We all know that equity markets have sent the value of our pension savings into free fall and some people understand that low prospective interest rates mean the amount of pension you can buy from your savings has fallen lower. But did you know the real  value of your DC savings has fallen by 40% in the past 10 years?

An article in Pension Insider makes the point that the pots we are cashing in today are only 60% as big as we might have expected 10 or 11 years ago. You can read about the Alexander Forbes Pension Index on which the article is based here – I think it’s a great idea and they are to be commended for getting it started, let’s hope they can keep it going as things like this have a habit of falling by the wayside.

A reasonable person might now be asking whether the class of 2011 are unlucky or were ill-advised. For them remedy is too late, if they have been exposed to equities over the past ten years they have had no investment growth and no protection from the collapse in annuity rates over the past twelve months. It is only a matter of time before advisers get called to account if they have not been delivering de-risking advice while continuing to receive commission.

A reasonable person might also be asking whether the solution for those five years or more is simply to pile in more contributions as suggested in the survey. Individuals can protect themselves from annuity rates detoriating by moving into long-dated gilts and can protect capital by moving into cash. I would suggest that for the 85% of those purchasing annuities this year who don’t buy annuity protection, this simple measure would have been more valuable than stuffing extra cash under the pensions mattress.

But even with a prudent pre-retirement investment strategy, are current annuitants really getting what they expected from their dc savings?

My suspicion is that people still believe in the golden exchange rate of 10:1 rather than the 25+:1 they get today.

As I’ve mentioned before – GAD still work on the basis of a conversion rate of 16:1 for scheme pensions which is a lot closer to the golden exchange rate than individual annuities are likely to get any day soon. Collective annuity systems are over 25% more efficient than individual annuities and even if our individual annuities are efficient in absolute terms, they are inefficient relative to the collective arrangements used by state and occupational DB plans.

To labour the point – the problems with DC are systemic – we have the wrong system. When the markets combine with the system to work against the DC pensioner you get the calamity of a 40% real drop in pension values. We cannot put right the markets, we can put right the system.

Anyone for collective DC?

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