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BT considers scrapping 'gold-plated' pensions in bid to plug £14bn deficit

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Holmes

I bet the board's pensions won't be affected.

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Much like my pension, which I'll likely never get.

Yet I've been paying in at a higher rate than any of those currently retired, the pension age will keep increasing and I'll probably die before it.

The country as a whole needs to take pension funding more seriously, for starters they should NEVER be allowed to run in deficit.

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Re: Much like my pension, which I'll likely never get.

The country as a whole needs to take pension funding more seriously

At some point, we're going to have to admit that defined benefit schemes are no longer viable. Going to be a huge fight with public sector unions, but it will have to be done.

Might help if we started with the MPs.

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Re: Much like my pension, which I'll likely never get.

"At some point, we're going to have to admit that defined benefit schemes are no longer viable. Going to be a huge fight with public sector unions, but it will have to be done."

They're only no longer viable because some dickhead accountants decide the money in the pension pot could be used elsewhere.

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Re: Much like my pension, which I'll likely never get.

I work in education and, despite the local pension scheme being well managed and profitable, have had my pension "renegotiated" downwards twice in the last ten years as "public sector pensions are in major problems".

That's cobblers.

It's a myth that the *average* public sector pension scheme is underfunded or badly run. I've paid in for thirty years so far at a regular (slightly increasing) percentage of my salary and can look forward to a £15k (yes, FIFTEEN) pension in 15+ years time but public sector employer contributions have varied widely, including taking pension holidays ... oh, hasn't any Prime Minister or Chancellor mentioned that?

It's only the top brass, civil servants, MPs, judges etc that get non-contributory or low-contribution civil service type pensions *and* can retire early on full pensions. Yet, during renegotiation, the civil service unions were screaming as some of their members would have to actually make a contribution to their pensions!

"Public sector" pensions are *not* all equal - do not tar us all with the same brush.

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Re: Much like my pension, which I'll likely never get.

A pension is a life insurance.

You're basically gambling that you'll live past 60/65/68/whatever it is now.

If you do, you might get some of your money back.

If you live a LONG time past it, you might get all of your money back, and maybe even make a profit.

But the reason you can do that is because the other half of people will never get that far, despite paying in religiously every month.

Add in administrative costs, regulatory costs, inflation, increase in necessary provision under law, shifting retirement dates, etc. and obviously profit for the pension company, and most people WILL NOT ever get out of a pension what they put into it. It's as simple as that.

The line has always been that those people in charge of a large pension fund were smart enough and regulated enough that they would be able to guarantee its availability, and also safely increase the fund enough to cover inflation such that it would become more viable than you just stuffing it all under a mattress or sticking it in a bank. That's no longer true, I feel.

Even banks barely offer saver's interest rates now, so for every minute your money is in a bank it's actually becoming less valuable.

There's a reason that we were all made to invest in pensions via a compulsory law on workplaces. Because the governments and pension schemes know that there likely would be nothing left for them (taxation, etc.) if people sit down and work this out, and invest or save the money themselves.

Pensions are a wager on whether you'll live significantly past retirement. Any mathematician could sit down and tell you what the age was. And up until that age - when you would break even - you're effectively losing money every month. That's likely to be around 80 for most people nowadays, I imagine. 15 years of pension paid for by about 40-something years of pension contributions, averaged out across everyone. If you die before 80, you've basically paid for someone else's retirement - even if your widow gets some lump sum or similar.

Now go look at average life-expectancy. it's 81 in the UK at the moment. Work out what the retirement age will be by the time you're there, and it's likely that 50% or more of people won't ever see a penny from their pensions, and most of it will go to others (what's the state pension nowadays? £490 a month?) Give it another 40-50 years and see what a pittance that becomes for you.

Of course, this is how they're designed and have always worked. But I can't say that I have any confidence in ever drawing any pension of any significance, and I'm still in my thirties and perfectly healthy..

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Anonymous Coward

Re: Much like my pension, which I'll likely never get.

Not viable for the plebs, perhaps.

