Who pays for University education?

Proposals have recently come out regarding the funding of University education. One of the key proposals involves a substantial increase in tuition fees. Of course this money is needed because there are so many people going to University these days that the state can’t possibly afford to fund it.

The aim of getting everyone into further education is a noble one but does it really make sense? Are students going to university to study anything other that science, medicine, engineering etc. really gaining anything that adds value to the economy? How many top writers have an English literature degree? I have no idea but suspect it is few. Are arts degrees anything more than studies for interest and proof of ability to learn and sit exams?

The problem is that with so many going to University degrees don’t even provide that proof anymore.

If you look at the economics from the other side it is often quoted that the average graduate salary is x thousand pounds higher than the average non-graduate. This figure is partly distorted by some very large numbers so the median would look a lot closer I suspect. It also seems a fairly obvious analysis to me that as more people go to university this gap will get smaller as there is only so much money to go around.

Getting that out of the way what I really wanted to point out was an odd inconsistency in what I’ve seen of the proposed policy.

1. Fees will only be paid once earning more than a certain salary, in this way the only people paying for the education will be those that benefit from it.

2. Poorer students will get money to help.

So who is paying. The first point implies the student is benefiting and so pays whereas the second suggests that parents would be paying and so poorer students need help.

This seems quite inequitable and you could surely then have the case that one student gets no help and earns e.g. 25,000 a year so pays back his loan over pretty much his entire life having not benefited that much from university whereas another could get help with paying the fees and then earn 50,000 a year and pay the loan off quite quickly easily.

On the Hutton

The initial findings of the Hutton review of public sector pensions are due out this week. It’s keenly awaited by many in the pensions industry and perhaps something rightly viewed very apprehensively by anyone in the public sector. I’ve been thinking today about what I’d like to see from it.

I’d like it to show real understanding of pensions, how public sector pensions are paid for, who pays for them and how governments should make decisions on allocating resources fairly through generations. It should be fair without political or private/public sector bias. It needs to recognise the variety of workers, salary levels and demographics so one size probably doesn’t fit all.

In doing so it needs to avoid meaningless statistics based on index linked gilt yields that will only give large numbers for journalists to seize upon and sensationalise. It also needs to avoid language that will incite one side or the other. For example, references such as “ponzi scheme” as in the recent Public Sector Pensions Commission report are not helpful at all. Neither would it be helpful to suggest public sector pensions are small on average so ok.

Above all I’d like it to have some practical solutions that have real merit and will be understood by members. Otherwise I’m sure we will only end up revisiting things again in no time at all.

I really hope it is indeed “on the button” and doesn’t cause unions to instead “press the button” on strike action.

Who’s also (mis)taking my pension?

So after the horrendous programme on pensions last year Who took your pension? shown on Dispatches on channel 4, the BBC decided they liked the title and sensationalist reporting so much that they’d do their own present tense version Who’s Taking Money from My Pension? (albeit it now seems to have various other names depending on where you look). Well I thought I’d follow the trend and use a similar blog title to my colleague Henry Tapper.

I attended a wonderful lunch yesterday where we discussed the issue and, as much as Henry tried to keep us focused, many others. His post linked to above shows much of what was concluded.

What angers me, and even the people in the programme, is that yet again it was a missed opportunity to educate the public on how pensions work, what they should look out for and what they should do. Instead we had more sensationalism with experts being cut off in mid sentence. The only thing this will achieve is more suspicion of pensions and less pension saving.

One of the things we discussed yesterday is the white knight status of ISAs. How many people will, following last night’s disgrace, stop paying into their pension and use an ISA instead. Yet ISAs are essentially just a different tax wrapper for the same product having access to much the same investment choices and charges. It was even raised yesterday that the charges on ISAs might be higher.

There is a real lack of financial understanding in the area of investment. ISAs are seen as good because they don’t go down in value like pensions. But this is just because they are Cash ISAs with generally poor interest rates attached. A stocks & shares ISA would perform exactly like a pension and aims for a higher return at the expense of additional risk. If you have a pension fund and don’t want to see it fall then talk to an IFA and get your fund moved into Cash. But do so in the knowledge that if you still have a while to go to retirement then its probably not the most suitable investment to have as the returns expected will be lower than from other investments.

