Superannuation

CIVIL servants have to retire on attaining age 60. This keeps the service mentally vigorous by the constant circulation of fresh blood. Many big private firms follow the same excellent practice. Such a desirable course is only practicable where proper arrangements have been made for granting the person retiring suitable allowances for maintaining himself. No one likes to send an old and faithful servant adrift without means of subsistence. Ih the absence of a fund for paying pensions old men are retained in posts for which they have ceased to be the best fitted, causing discouragement and discontent.

' Unless he is inhumane enough ruthlessly to scrap men whose efficiency has been impaired by age every employer really provides pensions. The most costly kind of pension is that given in the form of salary to a man past useful service. When systematically planned, the cost of pensions is small.- Employees will readily contribute to the cost of their own pensions where facilities exist: `Experience shows that more than 90 per cent. of employees will voluntarily join any satisfactory scheme. A pension fund is wonderful in improving the relations between employer and employed. The employee realizes that his employer takes an interest in his future and in return he takes more interest in his employer's business. He has a direct incentive to maintain the prosperity of that business which is to support him in his old age.

PRIVILEGES FOR PENSION FUNDS.

Special and valuable concessions are made by the Government in the way of income tax to pension funds. The contributions of employees carry a rebate of income tax of half the standard rate of tax. The contributions of employers are treated as a trade expense and escape income tax altogether.- This means at the present time that, of every £1 nominal contributed by .the employer, the Government pays 4s. 6d. and the employer only 15s. 6d. Income from the investments of pension funds is exempt from income tax. To ensure these privileges the fund must be registered, and an actuary, an auditor and a secretary employed. Actuaries and auditors require expensive fees, while the secretary must be a man of ability as his task is difficult. The satisfactory investment of money calls for expert knowledge. Depreciation is a great bugbear, upsetting calculations. Benefits cannot be stated exactly before- hand owing to the impossibility of foreseeing what rate of interest will be earned. This is a great objection, because beneficiaries like to know what they are going to receive for their contributions. A firm's own fund, too, will not be in a position to begin paying pensions until many years after its inception. For these reasons the services of a life assurance office are usually invoked.

A SIMPLE PLAN.

The simplest form of pension scheme is to effect an endowment life assurance on each employee, maturing at the age desired for the commencement of the pension. Some offices will guarantee a certain annuity on maturity of the endowment or pay the capital sum with interest in instalments spread over a number of years, still leaving the policyholder the alternative of purchasing an annuity With the proceeds of his policy. This plan is very flexible. The amount of the pension is within limits left to the employee. His portion of the premiums would be deducted from his salary by the employer, who would periodically pass it on with his own portion to the- assurance office. The employer chooses what proportion of the premium he will contribute. In this way his liability is easily ascertained, and is fixed and constant. He may contribute nothing at all, merely confining his role to the collection of premiums, in which case the employee gets the benefit of ordinary life-assurance rates though paying premiums at weekly or monthly intervals. Usually the employer contributes half of the premium with a limit of 5 per cent. of the employee's salary and a maximum of £20. Should the employee leave or be dismissed he takes his policy with him and continues it as an individual contract with the assurance office, paying the whole of the future premiums himself, or he can deal with it like an ordinary policy. If wished, the premiums paid by the employer can be reserved.

SOME DEFECTS.

Among objections to the plan is that unless it carries guaranteed annuities it leaVes the amount of the pension; to which employees attach great importance, open to doubt. It also fails to produce, except at high cost, any pension for men advanced in years, who may he of long service and therefore entitled to special consideration'. An undue proportion of the premium is absorbed by life assurance, especially at the older ages, whereas the main purpose is the provision of a pension. Take the example—the most favourable to the scheme —of a man aged 20. A contribution of a shilling a week by employer and employed would secure an assurance at age 65 of about E850. This sum would purchase a4 annuity, at current rates, of about £35 per annum'. With-profit instead of non-profit assurances could be effected which would probably give better results, but that introduces a further element of uncertainty.

Deferred -annuities instead of endowment assurance's would yield • still better pension results by virtually eliminating the life-assurance benefit, but this would not be dissimilar from the plan I will now describe. It is based on years of service as well as .rate of pay. The longer the service the larger the pension, while the total earnings in service, and not merely the salary at the date of retirement, also affect the amount of the pension. In no case can the employee lose. Whether he lives; -leaves or dies, he gets back at least what he par; in and normally considerably more. This appeals to employees. The employer has the right to amend the scheme should circumstances render such a course neces.- sary, but the rights of employees are amply safeguarded in such a contingency.

How A PENSION IS BUILT UP.