But you can bet the executive team will have a final salary gold plated pension written into their contacts that "are sacrosanct" and "cannot be violated" and are "comparable to other industry leaders" and "necessary to attract the level of talent we require".

Fucking bullshit.

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Re: Much like my pension, which I'll likely never get.

Actually, the typical person will get more money out of it than they put in due to the wnder that is compound interest:

"Compound interest. Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it. Compound interest is the most powerful force in the universe." - Albert Einstein

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Re: Much like my pension, which I'll likely never get.

They're only no longer viable because some dickhead accountants decide the money in the pension pot could be used elsewhere.

Nope, they're no longer viable because average life expectancy has dramatically increased, and regardless of the deficits, the real problem is the cost. There's two ways we can make a defined benefit scheme viable - increase the contributions both to match current life expectancy and keep increasing them if life expectancy rises. That will have big and largely negative consequences for most people of working age. Or we increase the retirement age - far more than is planned - so that the pension pot pays out for a relatively short average retirement.

Society and politicians don't like to consider the issue, because the solutions are unpalatable. But it used to be the case that male life expectancy was 70 years in 1970. Retirement was 65, so the pension paid out for five years on average. Life expectancy is now approaching 80, and the rate of increase is showing no sign of easing off. Even with retirement at 68, that's twelve years the pension has to pay out for, a 140% increase in the period of payout.

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Re: Much like my pension, which I'll likely never get.

Not sure where you work in education. Lets say you are a teacher - most likely.

The Teachers pension is not funded. It operates as a Ponzi - working teachers pay in, retired teachers draw out. Theres no investment backing it up.

Due to the increased longevity (esp of Teachers - see mortality stats) and the previous habit of retiring off too many teachers before pension age, the scheme needs a huge increase of teachers paying in.

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Anonymous Coward

Re: Much like my pension, which I'll likely never get.

The Teachers pension is not funded.

That's true of most public sector pension schemes, including the state pension. But the obligation still exists. Because the government doesn't undertake any proper accounting, this vast pension obligation amounts to a deficit that the National Audit Office reckoned to be about 1.5 trillion quid in mid 2016. Obviously governments prefer to ignore this fact, and rely on taxpayers to pay the benefits. Incidentally, this is approaching four times the cumulative private sector pension fund deficits.

Also worth noting that not everybody on a public pension is earning a mint. Many people are on quite meagre pensions relating to low level administrative roles, or where they only did a few years in the public sector. There are a very few doing a whole lot better. I knew one who retired twenty five years ago at 53, on a pension at the time of 45k, with RPI locked in, so about £80k a year now. In current values that would mean the pension cash value on retirement at 53 would be about £3.5-4m. I'll let you lot decide whether (regardless of seniority) there are any public sector jobs that justify giving up work for the last thirty years of your life and squeezing £4m out of taxpayers.

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Re: Much like my pension, which I'll likely never get.

Re Ledswinger - BT pension fund would be fine if they hadn't decided to not ''take a holiday' from paying into it after privatisation. The members continued paying but the company didnt as it felt the fund was oversubscribed. Presumably this money can be got back from the shareholders?

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Re: Much like my pension, which I'll likely never get.

The country as a whole needs to take pension funding more seriously, for starters they should NEVER be allowed to run in deficit.

It's not that simple though. The deficit of a pension fund is the difference between their assets and their potential exposure, but the potential exposure doesn't only depend on the number of subscribers, but also on the current annuity rates. During times of low growth, like now, interest rates are very low and consequently annuities cost significantly more than they would at other points in time. Put another way, the only thing keeping BT's fund in deficit is that interest rates are historically low.

So, do we need to fund our pension funds to be larger than their maximal potential exposure (like now)? Will everyone enrolled in that scheme retire during this low interest rate period, or will their annuities be bought when much cheaper?

Requiring all pension funds to never be in deficit would require that pension funds would have to be much much larger, in order to account for these low interest periods, whilst still providing the same benefits.

