Who made that choice for you?

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Put the question “why are pensions guaranteed?” into google and you will not get an answer. I reckon it’s because no-one asks the question.

Why is nobody asking the question?

Is someone guaranteeing the value of your house?

Is there a guarantgee that your share portfolio won’t go down in value?

Are you guaranteed a job for life?

Of course not?  If you were guaranteed all that lot , so would everybody else and the cost would mean a communist state whee there was no incentive to get out of bed.

So what makes your retirement income any different?

Somebody has chosen that you needed those guarantees why?

Suppose we in the UK did what the Australians and Americans do and pay all the money you’ve buit up in your pension as a big lump into your bank account – would that be better?

What would you do then? Would you go out and blow the money, or sit on it  or invest it or would you buy yourself a guaranteed pension?  I suspect that most of us would not chose to buy ourselves a pension.

So when we get to retirment and go and buy a pension, we are doing something strange to us and we’re doing it because that’s what you have to do.

Almost all the problems we have in this country with pensions are created by the guarantees that are offered in retirement. Sure, from time to time, the marekts in which pensions are invested don’t give the expected returns but this is small beer compared with the problems created by pension promises.

The question is really relevent today as we are in a period of crisis created by the economic crisis. The low interest rates which we are enjoying as mortgage payers are crucifying the guaranteed rate at which insurance companies and company pension shcemes put aside money to cover the pension promises they are making. The cost of reserving is driving some companies offering staff guaranteed pensions out of business. For those of us who have to buy the guaranteed pensions ourselves (eg all of us in DC pensions), it’s us who will have to pay for these guarantees and we have to do so by taking less retirment income than we were expecting.

Now it may be that you are prepared to pay this price but it may be, when you are told that these guarantees are costing us a 30% cut in our retirement income, you may think again.

The 30% figure refers to the anouunt of pension that you can get by buying an annuity in the UK compared with how much pension you’d get from an equivalent Dutch pension which you can’t buy into (unless you live and work in Dutchland -sorry Netherlands/Holland whatever).

Now I’m led to believe that certain high-ranking pension people including the minister for pensions Steve Webb, have been looking into these Dutch pensions and have decided they are a little flakey for us in the UK. Why? Why- because the Dutch pension doesn#t have guarantees.

Let me provide you with a difficult choice.  I wll pay you £70 for certain for next five years – £350 in total. Or I will pay you £100 this year, £105 next year, £110 the year after, £115 the year after but only £100 in year five- that’s £530 altogether or £180 more overall. You’d take the £530 over £350 wouldn’t you?

You wouldn’t worry too much that your payment in the final year was £30 less than a year before.

Now I may exagerate a little -  ok a lot – but it’s for a reason. I would like you when you finish reading this to ask yourself just why we Steve Webb and the Government Actuary and the civil servants at the DWP are so worried about us adopting something like the Dutch system where we seem certain to get more money overall, albeit in a slightly less certain way.

Because the Government seem quite happy for us to have all kind of uncertainty about houses, jobs and not least the funds we build up in these DC pensions but they are adament that our pensions should never be allowed to go down.

This looks like something you should be looking into eh? Something worth asking some questions about? I don’t know the answer but I’m going to keep asking the question.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly and the Pension Plowman
This entry was posted in annuity, auto-enrolment, corporate governance, customer service, EU Solvency II and tagged , , , , , , , . Bookmark the permalink.

13 Responses to Who made that choice for you?

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