All doctors have important decisions to make about their NHS Pension, personal pensions and investments before the end of this tax year in April 2014. This is the first in a series of three articles where we look at the background to the cuts to the NHS Pension. Further articles will appear in early October and November. We will be contacting all our clients at the end of this year to discuss what action you need to take to protect your pension assets and make sure you can retire when you want to.
To understand the British economic crisis you have to imagine the UK as one giant insurance company whose main purpose is to provide benefits, pensions and healthcare for its customers (the Welfare State). Side-lines include money-lending (banking), drilling oil, selling drugs and guns (pharmaceuticals and armaments) and fighting wars in distant lands. The Board of Directors (politicians) have always thought short-term, taking on unsustainable commitments, knowing they will be long gone when the bills fall due. Tony Blair, to politics what David Beckham has been to football, demonstrates that riches beckon once you leave office.
The problem is the insurance core activity is bust. Bills are arriving faster than they can be paid. Even bigger bills will fall due in the future as the rapidly-ageing population consumes more pensions and healthcare. One recent survey shows that whereas currently 51% of the population (aged between 0-14 and over 65) depend on the 49% of working age, by 2060 the dependency ratio will reach 73%. The 27% of working age would be crushed beneath this burden.
The OECD (Organisation for Economic Co-operation and Development) warned last year that the UK and Western governments must bring down their national debts from around current levels of around 100% of Gross Domestic Product (GDP – the total value of the UK’s goods and services) to 50% by mid-century. Without reform some long-term projections for public finances produce startling results – rather than rising to 100% of GDP by 2062, public debt could hit 200%. US rating agency Moody’s wrote prophetically in 2010: “While the current stock of debt is large, it is dwarfed by the accumulation of future liabilities if policies do not change”.
The International Monetary Fund (IMF) agrees, estimating that the fiscal implications of ageing populations by mid-century will be 10 times the cost of the current financial crisis. Recent figures from the Office for Budget Responsibility (OBR) concur that even if economic growth returns to previous trends, the ageing population means that current levels of healthcare and pensions are simply unsustainable. OBR forecasts for future health spending show it rising from 7% of GDP in 2017-18 to 8.8% by 2062-63 (and this excludes social care costs). None of these bodies are prone to exaggeration and all choose their words carefully. But whichever set of statistics you adopt, the only difference is the scale of bankruptcy and misery that lies in store for us and our children, unless big changes are made.
The problem is that since the end of the Second World War politicians have made lots of pension and healthcare promises to the British people to get themselves elected and re-elected. Now once again the British economy is starting to grow. But can’t the economy grow enough for the promises to be honoured? It looks unlikely.
Sir John Grieve, former deputy governor of the Bank of England, believes a sustainable annual growth rate for the UK may be 1.25%, or half the pre-crisis level. Mervin King, retiring governor, has questioned the official statistics of the last decade and suggested that they would have been closer to this meagre level but for the unprecedented debt binge of the ‘bubble years’ in the early 2000’s.
As a short-term measure, Quantitative Easing (or money-printing) and near-zero interest rates have so far prevented the collapse into 1930’s-style deep depression. But Western countries have now become what one commentator describes as “stimulus junkies”. Stephen King, HSBC’s chief global economist, has warned that these policies have temporarily allowed governments to survive with high debt levels:
“These policies started off as being the equivalent of powerful antibiotics to make the patient better quickly. They’ve morphed into addictive painkillers. We’re on them and we don’t want to face the cold turkey of coming off those painkillers.”
What’s the long-term solution? A consensus is developing about the type of changes Western societies must undergo in the next two decades if they are not going to re-enact the unfolding Greek social and economic tragedy. George Osborne talks a lot about austerity to impress our international creditors, but his current cuts will be mere scratches on the surface compared with the changes to come.
First of all there needs to be more equality. The rich are getting richer, but they tend not to spend all their money like poorer people. Consumer spending is good for economic growth – it’s not a party-political point, simply an economic one. But it does chime with the populist urge to ‘bash the rich’ in an age if austerity. Few would disagree with this in principle, unless you find yourself confused in the public consciousness with the ‘rich’ – perhaps a GP or consultant earning over £100,000 per annum.
Second the baby-boomers (born between 1946 and the mid-’60’s) need to have some of their wealth quietly confiscated and given to younger, indebted generations. There is a growing sense of injustice that pensioner households, often drawing generous pensions and living in big mortgage-free houses, have been least affected by austerity whilst working-age households with kids have been worst hit. Letting loose inflation to devalue savings and pensions is high on the government’s agenda as a solution.
Third there needs to be much more immigration. Immigrants tend to be young, paying more into the state than they take out. If net immigration were nearer zero, public debt would balloon – someone after all has to work to pay the bills. So expect politicians to talk tough on immigration…but see immigration levels quietly edge up again once unemployment falls to more acceptable levels. This is merely a continuation of government policy/hypocrisy over the last half century.
Fourth there needs to be a productivity miracle in the health service – difficult to achieve as it’s highly labour-intensive. The scale of reforms needed will make the current attempts at reform seem negligible. There will be pressure on doctors to give more for less. The market will tighten its grip on healthcare bringing more privatisation, growing inequality between various doctor’s incomes, with higher wages for some but greater insecurity for all. Lurid stories about patients dying needlessly through lack of basic care will provide the background music for this dismantling of large swathes of the NHS.
Fifth pensioners must pay increasing amounts of their savings for long-term care. If we live longer, we will need more care. One expert has commented ominously of the government’s latest reforms: “…unless you meet the needs criteria, your care costs may be unlimited.” Inherited wealth may therefore diminish for the next generation and it is probably not a wise idea to depend on this.
Sixth the Bank of England will target GDP and unemployment rather than inflation. Tolerating higher levels of inflation erodes debt – it’s default by stealth. This policy has been successful before. In 1945 the ratio of debt to GDP in developed countries was nearly 100% as governments emerged from World War Two close to bankruptcy. By 1970 it was 20%. This was achieved by screwing down interest rates and unleashing inflation. Inflation increases the tax-take by stealth without politicians having to announce unpopular tax increases. Cash savers beware!
Seventh more cuts to pensions are planned. In July this year, Danny Alexander, LibDem Chief Secretary to the Treasury, said that state pension ages will need to increase further. Steve Webb, LibDem Minister of State for Pensions, even suggested earlier in the year that wealthier pensioners should downsize to smaller houses to finance their old age. Lord Turner, architect of changes to state pensions in the last Labour government, now suggests an eventual state pension age of 70. The Pensions Policy Institute has warned that to keep the length of retirement at the same level as 1981 would mean a retirement age of 72 by 2032.
Not all of these changes are bad – in time they will lead to higher economic growth rates and greater national wealth accumulating. Some doctors will undoubtedly prosper in the long-term as a result of these changes. But in the medium-term they spell cuts to the Welfare State and increasing taxation especially for the well-off. Doctors are doubly vulnerable as public sector workers with relatively high incomes.
Next month we will look at the planned cuts to doctor’s pensions in more detail. The following month we will look at the action all doctors need to take.
If you are a client of Financial Therapeutics, we will be contacting you later this year to discuss the reduction in the Lifetime Allowance for Pensions and whether you should seek protection from this. You are also welcome to forward this email on to other doctors who may be interested.
If you are not a client of Financial Therapeutics and you need advice about the NHS pension and your pension planning (highly recommended!), please contact me on 07771 651231.
David Bowker
Financial Therapeutics is a trading style of Financial Therapeutics UK Ltd.
34 Park Cross Street, Leeds, LS1 2QH.
Financial Therapeutics is authorised and regulated by the Financial Conduct Agency.