This inevitably means that pensions will cost more, but who should pay this? If it is the employee who is still working that is paying in extra to reduce the benefit, this is massively unfair. They are paying because the previous pool of employees, despite intentions, failed to put aside enough money to fund their desired pension benefits.

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Re: Much like my pension, which I'll likely never get.

Some are funded, some arn't. Its random - no rhyme or reason.

Even the ones that are meant to be funded e.g. LA ones, they are not fully funded.

Im not against early retirement. Some people develop serious illnesses that mean they can no longer work. However .... letting people retire early, when that person draws down on that pension for 15+ years is a joke. Just moving the cost from the wage pool to the (unfunded) wage pool.

There's a long retired teacher who lives net to my Mum. He's in his 25th year of retirement (I think hes under 75).. He took early retire for 'health reasons' Allergic to the kids he was teaching is the only obvious candidate. Hes a bit 'right-on' and was asking me how, when the ;kids' are getting it so hard these days,. what he could do to help them. I suggested dying.

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@Halfmad - "never be allowed to run in deficit"

You don't understand how it works if you think that. They have a pot of money invested and assumptions about the average return on those investments, but you can't get the exact same return every year only make an average return over time even if you are conservative in your estimates. So in the down years, they will be in deficit. It is impossible to avoid running at a deficit some years.

If your expectations about average return are too optimistic, then you will have a deficit that increases over time. Perhaps that's what happened with BT - though probably they underestimated how long their retirees would live and are paying out more than they calculated back when those people were working and paying in.

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You are probably correct. More likely they will give themselves a bonus for finding a way to drain money from others.

My wife's "Final Salary" pension was frozen in 2008 to her then salary and locked to the lowest of 2%, inflation, or her pay increase. Then her pay was essentially frozen. So her "Final Salary" is about 27% lower than what it was in 2008 (and she's had to keep her contributions up for that!).

The only way around some of these things is to exit work, and start claiming the pension - so it gets protection.

The pension gap is quite simple, when the markets crashed far too much of the pension pots were invested. Then those investments were sold off for peanuts and the pots ran dry. Seeing that the pensions could no longer be afforded new members were not allowed to join - thus no new money went in!... So now it is a bit like everyone living off of savings. Prior to the 2000's it was more like everyone living off of interest with a new cheque being put into the bank every month. BT should make it all good for all of the staff - end of.

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"I bet the board's pensions won't be affected."

They did say it was the gold plated being scrapped, not the solid gold...

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Re: Much like my pension, which I'll likely never get.

"they should NEVER be allowed to run in deficit"

It's a bit late now to be saying that. Well unless you live in Norway.

This is also why many of Labour's proposed economic strategies are unsustainable.

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Re: Much like my pension, which I'll likely never get.

"They're only no longer viable because some dickhead accountants decide the money in the pension pot could be used elsewhere."

I didn't know Gordon Brown was an accountant!

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Re: Much like my pension, which I'll likely never get.

BT pension fund would be fine if they hadn't decided to not ''take a holiday' from paying into it after privatisation.

"They" in this case is not BT. The guilty party was the IR/HMRC. It is thay who decide that a pension fund is overfunded and that continuing to pay would be tax evasion. They fail to take due note of the fact that investments can go down as well as up, as can interest rates.

The adequacy of funding depends on interest rates. The amount that can be paid out from a given level of funding depends on the interest rates. We currently have very low interest rates. To fund the liabilities of the pension fund at these rates is huge. The holiday was insisted on at a time when interest rates were much higher.

Tax inspectors pensions are a public sector Ponzi sceheme so they are immune to this sort of situation. Were this not the case they might have been les capricious about declaring holidays.

Presumably this money can be got back from the shareholders?

The consequence of the enforced payment holiday is that the business (AKA the shareholders) has for some years been making large payments for a considerable period in a vain attempt to catch up and is connetted to do so for some time to come.

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Anonymous Coward

Re: Much like my pension, which I'll likely never get.

..and governments changed the rules, in effect robbing all of us.

Defined Benefit schemes have been screwed by tax changes.

State pensions by government rules.

