Unexpected risks – people just don’t get pensions (education).

We’re all aware that investing in the stockmarket is a “risky” business, it’s easy to understand how the sharp falls in stock markets impact on your savings and as stock market falls are the staple of media reporting, it’s not surprising that most people regard capital preservation as the key financial objective.

It is hard to explain to people that even if they keep their capital intact, the pension income it provides can fall dramatically. Take this from Richard Evans’ piece in the Sunday Telegraph (December 18th 2011).

..when Mr Keeling’s pension came up for its regular review in April, the administrator, A J Bell Sippdeal, had no choice but to tell him is income under the new formula would be £9,000 a year less. This is despite the fact that his underlying investments had performed well in a very difficult market – they had lost just 5pc of their value at the time of the review even though Mr Keeling had been taking his income from it.”

Mr Keeling is apparently furious, blaming the GAD drawdown rates for his predicament…

“I do a lot better with my finances than the Government does”

I feel sympathy for Mr Keeling, he has a genuine beef with Government but it’s not about GAD rates, last week the gilt rate fell to another record low of 2.06%, It is the gilt rate that drives the GAD rates and the reason the gilt rates are on the floor have more to do with quantitative easing , a macro policy of which Mr Keeling is an unwitting victim.

This “witnessless” is the real issue of this blog. For whatever reason, the way we look at risk has become skewed towards capital preservation. Pensions are instruments to distribute income over a lifetime and the chief risks that pensioners face are not from capital preservation but from interest rates and improving mortality factors.

Any old (or young) actuary knoweth this. The only actuarial input in the Telegraph article is hidden in the “A” of GAD which stands for the Government Actuary’s Department, a body so arcane that I doubt that more than one in a thousand of us even knows what it does.

The Government Actuary advises Government on its strategic policy decisions relating to old age and determines many of the tactical moves that keep people Mr Keeling from penury and in apoplexy.

As so often, the disjoint between GAD’s public profile and it’s influence is down to an inability among its officers to get messages out to the public. I know lots of its actuaries and a very bright and honest lot they are. They understand that you cannot pay out pensions regardless of pension risks but they seem incapable of getting this message beyond the confines of their offices in Holborn.

There will be many who would argue that the method of calculating the GAD rates (using mark to market theory) is itself flawed, but it is the methodology that applies to companies and insurance companies and is likely to become more and not less relevent as the EU’s Solvency II regulations take a grip over the next few years.

Mr Keeling is one of the relatively small number of people who has £9,000 pa to lose from his pension and makes it to the Telegraph complete with a picture of him and his wife in their posh conservatory. The majority of people will not opt for a drawdown approach when establishing their retirement income  – they simply won’t have the savings to have that option, not the scheme pension that Richard Evans’ article also discusses.

Nonetheless, the same risks , of gilt rates, interest rates and mortality factors drive the retirement incomes being purchased by the estimated 450,000 people who purchased an annuity this year.

That the understanding of these pension risks is almost zero outside the more advanced end of the financial community is a damning indictment of the life and pensions industry, of the Government’s Financial Capability agenda and of the FSA, DWP and GAD all of which have failed to get us to understand what the hell is going on with our personal pensions.

About henry tapper

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