Le Pension Crisis est Arrivé

Steve Webb MP makes a speech at the Liberal De...
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PWC report today that the value of DC pension pots has fallen by 30% in the last three years. This Telegraph article gives the grim details. This is not a paper loss which can be reversed if markets recover, for the 40,000 people retiring each month, the choices are dreadful. Either lock in to a 30% lifetime pay cut or drawdown on any saving you might have till things right themselves.

The figures are truly awful.

PwC has calculated that falling gilt yields have cut pension incomes sharply. Three years ago, every £100,000 a worker saved into a pension pot bought an income of £7,500. Three months ago, that figure was £6,500. And this week, the same sum would pay only £6,160.

Whether we are in this bind or imagining “that could be me”, the natural question is “what’s being done about this?” and the shocking answer is “nothing much”.

When we look to how the problem arises we can attribute the blame to do things, falling equity prices and falling gilt yields. People close to retirement shouldn’t be in equities, they should be protecting themselves from both drops in share prices and falling interest rates by switching to cash and gilts. If you are lucky to be invested in a lifestyle program targeted to today and you are drawing your benefits – good for you.

But the truth is that most DC being cashed in today is not lifestyled. The advisers who sold the policies (and were paid for a lifetime of advice) are probably nowhere to be seen. Even if advice is to hand, it seems not to be taken. Retirement Angels report that 85% of the annuities they are arranging involve cashing in largely equity based DC pots.

For two years I have written about the need for structural change in DC. Let’s be clear about this, if you are a pensioner of a DB plan in the UK, your benefits are not being reduced , they are guaranteed not just to be maintained but to increase in line with prices. The trustees of these schemes use expert advice to protect the pension fund from market risks. They can afford to do so as they are acting on behalf of a collective of sometimes thousands of people. They can afford to do so because a sponsor, the employer, is guaranteeing to meet the exceptional risks of pensions – the risks of people living longer than expected and of the kind of market conditions that we have experienced for the last 3-4 years.

Anyone who watched Channel 4 on Thursday night would have seen the excellent Tom Mcphail explain that Quantative Easing is going to make things even worse for those retiring in the next six months because the Bank of  England is injecting money into the economy by buying gilts from financial institutions. This further depresses gilt yeilds.When falling gilt yields are combined with the reduction in the size of many pension pots, the fall in pension incomes is even more dramatic.

Peter Macdonald, PWC ‘s spokesman is a decent man. bright and “membercentric” (awful phrase I know). If you are reading this Peter, perhaps you might like to give me a call (details below). I am sure like me that you would like to be a part of the solution!

There is a group of us. Not many yet but a growing number, looking at this problem  and focussing on one question. How to provide the security and efficiency of DB plans to those with DC assets. The technical phrase for this is Collective DC but what matters is not what it’s called but what it does.

If, as the RSA claims, as the Dutch have proven, as GAD intimate and as common sense confirms, risk sharing in DC is possible, then now is the time to act. Peter, your numbers are the spur that pricks the side of our intent – thankyou. Steve Webb, Lawrence Churchill, Andy Young , John Hutton– you who have your fingers on the levers of power, please listen.

The last time I saw a pension crisis this acute was when Allied Steel and Wire’s pension scheme collapsed so badly that thousands of Welshmen and women were left destitute. The numbers in this crisis are greater though the collapse not so total.

The last time we had such a crisis, we got a short-term fix- the Financial Assistance Scheme and a long-term solution, the Pension Protection Fund.

The decisive action taken then can be repeated, the guys who sorted that crisis are still around and ready to help. All is needed now is a  little collective will.

Anyone wanting to know more about what is going on , feel free to drop me a line on 07785 377768 or mail henry.h.tapper@gmail.com or henry.tapper@firstactuairal.co.uk

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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