Defined Contributions are only worthwhile if you are rich.

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Anonymous Coward

Re: Much like my pension, which I'll likely never get.

they are not that good. With a Life insurance policy you are guaranteed a return if you satisfy certain criteria.

A pension is a savings scheme with benefits which benefits those that can afford them.

Either way it is a bet, you can bet you won't get what you expected.

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Anonymous Coward

Re: Much like my pension, which I'll likely never get.

He wasn't on the side of workers either, or he wouldn't have robbed the pensions of their dividends.

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Unhappy

"They're only no longer viable because "

You might like to look at Gordon Brown's "contribution" to raising a bit of extra money for the government.

I don't think any government since has felt they liked most pension contributors quite enough to rescind this particular law.

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Re: Much like my pension, which I'll likely never get.

I can't believe we have had so many comments and Gordon Brown's pension raid has not been cited. Granted, increased life expectancy and employer contribution holidays have also had an effect.

(Edit: JS19 got in first - must type faster.)

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Re: Much like my pension, which I'll likely never get.

"A pension is a life insurance."

No, it was SOLD as life insurance.

When the goalposts keep being shifted, it's a pyramid scam.

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Re: Much like my pension, which I'll likely never get.

Except of course, the pension funds tend to be the major shshareholders anyway so trying to pull the funds back from the shareholders would be robbing Peter to pay Paul...

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RPF

Re: Much like my pension, which I'll likely never get.

Surely it's up to the trustees, not HMRC.

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Re: Much like my pension, which I'll likely never get.

@Halfmad

You can't legislate that pension schemes never run in deficit, because no government or pension trustee has control over such issues such as sudden changed asset evaluation or the assumed rate of return. A massive financial shock, such as that in 2008 has huge knock-on effects on pension valuations, and the policies of central banks to artificially suppress bond and interest rates through policies such as QE.

If companies are suddenly forced to find several billion pounds to instantly fill pension deficits as soon as a valuation is performed, then they might have to resort to things such as the forced selling of assets ar fire-sale prices. That will drive down their share price, kill dividend payments which will, in turn, have a knock-on effect on pension schemes holding their shares. That, in turn, will trigger bigger deficits. In short, this medicine will kill the patient.

I would suggest changing your forum handle to barkingmad.

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Anonymous Coward

The real issue is...

Despite the impact on all employees past and present and some knowledgeable input take a look at the level of interest, number of votes and replies to this article. The real issue is that no-one takes enough interest or educates others until it is too late. This is why Gordon Brown got away with his raid on pensions and no party has offered to reform this raid. He was after all the man with the vision that sold the nations gold at the bottom of the market. ( I have no political agenda nor am I a Tory or UKIP).

All the parties seem to think they can pay for everything tomorrow or leave it to the next government. In any other field no organisation can do this and get away with it as was seen at BA this week. Penny wise and pound foolish. Who will pay our pensions when robots and AI run the world and the government has run out of money?

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Re: Much like my pension, which I'll likely never get.

"Surely it's up to the trustees, not HMRC."

Not in the real world. HMRC lays down the rules.

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Facepalm

BT, a pension scheme with a telecommunications provider attached to it.

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M7S
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BT, a pension scheme with a telecommunications provider attached to it

Much like BA, BBC and lots of other things beginning with B from that era. It was all a huge Ponzi scheme

I recall an article a while back on unfunded local government pensions, roughly 25% of your council tax payments goes to paying current retirees (YMMV). Its only going to get worse.

All final benefit pension schemes should be stopped, obligations already incurred must be honoured (painful as it will be for a long time) and for those retiring in the next five years a modified system for the remainder of their time should be introduced to soften the blow. For everyone else there should be money purchase only from now on, run along the Dutch lines (far less in the way of onerous charges).

After all, these people who think saving 10% of their income for 30-40 years should generate perhaps half their income for a further 30-40 years have been seriously misled. To put it politely.

