GAD tried to knock the idea of risk-sharing on the head in their infamous paper to the DWP because it reduced the certainty of pensions in payment continuing at a given escalator.
Why this paranoia?
The value of units can rise and fall, the value of pensions can rise and fall. I earn less today than I did five years ago – that’s market economics.
The certainty created by the “guaranteed pension” is spurious not for what is guaranteed but for what is never paid - the pension that is jubblified by the attendant costs of the guarantee.
The opportunity cost of an investment into gilts for the second half of an adult’s lifespan.
The operational cost of individual annuitisation for the half a million personal annuities purchased this year.
The certainty of the annuity is matched by the guaranteed loss relative to the pension that could have been purchased under the Dutch system.
The RSA’s paper – Tomorrow’s Investor demonstrated that the Dutch system of pensions produced a pension of £1.50 for eery £1 of pension we get from a typical UK DC plan. Albeit that £1.50 pension didn’t get the same degree of certainty than our £1 pension.
To get a pension 45% rather than 50% better is no hardship. To be conscripted into a pension that is “only” 45% worse than a Dutch pension is.
There is little value in the almost certain prospect of being worse off in retirement.
The pension corporation’s estimate that there was a 55% greater efficiency in the creation of pensions under a DB than DC system reinforces the point.
We cannot afford the spurious certainty of guaranteed pensions.
Talk to the Dutch - they love to talk. The Dutch system is so flexible. Like a wooden boat it bends with the force of the waves. The boat we have built ourselves in our crazy UK has no chance to float, it is so weighed down by its obligations and the guarantees that wrap them.
This was how it was when we started out with our DB plans, before we decided to reinforce our craft with an iron hull that instead of protecting us , has sunk us!
Its time to take a step back. We live with uncertainty - it’s part of our post-modern make up. We know more need a guaranteed second tier pension than we need a job for life or a right to buy. We have to ween ourselves off these “nice to haves” and get on with life pragmatically!
Chicken Lickin was so certain that the sky would fall on her head that she forgot to lower her eyes to see the fox that came to eat her up. Make sure that your pension doesn’t go the same way.
- Spurious optimism (henrytapper.com)
- Steve Webb’s good week (henrytapper.com)
- Pension Corporation points the way to “ambitious pensions” (henrytapper.com)
- Aspirational pensions – popcorn pensions!! (henrytapper.com)
- Pensions crisis: one in 10 forced to delay retirement (henrytapper.com)
- Don’t kid people that pensions are easy (henrytapper.com)
- Steve Webb needs hard cash for his defined ambitions. (henrytapper.com)
- To get better pensions we need to share risk (henrytapper.com)
- What have the Australians done for us – not much! (henrytapper.com)
- Why we shouldn’t give up on pensions. (henrytapper.com)
- Define your aspiration. (henrytapper.com)
- Yes pensions minister (henrytapper.com)
- Who pays for a register of pensions? (henrytapper.com)