On to some numbers.

The headline grabbing 80% of money paid taken in charges is a terrible number. If there is to be any analysis done then you need to compare apples with apples rather than pears or oranges.

Oranges with Pears

To get to the 80% number I have to use an annual management charge (amc) of around 1.75% pa. This is unquestionably a high charge and would not be considered normal but probably reflects a special type of policy. If that policy is right for you then that’s ok. For the majority though you should be looking for policies charging less than 1% pa amc so I will also do some figures with an amc of 0.75% pa.

Paying £250 a month for 40 years is £120,000.
The charges over the period equate to £93,500 (1.75% amc) and £48,238 (0.75% amc)

So it’s reduced the amount you’ve paid in by 80% (1.75% amc) or 40% (0.75% amc) – this was the calculation done in Panorama.

Apples with Pears

But the above is a ridiculous comparison as the charges are taken out at a totally different time so have a completely different value to the £120,000. We should really compare with the fund value at retirement.

The fund values at retirement equate to £385,000 (1.75% amc) or £505,000 (0.75% amc)

So the charges would represent a reduction of 20% (1.75% amc) or 9% (0.75% amc) – doesn’t seem so bad now.

Apples with Apples

We’ve now gone too far the other way as the charges are worth more than this since they’ve been taken out of the fund earlier. If we are truly comparing apples with apples then we should compare the fund value at retirement with and without charges.

Without charges the fund would grow to £621,000!

So the effect of charges is a reduction in value of 40% (1.75% amc) or 19% (0.75% amc)

So there really was no need to be sensationalist as the true figures are still significant.

Who is to blame for high charges?

There are 2 key groups to blame in my opinion:

Some poor IFAs who are still selling inappropriate policies (the blame to some extent also falling with product providers for incentivising certain products by high commissions).

But, most importantly, the public for not taking enough interest in their pensions, trying to understand them and reviewing them regularly.

The economics of free wifi

I’m writing this post on the no longer free wifi service offered by East Coast trains.

I travel from Leeds to London a fair amount and have always been very pleased with the service. It’s been on time, clean and offered free internet access.

The internet was always patchy but it was free so who could complain.

However, on connecting today I was told that it was now only free for 15 minutes and I would have to pay £4.95 for an hour or £9.95 for 24 hours (+ the free 15 minutes!) The reason for this apparently was that they’d had comments about the patchy service and so made improvements to the service that meant they needed to charge.

This is perhaps all very well if it were true but having paid my £9.95 the service was notably no different to how it used to be. In my 2 hour journey I was disconnected no fewer than 20 times! Each time required 30-45 seconds of hitting refresh before it came back to life. So, not exactly value for money.

If you consider the economics of the move it’s also difficult to see how the pricing works. Even the 1 hour cost is higher than the daily rate on a pay as you go 3G card. I for one will just be getting a sim for my laptop rather than using the on train service again.

So the end result is:

a) one less incentive to like/choose East Coast over another operator
b) very little new extra income for them

This doesn’t seem like great economics to me.

Communication is key

I’m currently in process of moving house. Something regularly listed as one of the most stressful things to do and it really doesn’t surprise me.

The last time we moved we were forced to exchange on our sale before our purchase to stop the chain collapsing. We then had a week wondering whether we’d be homeless at the end of it!

Much of the problem was caused by our estate agents. Their communication was appalling. They rarely returned our calls and when we did get to speak to someone we rarely got anything useful out of them. In the end our buyers knocked on our door to ask if they were still buying the house as they’d heard so little, and this was the only reason things did still go through.

This time would be different I thought.

Our estate agent this time has been quite good to be fair. I was always a bit dubious about who they were working for when it came to negotiating and often felt they were pushing us to accept offers we weren’t happy with. But communication wise they’ve been good and I’ve always felt quite well informed about how things are going.

