For years I have battled with educators and others who see no role for the for-profit sector in education. When I point out that without it they’d be teaching in a local park or leading their class by writing with a stick, they almost get the idea, but what clinches it is when I challenge a core shibboleth, their knowledge of (for most) their ‘gold-plated’ final salary pension which will come from the Teachers’ Pension Plan England & Wales (TPP). It’s fantastic they cry! Crap, it’s a Pozi Scheme, sayeth I. Nonsense they shout back, it has 1.5m ‘members’ and £176bn!
Actually, no, it’s a state-approved Ponzi Scheme and its inevitable failure, along with under-performance by 90 local authority pension schemes (now being rolled into just 6), is a strong argument to vote for the UK to stay within the EU.
Why? When they go bust, as Ponzi Schemes do, it will make the cost of the Greek bailout look like an accounting error. For those of you who doubt my claim (and it will be most I suspect) then I suggest you download and carefully read the 2012 Government Actuary’s Department (GAD) report into TPP, which reads:
- 2.1 (in part), ‘The Scheme is an unfunded statutory public service pension scheme with the benefits underwritten by the Government. The Scheme is financed by payments from employers and from those current employees who are members of the Scheme’.
- 3.5 (in part), ‘There is no actual fund of assets but an account is maintained of a notional fund made of contributions paid by employers and members, supplemented by a return on the notional fund at a predetermined rate’ (currently 3% p.a.).
Astounding, not only are there no real assets but the value of this chimera goes up by 3% p.a., when the official Bank of England (BoE) interest rate has been around 0.5% p.a. since well before the GAD report was published. Worse (if that’s possible) is that current entitlements are being paid out of current contributions, a ‘rob Peter to pay Paul’ strategy.
For balance let’s compare this with some of the pension woes in the private sector. The Pensions Institute forecasts that the current deficit in private pension schemes of UK Plc’s is about £1.1tr. Of these, 600 defined benefits schemes (including 25 of the biggest) are ‘very unlikely’ to pay future pensions in full. Another 400 are suffering “unmanageable stress” and have a combined deficit of £45bn! To make matters worse, the Institute also expects many sponsoring employers to become insolvent over the next decade (as we have just seen at BHS).
If £45bn is unmanageable what should be call £176bn of nothingness?
Luckily many of us will soon have an ability to vote on the UK’s membership of the EU. We last had this opportunity in 1975 when England voted to stay and Wales and Scotland wanted to leave. The Pro-EU campaign has been very hot on promoting scare stories about if we leave the EU but one they have ignored is why retaining EU membership may be a good insurance against our impending pensions tsunami.
Also voters should reflect that in 1976 the UK had to be bailed out by the International Monetary Fund who forced the then Labour government to implement a 20% reduction to the budget deficit. Something to reflect upon when debating the current austerity cuts.
So what are the options?
- Stay in the EU and hope their financial strength might act as a form of insurance to underwrite our pension problems? It’s not a great strategy but then nor is pretty much anything we have done for the past 25 years (rather unlikey now that BREXIT looms).
- One action that we can take irrespective of the vote is to tackle the scandal of inaction that has characterised British politics for decades. Doing something will add to our financial pain but it can be done. While our politicians fiddled, in Australia they built a coalition right across politics, unions and business to create a national retirement saving scheme. In it employers contribute directly to individual employees’ superannuation (pension) accounts. This started at 3% and is now 9.5% and the amount saved is in excess of A$3tn (an estimate from 2016). It’s even better if you are a government employee with many departments contributing 15%+ to which employees and employers can voluntarily contribute additional amounts.
- A second, education specific action, would be to create a local version of Ontario Teachers’ Pension Plan (OTPP). This began 26 years ago and is an independent body established by the provincial government whose ‘responsible investing’ model may not sound sexy but by hiring the best and brightest in the sector they have managed to generate a fund worth £89bn that has had an annual return (for 25 years) of 10.3%. Yes, Warren Buffet’s Berkshire Hathaway has done even better, but OTPP is the best public sector scheme I’ve ever seen, and if I were a UK teacher I’d want my money managed by them rather than keeping on tipping it into a giant Ponzi Scheme!