Mike Fenwick: Are you sure you know what your pensions contributions are paying for?

CommonSpace columnist Mike Fenwick questions where the money is going in pensions schemes

REFURBISH the palace, but cut the costs of the cladding. Refinance the banks, but cut disability benefits. Impose a sanctions regime, watch food banks increase in number, but cut the tax for corporations, and replace Trident. Change the retirement age, but do so without adequate warning, just save the money and ignore the effect. Pay for new schools and hospitals on the never never through PFI, but say you have to close jobcentres to save on costs. 

Like me I am sure you can add to that list. All you need do is follow the money, as they say, and trace some of the sources of inequality.

In this piece, I want to follow the money in just one area, within the specific subject of pensions, one of the weak areas in the first indyref. I hope you will stay with me as we follow the money.

In this piece, I want to follow the money in just one area, within the specific subject of pensions, one of the weak areas in the first indyref. I hope you will stay with me as we follow the money.

It comes in five parts, including one where we see £216,000,000 simply disappear, and that is just for starters.

Part one: In a recent conversation I put forward this idea: instead of means testing the poor, why don't we means test the rich?

The response I received was both immediate and condemnatory. Mike, you are attacking "universality" with that thought, it will be a slippery slope that ultimately will harm the poorest among us. 

I should be condemned if indeed that was inherent in what I was thinking, but it wasn't, and that leads to part two.

Part two: You probably don't immediately recognise these names: Neil Woodford, Richard Woolnough and Tidjane Thiam. 

Neil Woodford runs an investment company called Woodford Investment Management, which recently saw it take in £58.4m in management fees from thousands of savers, and his personal success in so doing recently brought him earnings of perhaps £13m. 

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Woolnough and Thiam can be traced to perhaps a more recognisable company – Prudential. Their earnings in 2014 were £17.5m and £11.8m respectively. Let's just also mention Standard Life (CEO earnings including bonus – just over £3.6m), or Legal and General (CEO earnings - £5.5m in 2015).

Part 3: Now ask yourself this question – if such large amounts of money can be paid out as incomes – who was paying it in? 

You could argue it comes from all the activities of the companies concerned, and that a remunerations committee in the company decides to allocate whatever it deems appropriate to staff, but where does the initial money come from to allow for all of those activities? 

Let's follow the money - who crowdfunds the companies? Who supplies the money from the start and continues to do so, the money that allows any of those activities to take place? A magic money tree? 

Follow the money for one possible source - you!

Part 4: In October 2012, the government introduced something called "auto enrolment" - you may remember a flood of adverts all saying "I'm in!". It is being progressively rolled out, concluding over the next two years. It is not compulsory, does not apply to everyone, and you can opt out.

Quick maths will tell you that it works out that nearly 2,500 individuals who may think they are creating a pension pot for themselves, are in fact doing nothing more than creating one individual's income.

The average wage in the UK is £27,000. So let's take someone on that average wage of £27,000, and follow the money into the next two years, and beyond.

Under auto enrolment, an employee will contribute a minimum of four per cent of their earnings into a "pension pot", their employer will contribute three per cent, and tax relief of one per cent will be added. It gives us a total of eight per cent.

Eight per cent of £27,000 is £2,160. So now let's follow that money - where does it go? Is it going into a pension pot for each individual, or might it be going somewhere else?

There is a government default scheme called Nest, and it is important for comparison with the income figures above. Its chief executive earns just over £110,000.

Our employee may find they are contributing to the Nest arrangements, or just as possibly it might be a scheme run by perhaps the likes of the Prudential, or Standard Life or Legal and General – but who actually makes the decision of where the money goes? The fact is that it may not be decided by our employee, but by their employer.

Just for this article, let's say the scheme is not with Nest but with a company whose CEO has a package worth £5m. Question: how many individuals on an average salary of £27,000, with that contribution of £2,160, does it take to pay that salary of £5m?

Maybe, if it's your money, if it's meant to be your pension pot, you should follow where your money is going, and find out who it is that benefits. Do you know, have you ever asked?

Quick maths will tell you that it works out that nearly 2,500 individuals who may think they are creating a pension pot for themselves, are in fact doing nothing more than creating one individual's income.

But please don't stop there, keep following the money. Maybe if today those 2,500 individuals were, say, 25, and hope to retire at 65 (yes, as pensions are organised today I know it is some hope). Follow the position over those 40 years (ignoring any inflation), and do the maths: 2,500 x £2,160 x 40 = £216,000,000.

Yes, you read that right – you followed the money and the answer was £216,000,000. Where did it go? We know it wasn't just to those 2,500. And remember, please remember, we only referred to one CEO on £5m. How many CEOs are there?

Then, perhaps, begin to think of Waspi, of threatened cuts to the pensions triple lock, of the loss of the winter fuel allowance, of the recent debacle over social care. Then move on to the indyref threats over state pension entitlement, and maybe it's time we in Scotland thought very hard about this subject of pensions. 

But I have only looked at one small part so far - let's follow the money some more.

I hope, at an absolute minimum, what I may have done here is opened up just one small piece of the larger jigsaw of pensions.

Part 5: Our Scottish local authorities are empowered to borrow money. The Scottish Government has been granted limited borrowing powers – but follow the money – who does it borrow from, and does it at any stage involve pension funds?

Did any of the PFI schemes involve pension funds? Do you know? Have you ever asked?

Do our local authorities pay interest on their borrowings? Will the Scottish Government likewise have interest payments to make on any borrowings they make? And who do the local authorities and the Scottish Government send the bills to, to actually pay that interest, and how much of those bills takes from the poor and potentially adds to the incomes of those already rich? Do you know? Have you ever asked?

Maybe, if it's your money, if it's meant to be your pension pot, you should follow where your money is going, and find out who it is that benefits. Do you know, have you ever asked?

I hope, at an absolute minimum, what I may have done here is opened up just one small piece of the larger jigsaw of pensions, and better explained my suggestion that instead of means testing the poor, we should means test the rich.

We should follow the money.

Picture courtesy of malik ml williams

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