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Anonymous Coward

Re: BT, a pension scheme with a telecommunications provider attached to it

No they haven't. Open up Excel. Pop in a few formulas that compound Salary * 0.10 by a 5% annual growth rate for 40 years, then take out 50% a year (while still letting the invested pot grow by 5%) and see how long that lasts for.

If -all- of their 10% contributions had been invested, rather than raided during the boom times (the fund is in surplus! we can stop contributions for a while and redistribute it as dividends and bonuses! trebles all around!) there would have been no problem.

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Re: BT, a pension scheme with a telecommunications provider attached to it

>a 5% annual growth rate for 40 years

That's the problem, the assumed annual growth rate did not envisage governments changing the taxation rules (remember Gordon Brown's late 1990's raid that hasn't been reversed...), and long periods of very low annual growth rates, where the pension investment rules have meant near zero growth for a significant number of years.

Basically, at current rates of investment return, if between you and your employer, you aren't investing between 20~25% pa of your pensionable salary in a pension scheme, then you are under funding your pension.

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Re: BT, a pension scheme with a telecommunications provider attached to it.

That's been true for for many businesses.

The UK government recognised back in the 1980's that the Exchequer was destined to become a pension scheme with the obligations of government attached. However, whilst it did take some initial steps, it didn't solve the problem...

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Re: BT, a pension scheme with a telecommunications provider attached to it

I recall an article a while back on unfunded local government pensions, roughly 25% of your council tax payments goes to paying current retirees (YMMV). Its only going to get worse.

Seems unlikely. The largest scheme by far is LGPS, which is fully funded. If all its members stopped paying into it today, it could still meet all its obligations for the next 20 years.

That quote of 25% has the look of a headline shock value of the sort you'll see in the Daily Mail. People see that and automatically think 'Only 3/4 of council cash is being spent on me and the services I need!', not pausing to think that councils get central government grants, have investments of their own (well, mostly) and also raise money from business rates and car parking, etc (one or two even still get rents from council house tenants!). It's always more complicated than one figure suggests. After all, if retirees didn't have any reasonable pension income, sooner or later some of them would end up on the street and the council would be required to house them...

I agree with you that the situation is going to get worse, though. Just look at how much private pensions have been devalued over the last 25 years.

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Re: BT, a pension scheme with a telecommunications provider attached to it

Companies didn't raid pension pots; they stopped paying in because they had to pay tax on the surplus. The link below is to an old story, but explains the bones of it, including

"So-called pension holidays created a savings nightmare, the most spectacular example of which was at the Royal Mail, where successive governments paid nothing at all into its pension scheme for 13 years and ended up with colossal shortfall. "

http://www.telegraph.co.uk/finance/personalfinance/pensions/10343130/Who-will-end-this-pension-scandal.html

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Re: BT, a pension scheme with a telecommunications provider attached to it

"Companies didn't raid pension pots; they stopped paying in because they had to pay tax on the surplus."

Absolutely spot on. Not that facts ever get in the way of comments on BT.

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Anonymous Coward

Re: BT, a pension scheme with a telecommunications provider attached to it

My Defined Benefits Pension increases each year in line with CPI/RPI at one fixed point in the year. The annual increase is capped to a maximum of 3%. Once inflation goes above 3% then my pension's value will decline - while the pension fund's investment returns will presumably increase uncapped.

If the UK economy takes a big hit then the company could fold leaving a pension fund shortfall. The pension fund would then be taken into the government guarantee scheme - which has limits on the annual pension paid to an individual.

There is nothing to stop the government closing their guarantee scheme.

The worst case then is that the company pension stops - and inflation wipes out the value of backup savings.

It's happened before - it can happen again. Just hope I don't live long enough to see that day.

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Anonymous Coward

Re: BT, a pension scheme with a telecommunications provider attached to it

From Mr MoneySavingExpert, Martin Lewis: "Take the age you start your pension and halve it. Put this % of your pre-tax salary aside each year until you retire"

Nothing is ever certain in this life....just use the best advice you can....

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Who should pay?

So the plan is for the workers to pay for a £530 million accounting scandal in Italy? And a load of other bad decisions.

