Pension fund charges that make retirees poor

"For too long, pension savers have been at the mercy of their pension provider." 

Pension fund charges make retirees poor.

UK

Excessive pension fund fees capped by minister

"Full frontal assault" on pension charges revealed by minister could add thousands to workers' retirement pots

Pension fees will be legally capped in a move that will prevent workers from being “fleeced” of hundreds of thousands of pounds, ministers will announce on Wednesday.

Steve Webb, the pensions minister, said the limit is part of a “full frontal assault” on charges that can consume as much as half a worker’s retirement savings.

Older workers with long-standing occupational pensions are most exposed to what Mr Webb described as “excessive” fees.

The Coalition will present the cap as the latest in a string of measures they say will help households struggling with the rising cost of living.

The cap could be set as low as 0.75 per cent of the funds being managed, a lower level than previously proposed.

An Office of Fair Trading (OFT) investigation into the £275 billion pensions industry concluded that millions of workers are left short-changed and bewildered by retirement schemes that carry a complex web of up to 18 different hidden fees.

“For too long, private pension savers have been at the mercy of their pension provider. Apparently 'low’ charges such as 1 per cent per year can mount up to a huge sum over the course of a working life.”

A worker paying £100 a month into a pension with a 1 per cent charge will see £160,000 wiped off their retirement pot over a lifetime of saving, Mr Webb said.

UK announces 0.75 percent cap on annual pension scheme charges

Webb said the cap would transfer 200 million pounds ($331 million) "from the profits of the pensions industry to the pockets of savers" over the next 10 years.

But insurer Legal & General said the cap could have been set even lower and that one of the reasons people were not retiring with large enough pension pots was high charges.

"We would have liked the government to have capped auto-enrolment default schemes at 50 basis points, but we welcome the direction of travel," said Adrian Boulding, L&G's pensions strategy director.

However, even 0.75% is 10 times higher than the management fee for Norway's pension funds. Even 50 basis points (0.5%) is still very high.

Norway

According to the Norwegian Ministry of Finance report on the management of the Government Pension Fund in 2013, the management fee was only 0.07% for the Government Pension Fund Global and 0.09% for the Government Pension Fund Norway. The GPFG has about 5000 billion NOK (about US$750 billion).

The annual return, after deducting management fees, of the Norway Government Pension Fund Global is
- 9,93% for the last 12 months (Q3 2014 report)
- 6.3% over the last 10 years
- 5.6% since Jan 1998.

Singapore

The Central Provident Fund, which has a balance of S$260 billion contributed from worker salaries, is entirely managed by the Singapore Government. The government guarantees an interest of 2.5 to 4%, with an average of slightly more than 3%.

The CPF money is reportedly invested by GIC. The reported annualised returns are
- 12.4%,
- 7.0% and
- 6.5% for the five-year, 10-year and 20-year time periods respectively.

In return for the guaranteed return of about 3%, the Singapore government takes away any investment returns over that. For example, for the last five-year period, the investment return is 12.4%. The CPF interest is about 3%. The government management fee works out to be about 9%. This is 100 times more than the management fee rate (0.09%) for the Norway government pension funds.

Citizen dividend: Everything is ready, except for the East wind.

Red Cliffs Battle. Waiting for the East Wind (From Wiki)

In the famous Battle of Red Cliffs during the time of the three kingdoms in China 2000 years ago, the defender had all the battle materials and soldiers prepared and waited for the East wind to blow, to bring the fire across the river to the attacker.

In Alaska, the Alaska Permanent Fund was set up 3 decades ago. Within a few years, the wind of citizen dividend started, and the investment money from the fund has been flowing in to Alaskans' pockets for 3 decades. This year, every Alaskan will get US$1884.

In Singapore, the permanent Singapore reserve was set up a few decades ago. Money has been pouring in to the permanent reserve with nothing coming out. It is big enough to easily distribute a citizen dividend of $10,000. When will the wind of citizen dividend blow?

In many countries, e.g., UK and Switzerland, that are looking at a citizen dividend or a universal basic income, their biggest problem is looking for the money. In quite a few countries, e.g., Singapore, Kuwait and Norway, the money is already there. Waiting. Waiting for citizens to really believe that they are owners of their country's sovereign wealth funds and other public properties.

Everything is ready, except for the East wind.

Return our Citizen Dividend. "People need to quit demanding jobs and start demanding justice."

Why you have the right to a $5K dividend from Uncle Sam | Making Sen$e | PBS NewsHour: (Aug 27, 2014)

This post on citizen dividend has quite a few gems.

"Dividends from common wealth, by contrast, unite society by putting all its members in the same boat. The income everyone receives is a right, not a handout. This changes the story, the psychology and the politics."

"A national dividend system would be simple, fair and immensely popular. It would rest on the principle of shared ownership, not redistribution. Once set up, it would be market-based rather than tax-funded. And it could gain support across the political spectrum: conservatives from Sarah Palin to Bill O’Reilly have lauded Alaska’s dividends."

"Our times demand a reliable flow of supplementary income as well. The best way to provide that is to pay dividends to everyone from wealth that’s logically ours."

From progress.org (Aug 28, 2014), on the above post about citizen dividend:

"What’s needed is for regular people to feel enough self-esteem to demand a fair share of what’s already ours just like the rich feel when winning an enormous share of what’s not theirs. We’re not broke. There is a surplus. It just needs to be shared. People need to quit demanding jobs and start demanding justice."

When will more people around the world be more like Alaskans, demanding their share of their own state's resources?

