Cashflow forecasts and the GAD
Towards the end of 2017, financial-planners were (not unnaturally) obsessing with MiFID II and therefore may not have been sufficiently interested in other matters to have engaged with the publication of the 'Government Actuary's Quinquennial Review of the National Insurance Fund as at April 2015'. This was published in October 2017. So, if you did not obtain your copy, hot off the press, here is the key chart which ought to have demanded your full attention:
This shows the working capital balance of the National Insurance Fund (NIF) which, as you can see, is now projected to be exhausted in 2032. To be fair, the last Quinquennial Review (QR), which represented the position as at April 2010, still showed that the NIF would be out of cash a mere three years later, in 2035. As financial advisers will already know, the NIF was established in 1948, and it is operated on a pay-as-you-go (PAYG) basis to support State Pensions, Employment & Support Allowances, Bereavement Benefits, Jobseeker's Allowance and Maternity Allowance.
Because the NIF is managed on a PAYG basis, the hope is that that incoming National Insurance (NIC) receipts will largely wash the hands of the outgoing payment of benefits. The working fund balance tends to be a fraction of the total throughput, and is used to balance income and expenditure, in order to even out timing issues or exceptional liabilities - in that sense, it seems to operate a little like those long-gone, traditional with-profits policies. It benefits from a Treasury Grant of up to 17% of benefit expenditure, where this is needed to maintain a fund balance of one sixth of the demand - from around 2029 onwards, the NIF will rapidly start hitting that maximum required level of support, to keep pace with outgoings, and within a few years is projected to head north to around 23% of expenditure. To put it another way, by 2035, the shortfall between projected NIC receipts and benefit exposure will exceed 1% of GDP, and that number is unlikely to fit on your pocket-calculator display.
As any employer (or employee) will know, the National Insurance system is already a considerable burden on the working population. In the 2017/18 tax year, within band earnings, employees pay NICs at the rate of 12%, whilst employers are contributing a hefty 13.8% That's an additional combined tax rate of 25.8%, meaning an effective total tax on earnings for a basic-rate taxpayer of 45.8% (excluding allowances). The calculations of the Government Actuary's Department (GAD) suggest that the combined NIC rate would need to rise to 28%, edging the working population to an effective tax-rate of 50%. Clearly, higher-rate taxpayers are in for rather more expense than that.
There are reasons for this unpalatable situation. The pensioner population is increasing much more rapidly than the working population - and even deferring State Pension Age (SPA) doesn't do much more than supply a temporary amelioration to this demographic crisis. It is evident from the QR that historic net migration figures are in part fuelling the demise of our National Insurance system and the QR attempts some modeling as to how the varying of assumptions relating to fertility, mortality and migration might alter the outcome. The reality is that the looming crisis is a direct (and, I would say, entirely predictable) result of historic government policy decisions - for this is an exercise in cashflow forecasting, the kind which financial planners engage in, albeit without an actuarial qualification. Sure, the numbers are much bigger, and the GAD has to deal with data relating to populations, rather than individuals or families - but as you dig through the QR, the realisation swiftly sinks in that none of this is rocket-science. It is an intriguing thought that there are those individuals who think that humanity can control climate-change via the taxation system, when it is quite clear that we are politically incapable of managing our own national social security budgets.
Are there any practical lessons which one can derive from this sobering report? I apologise in advance in case some of these are slightly trivial and contaminated by at least a trace of political comment:
This QR is dynamite, but so (to be fair) was the last one. I cannot recall anyone drawing my attention to the previous one, or to any that preceded it. Instead, we have been, as a profession, utterly absorbed with the endless succession of regulatory initiatives, each of which plops corpulently out of the backside of the regulatory sausage-machine. Compared to this QR, MiFID II is like a clown on the other side of the road, distracting you whilst you walk in front of the oncoming HGV;
The NIF was never a bad idea, but it is wholly a victim of politics. It seems that our politicians make crazy decisions with nary a consideration of the consequences for normal people over the medium to long term. We need to be much better than this, if we are to help protect our clients - and decent cashflow forecasting provides you with the ideal tool for that kind of joined-up thinking;
I have recently read some (mostly leftwing) pundits asserting that the national finances can be managed in a way that is entirely free of the kinds of disciplines which financial-planners would apply with our clients. Many of us have argued, over many years, that you cannot manage the national budget without this kind of rigour - and this QR lends support to the view that when our leaders depart from those disciplines, depending instead upon magic money, there comes a day of reckoning;
There is the matter of timescales to consider. You look at the table above, and the dates of the impending National Insurance Catastrophe look far ahead, at least at first glance. You find yourself, just briefly, contemplating the idea that this might not actually affect you. It took only a moment to work out that, in 2032 I shall be 73. I plan to be a sprightly, and active 73-year-old, insofar as that kind of planning has any kind of meaning. Whatever actually happens to the NIF is going to affect me - so I need to take action now, and plan ahead. I'm not sure what those plans may look like, just yet, but you can bet your bottom dollar that whatever emanates from Government (irrespective of colour) is going to be tortuous, longwinded, and hopelessly compromised;
So, there is an underlying message for your clients: the Government's going to take your money now, and is unlikely to give you much of it back later on - and, when you're at your most vulnerable, they're going to take what's left - so you need to plan ahead effectively for a decent standard of living, whilst you have the chance.