that tax on income starts becoming optional at that level. If tax is too high they either put it into various perfectly legal vehicles (pensions and ISAs work well up to a limit) or they start looking keenly at moving cash offshore if possible. And taxing people too much can feel very unfair to those people. Get a £30k bonus and see £20k go to the government. They may not be right to feel like that, but that’s not the point. They feel unfairly treated and so get motivated to look for alternatives. As the IFS study reveals, the Lib Dems would almost certainly raise a lot more money with their tax changes than Labour would.

Labour is the party of the middle classes.

It’s true. Student fees position? Well, the current regime of student fee repayments introduced by the coalition means your repayments are lower if you earn under £35k than under the earlier top up fees system introduced by Labour.

Pensions position? Most of the people affected are people with good pension incomes. They are not poor people. Poor pensioners are considered in a secondary way, because they do at least vote. But most of the policies continue to leave wealthy pensioners paying far less in tax than young people on equivalent incomes.

The unions? Most union members earn good money. According to a study by the Department for Business, Innovation and Skills, trade union members were paid an average of £14.45-per-hour, 5p more than in 2012 (£28k/yr, equivalent to over £30k/yr today) – source

So who does represent the best interests of our cleaners?

I say the Liberal Democrats. A party I finally got involved with in 2016, after The Referendum. You’ve seen the chart above, and in the early years of coalition, before the Conservatives neutered them, they did a great job of taking low earners out of the tax system entirely. The UK’s Gini Coefficient improved for once!

For more information, see https://www.equalitytrust.org.uk/how-has-inequality-changed

But here’s the problem for the Liberal Democrats. Nobody really knows this. But our doorstep action, whilst being great on a local level, needs to talk about the bigger issues. Potholes and poorly kept parks are important, but these things rarely keep the bulk of people awake worrying. But the NHS does worry people. Brexit does worry people. Not being able to feed the kids does worry people. These issues need addressing. Loudly and proudly.

If you’re campaigning in the 2018 local elections, it’s important to share a little bit about what the Lib Dems mean for everybody. Not just campaign in the middle class areas and get squeezed, but in the poorer working class areas where we can make a big difference. Our policies are better for them. They just don’t know it. Not to tell them this is a disservice to them and to the Liberal Democrats. The working poor need us to help them. And if we reach out to them, maybe they’ll reach out to us. And our cleaners and their friends – they’re essential people, and once they get going they are awesome!

Feature Photo by Verne Ho on Unsplash

Quiet Weekend in Arica

I’m staying put while I wait for the headstone to be finished and fitted, and consequently got to see an Arican weekend.

There’s not a lot for me to do in many ways, so yesterday I spent some time going through all of my father’s papers and notebooks. I found evidence of one email address he’d used from five years ago, but it no longer existed. So I returned from the computer and continued… until I found painstakingly detailed notes on how to use Yahoo mail. Including a password.

Bingo!

I felt that if he had e-mail perhaps he’d been in touch with people and I could work out more of his life. I ran down to the computers they have here in the hotel, logged in and… he’d only ever emailed one place – the Department of Work and Pensions. It was all about his pension, along with a couple of emails explaining that they had his address wrong (and which they never seemed to correct!) and that was it. Nothing else, nothing in the sent folder to anyone else. It was a dead end.

Ah well. So I went back to the notes and worked out a fair few things. I’ll note what I’ve learned in full at the bottom of this post, as the whole day taught me things.

The Letters

One of my disappointments was to find no detail of any personal life, anywhere. But I did bring with me all the letters he sent me from 1988 to 1991. These covered his crisis period. I decided to get them in order, photograph each one, for posterity, and then read them one after another.

Ouch. This caused another period of getting down, because I realised some things. I remembered how, in the letters, were statements which were essentially threats to commit suicide. The incredible emotional blackmail. His feeling of injustice over what he thought was some kind of inheritence. In part that my memory hadn’t formed a perfect impression of the order of events (although I wasn’t too far out) and that his crisis had clearly been real enough, but largely because towards the end of the letters he stopped being so demanding and so hard on me. In fact, the very last letter was more about caring for me than himself. He was almost upbeat and looking to the future.

That was the moment. He’d realised what he’d done and he was trying to repair it. Problem is, he was too late. I was still upset at him, and I’d now rejected him completely. At the time I couldn’t forgive him for what he’d done. The letter is in quite a sorry state as I’d crumpled it up ready for the bin, but interestingly it looks like I changed my mind, flattened it out and put it with the rest.

And so I found myself wondering. Should I have forgiven him sooner? I’d certainly have stood far more of a chance of finding him, and maybe he’d learned. But at the same time I do believe I was still scared of him. I never told him I’d moved, and I never checked again with the neighbour who’d been taking my post in.

I think, to me (and maybe to others) that this is a valuable lesson in the dangers of losing the trust of those closest to you. If you want to get it back a letter isn’t enough. You have to earn it. Really work at it. He could have forged the connections once more, the stupid bugger, but he couldn’t stop me walking away. My own instability at the time meant he had no chance of finding out where I lived…certainly not from South America.

It’s also taught me that communication is everything. Sometimes those around you know little about what you do and what you think. For example, he didn’t really understand the repossession of my grandmother’s house or the intense solitude I felt at the time.

Maybe if I’d simply told him? But I needed to protect myself as well.

I did originally plan to place the letters online in their entirety, but that will have to wait. I saw some things there that could cause real issues for some people and which need to be cleared first. Maybe in the future. But it’s a thin maybe.

More Friends

arica-trip-and-more 162 (Medium) — Rafael, Joaquin, slightly mental chewing gum seller.

At 9pm, after the terror pizza, I headed to the pool hall to meet more of my father’s friends and acquaintances. There was Oliver (or Oscar, my notes aren’t clear on this and I need to check tomorrow) who met him over ten years ago on the La Paz-Arica train. Or Pablo, who’d known him since 1991… from the time of that last letter.

Obviously I had questions. I asked if he’d mentioned family and they only had one mention… a daughter, in Quito, Ecuador, who died in a road traffic accident at the age of about 13. But I couldn’t find any more detail than that. No names, no known addresses, and there’d been nothing in the notes. Back home we suspect he may have been using this as a way of blocking conversation about family, but who can be sure? He gave the story consistently, everyone reported it as the same, but something occurs to me… it’s an old story. If he was reporting this 19 years or so ago, then the age wouldn’t be possible as I’m not aware of him having been to South America prior to around 1983.

So, after all this, and without the help of an interpreter, I only had vague echos of the man. Nothing so firm other than that he was, it seems, generous with friends, selective about his company, and a creature of habit. I sat where he sat, chatted with his friends, enjoyed a beer, and learned to spell ‘jote’, the red wine and Coke mix, correctly.

This all cheered me up. Apart from the odd mentalist (my father did hang around with a diverse group) I found that these friends he had were pleasant, intelligent people with things to share. We drank to my father, I tried to explain the story in as sensitive way as possible, and we laughed and joked.