The unit is £1 of pension per annum at age 65. A contribution of a shilling weekly for one year by the employee secures a pension of £1 per annum ; a contribu- tion of 2s. a pension of £2 ; 8s. £3, and so on. A man aged 20 joining the scheme and contributing a shilling weekly until age 65 would. be-entitled- to a pension of £45 per annum. Life assurance during the period of service would be provided in addition, or, in the event of total disablement, the sum- assured becomes, distributable by monthly instalments. • A shilling weekly is a small sum to a man with a big salary. A larger contribution-Could obviously be paid by employees earning large salaries. Contributories are therefore divided into salary classes. Here is an actual example :

Life assurance.

5 £50 £100 £200 £300 £400 £500 £600 £600 £600

Assume a man started in class A and passed through the whole of the classes to J, spending five years in each, he would be entitled at age 65 to an annual pension equal to five times each item mentioned in column 4, that is, 5 X 10s. + 5 x + 5 x £2, and so on, until J+ 5 x £14, or a total pension of £287 10s. per annum. Changes from class to class take place on the anniversary of the intro- duction of the scheme next succeeding the change in salary. A man who spent 10 years in class C, 10 years in class D and 10 years in class E would be entitled to a pension of 10 x £2 plus 10 x £4 plus 10 x £6, or £120 per annum. That is how the pension is built up.

COST TO EMPLOYER.

Now what would be the cost to the employer ? A definite answer is difficult because it obviously varies with the age and salary constitution of the group. At the younger ages the employees' contributions practically pay for the. pension benefit. At the older ages the call upon the employer is considerable. The employer pa'ys for the whole of the life assurance benefit and if he does not like that included it can be omitted, but, assuming its inclusion, the cost would generally be from 3 per cent. to 5 per cent. of the annual wage roll, increasing with the increase in the proportion of the older salaried men and decreasing as they retired on pension.

The scale quoted above was prepared for a small and highly paid staff of 18, containing 2 representatives in classes B, C, D, G and J, and one each in A, E and F. Yet the cost, covering pension, life assurance and disable4 ment benefit, only came to £345 -per annum on a payroll of approximately £5,650, or 6.1 per cent. The employees' contributions aggregated about £200 per annum. With a younger or lower paid staff, the employer's total contrit bution would be about the same as that of the employees': The cost to the employer in another case, where the staff consisted of 66 persons, of whom 6 were older than 29 years, the pension benefit £1 per annum per year of service, and the contribution a uniform shilling weekly per employee, was £54 per annum, while the employees' contributions amounted to £172. This staff included women, who on leaving to get married received back all their contributions with 3 per cent. compound interest.

PAST SERVICE PENSIONS.

The foregoing -pension benefits apply only to years of service from the inception of the scheme 'to retirement. Special arrangements are required to provide supplemen- tary pensions for those nearing the end of their service, to be paid for wholly by the employer. These supplemen- tary pensions, it is suggested, should be one half the rate applicable for future service on entry into the scheme for each completed year of past service. Any other unit of pension can, of course, be provided according to the amount the employer is willing to pay. The cost can be liquidated either in a lump sum or over a period of years. The assurance office is prepared to extend the period to Class.

1 A

B

C

D

F H

Annual salary . not exceeding 2 £78 £156 £250 £350 £450 £550 £650 £750 over £750

Employees' weekly contribu- tion. 3

6d. Is. 2s. 48. 6s. 8s. 10s. 128.

. 14s.

Pension for each year's contribu- tion. 4 108.

£1 £2 £4 £8 £10 £12 £14

10 years or more so that the payments can obtain income tax remission. . . Taking the examples quoted above, the cost in the fast case would be £220 per annum "for 10 years with a smaller payment in the eleventh year, and in the second instance to £20 per annum .for 13 years. The period would be reduced. by_ employees dying -or leaving • service before additional pensions 'had been purchased for them. • • DEATH AND DISABLEMENT BENEFITS.

Pensions are payable in any event.for a minimum period of five years. ' Should an employee die bekore reaching pension age his legal representatives would receive the amotmt of the life'assurance plus the return of contri- butions. In the event Of permanent disablement before age 60 the employee would receive the life assurance money by way of either 40 or 60 monthly instalments, and with the final instalment the return of alt his contributiOns.

He would be further entitled at ;normal pension date to the amount of pension purchasable by the employer's contributions.

Instead of taking the normal pension, an employee may have a reduced pension payable throughout the lives of himself and wife and survivor. Or he may retire before the normal age and take .a smaller .pension, or continue beyond that age and have a larger pension. All contingen- cies are provided for and any variations can be arranged in schemes to suit special requirements or desires. It is simply a question of how much employer and employed are willing to pay.

Should an employee leave his employmerit through any cause he may : (1) take a pension at age 65 for the amount secured by his own contributions ; (2) continue his con- tributions and secure the larger pension purchased thereby; or (3) have his own contributions refunded to him. Should he adopt either of the first two courses he may, with his employer's consent, have the extra pension purchased by the employer's contributions.

F. M. TOOVEY.