Unfortunately the same hasn’t materialised on our purchase where the big problem has been the tenants currently occupying the house and when they might vacate. So far we’ve been told:

Not a problem, month to month and only 1 month’s notice no problem for 31 October – this was pre offer
No problem at all, will serve notice tomorrow and only 1 month’s notice no problem for 31 October – this was when we made the offer 10th Sep
Actually 2 months’ notice, have served notice but takes effect next week so will be mid Nov – week after offer
2 months’ notice, have served today and takes effect shortly will be start Dec – now 1 Oct

This is awful communication and has really annoyed us. We are so annoyed in fact that we feel suspicious of the whole deal now and feel like pulling out.

With good communication you can get away with a lot (look at Tony Blair ;-)). Bad communication on the other hand can make even good endeavours go bad. Communication really is key.

Nowhere is this more so than in my industry of pensions.

A great recent example is the BBC pensions debacle. Lack of communication between management and the trustees looking after the scheme has led to outcry by all parties and planned strike action. I know of other large organisations that have taken almost identical steps with their pension schemes but there was not a ripple of trouble.

Communicate, ensure understanding and manage expectations and you will do a better job no matter what industry you are in.

Should we still read classic books at school?

I watched an excellent programme yesterday about Toby Young’s quest to open one of the first “free schools” under the coalition government’s policy. I wish him well with his plans.

The thing that sparked the most discussion in our house was the comment made about the sort of books that he thought the children at a school he visited should be reading.

I was very much on the side of the student in the programme. The books to be read should be those that were of interest to the students and that sparked an interest in reading. My wife on the other hand was completely in Toby’s camp that the books to be read should be more along the lines of classic works.

When I was young I used to read a lot and I used to really enjoy reading. I read entirely fiction and a lot of Enid Blyton. I bought lots of books and I was a regular visitor of the town library. My love of reading meant that I picked up quite a variety of books and read tales of Odysseus, for example, when age 10. I can vividly remember staying up reading all night at the weekend as I loved what I was reading so much.

Things changed when I got to secondary school. Here we began to have set books we had to read as part of our English lessons. Some of these were ok but many were so called classics and very hard going with little interest to me. We’d then dissect them into something they often weren’t meant to be (even in the author’s opinion) and all the pleasure of reading was killed. I rarely read a book between the ages of 14 and 20. Since age 20 I have been reading, albeit irregularly, but the subject matter has been 80% non-fiction.

My wife on the other hand goes to a regular book group and reads 2 books a week!

This is perhaps where the big difference is between me and her. I have always been a very slow reader whereas she reads extremely fast. Our brains work in completely different ways in how we read as well. For example, when doing a cross word together she always does the “easy ones” first stating that they stand out. Meanwhile I wonder how she could have found the easy one that is 13 down when I’ve only worked my way half way down the across clues. She can take in all the clues at once whereas I read them one by one.

For me therefore, reading classics that didn’t interest me took up so much time that it meant I didn’t have chance to read anything else and I lost the love of reading. Whereas for my wife reading the classic might not have been enjoyable but she was done in a few days and on to something better.

We agreed to disagree on the debate in question.

The other question that springs to mind though is what makes a classic? and who is it that gets to decide that a book is a classic? Is there really any merit in force feeding children Dickens and Shakespeare and pointing out why it’s considered so good? Should we not be spending time making sure that children have a real grasp of the English language, have the skills to write letters, reports and other important documents rather than worrying about literature? When it comes to literature is the best teaching not to get children interested in reading so they can take a view on what’s good themselves? Literature is after all an art and is utterly subjective – how can there be a right answer?

I thought jargon in pensions was bad…

…but I hadn’t seen anything until I got into Education.

When I became a governor of one of my local schools I was sent a big induction pack of information. Much of this was information to be expected such as information on the school, the latest Ofsted report and terms of reference for the board. The one document that stood out though was the Glossary. It was huge!

I joked that I thought I knew what a “Young Person” was until I went through it. The amount of definitions and terminology is incredible. It makes me think that the world of education has probably become bloated with rules and regulations and a more simplistic approach would mean more time could be spent on things that really matter.