When will the Alaskans be more Alaskan, demanding a better share of their own state's resources? They only get a quarter of what the state gets from the oil companies, which is a small fraction of the oil wealth. I think Alaskans get less than 10% of their oil wealth in citizen dividends.

The wealth of nations (The Hewitt version) and the size of your citizen dividend

Public money wealth per capita

This picture is from a post on The Wealth of Nations, by Mike Hewitt, at http://dollardaze.org/ It was done in 2008, and the numbers are outdated. For example, Norway has 1 million Norwegian Krone per capita in 2014 just from the Norway sovereign wealth fund. That is about US$170,000, way more than the amount shown in the chart above.

An updated chart will be useful in calculating how much citizen dividend is possible just from the government's money wealth. This amount does not include other wealth assets such as oil, land, minerals and water.

Using Norway as an example, the sovereign wealth alone is US$170,000. If the sovereign wealth fund makes 5% return, that will mean a citizen dividend of US$8,500 for every child and adult.

The UAE, the top country in the chart, clearly can afford a huge citizen dividend just from its sovereign wealth fund.

Norway. A Great Citizen-Ownership Democracy Potential.

If Norway becomes a citizen-ownership democracy, the citizen income is at least US$4,800 per citizen, just from Norway's Government Pension Fund. This is 5 times bigger than the Alaska Permanent Fund dividend (US$900 in 2013).

A family of 4 will get US$20,000 a year. Imagine that!!

Norway is a great potential for a citizen-ownership democracy.

Reforming Alberta's Heritage Fund: Lessons from Alaska and Norway

Reforming Alberta's Heritage Fund: Lessons from Alaska and Norway, by Jason Clemens and Robert P. Murphy.

"Alberta’s policymakers can learn much from the examples of Alaska and Norway. One obvious change in the Alberta fund would be the establishment of an explicit percentage of non-renew able resource revenues to be placed into the Heritage Fund, where they would be off-limits to cur rent spending. Another change would be the creation of realistic institutional safe guards to make these rules effective. If Alberta’s policymakers moved even modestly in this direction, future Albertans would be far richer because of the changes."

This is a very informative comparison of three citizen-ownership funds.

1. The Alaska Permanent Fund
2. Alberta's Heritage Fund
3. Norway’s Government Pension Fund Global

The first is growing and giving good dividends to citizens/residents.

The second is a complete failure. It is not growing and is not giving dividends to citizens/residents.

The third is growing and growing, but not (yet) giving dividends to citizens/residents.

The main lesson is that the fund must be well protected by the Constitution, by carefully enacting laws that protect the growth of the fund and at the same time ensure dividends to citizens/residents. Only the Alaska Permanent Fund has this protection.

Myth: Citizen income means more tax.

It is often said that citizen-ownership income, or other forms of basic income, means more taxation. This is a myth. It is false.

In principle, citizen-ownership income is getting back what the government has been taking from citizens. Money that rightfully belongs to citizens is being taxed away. Getting your citizen-ownership income is a reduction in tax.

In practice, the total effect depends on each country.

In some countries, everyone will end up paying less tax. For example, Norway has this sovereign fund that is not used in any way. Getting the investment returns distributed as citizen income has no effect at all on the government expense and revenue. The total effect is everybody pays less tax by the amount of the citizen income. Similarly for Singapore, much of the investment return from its sovereign fund is put back into the fund. Distributing the return as citizen income has zero effect on its budget.

Update on Norway - how much can its citizens get?

In an earlier post, the estimate is $3000 annually per citizen.

Norway's Government Pension Fund reports an asset in 2011 of 3,441 billion NOK, which is about US$600 billion.

This fund comes from Norway's oil revenue:

"Large state revenues from the petroleum activities have resulted in substantial financial assets in the Government Pension Fund. The purpose of the Fund is to facilitate government savings to finance rising public pension expenditures, and support long-term considerations in the spending of government petroleum revenues."

Although it is called a "pension" fund, it is not meant for pension. It is a general state savings, i.e., it is a common wealth that belongs to all citizens.

"The Fund is an instrument for general savings on the part of the State and is not, unlike traditional pension funds, earmarked for specific liabilities."
With a population of 5 million, the asset per citizen is US$120,000.
The long term real return is reported as 4%.

So the real return per citizen is US$4,800 annually.

If Norway becomes a citizen-ownership democracy, the citizen income is at least US$4,800 per citizen. Other forms of common wealth have not been included in this estimate.

Norway - how much can its citizens get?

If Norway becomes a citizen-ownership democracy, how much can its citizens get?

Norway has a population of 5 million.
http://en.wikipedia.org/wiki/Norway#Demographics

Norway's sovereign wealth fund ( The Government Pension Fund - Global, Statens pensjonsfond - Utland, SPU) is estimated at $ 500 billion. "The Norwegian Ministry of Finance forecasts that the fund will reach NOK 4,334.3 billion ($717 bn) by the end of 2014 and NOK 6,065.7 billion ($1,003 bn) by the end of 2019[4]. In a parliamentary white paper in April 2011 the Norwegian Ministry of Finance forecast that the 2030 value of the fund would be NOK 7,400 billion ($1263 bn)."
http://en.wikipedia.org/wiki/The_Government_Pension_Fund_of_Norway

Assuming the current number of $500 billion, each citizen's share of the sovereign wealth is $100,000. Assuming 3% investment return, each citizen should get $3000 per year. As the fund increases with more oil revenues, the citizen-ownership income should increase as well.

Again, we are looking at very substantial amounts of citizen-ownership income. Are the Norwegians ready for a citizen-ownership democracy?