Now surely the people responsible should pay for management errors and failings? If BT was a co-op then fine, adjust wages and pensions, but it's the shareholders who are responsible for these decisions (via their appointed management) - surely the solution to a pension black hole is a levy on the shareholders?

On a more fundamental point, I accept there is a need for a pensions re-think. A system that is based on making a promise of benefits 40 or 50 years in the future is really asking for trouble, and it's amazing it's lasted so long. State pensions were introduced on the assumption that pensioners would die fairly quickly. Now we're all living much, much longer (thank you medical science and the NHS). A system designed around people contributing for 45 years and receiving benefits for 5, won't work when they contribute for 40 years and receive benefits for 30.

We'll need to work longer - possibly at different jobs (I don't anticipate many 75 year old fire-fighters). We'll need to save more (fewer 65" TVs and foreign holidays now, but food and heating when we're old)

BT not doing it right though!

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Re: Who should pay?

IIRC, the average life expectancy when state pensions were introduced was pretty much the same as the state pension age.

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Re: We'll need to work longer

Well, that will only work if its possible for 55 plus people to readily get jobs... The way the job market works at the moment all that will happen is that people will be transferred from the pensions list to the dole list.

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Re: Who should pay?

@Aladdin Sane

That is true, but the people who tell you that, don't tell you when Bismark introduced the aged pension many people started work at 13, and you had to get to 65 before it paid out. You worked for 52 years - The average life expectancy was also influenced by the statistic that perhaps 20% of the population had died before they reached 13. These days a number of people are not in the full time workforce until they are over 21, so that only gives 44 years of potential contributions. A realistic pension contribution to give people a comfortable retirement could be >20%. The discussion about putting up the retirement age seems to ignore the projection that, within a decade, 40% of the potential workforce will be un(der)employed.

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Re: We'll need to work longer

Indeed, lots of jobs not viable as you get older.

Not just th3 physically demanding jobs (e.g. the fire fighter example given earlier)

The extremely mentally demanding jobs too,

Beyond a certain age (varies per individual) your mental performance declines noticeably (lots of old people deny this but bar teh odd statistical outlier they are probably incapable of accurate assessment of their abilities or just liars), and so your ability to do a mentally demanding tasks is reduced (does not necessarily mean you cannot do a task but e.g. task takes far longer to do to same standard as when you were younger, and the time taken deemed unacceptable)

IT ofen describes people as suffering "burnout", in many cases this is actually those people just no longer have the mental "spare capacity" to keep on top of a rapidly changing environment (very few jobs in which pace of change is as high as software dev etc.)

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Re: We'll need to work longer

IT ofen describes people as suffering "burnout", in many cases this is actually those people just no longer have the mental "spare capacity" to keep on top of a rapidly changing environment

From what I've seen, "Burnout" in IT is due more to 'mental indigestion' and lack of meaningful rest. I've seen people who have taken a career break (often enforced), who come back after 2~3 years reinvigorated because they've gone and done something else ie. a non-IT job for a while eg. worked in a bakery, become a primary school classroom assistant, built their own house etc.

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Re: Who should pay?

"don't tell you when Bismark introduced the aged pension many people started work at 13, and you had to get to 65 before it paid out."

Actually I believe the German pension began at 64 and the average life expectancy of a worker was to around 65. Bismarck's idea was that the pension would cut in when you were too old to work and last long enough for you to put your affairs in order and die.

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Re: We'll need to work longer

>Well, that will only work if its possible for 55 plus people to readily get jobs...

It is, but career culture is changing - you'll have 30 years to get your house, bring up your kids and work in the skilled/professional sector - then 15 or 20 more doing something more mundane and increasingly part-time in B&Q or Starbucks.

Not quite as bad as being vapourised by lasers on primetime, but Nolan and Johnson were on to this inevitable problem back in the 60's.

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Re: Who should pay?

The very first pensions, introduced by Otto von Bismarck, actually started when you were 70.

Average life expectancy in Prussia at that time? 45. Although once you subtracted child mortality, average life expectancy soared to - 70.

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