Sorting the pensions of the “squeezed middle”.

There are three distinct streams among those old enough to work and young enough not to,

Stream One is for  those who can look forward to retirement with a degree of confidence because their employer is guaranteeing it. They are primarily in the public sector (though there are still some big guarantees on offer if you work for a company with British in its title) and the guarantee is provided by those who pay taxes;- people and corporations.

Stream Two is for  those who are paying the taxes for Stream One but are only guaranteed a cut of their wages into a retirement fund, I include here the self-employed who make their own retirement provision,

Stream Three is for those who either because they work for an employer who does not pay a cut of their wages away or because they have chosen to opt-out of their employers retirement plan or because for whatever reason they do not earn a wage – Do Not Save For Retirement.

The Government, most especially the DWP and the Treasury are on a mission to slim down the tax-bill for Stream One and get as many of Stream Three into Stream Two as possible. The fear, as voiced by Stuart Southall and the ACA yesterday is that we end up with everyone in a single stream– a pensions comprehensive with high truancy rates (auto-enrolment opt-outs) and a significant pensions underclass dependent on state benefits.

I’m concerned about the squeezed middle who are fast becoming the largest stream of the three. Many never benefited from defined benefits and are entirely reliant on ill-understood savings plans – many had a few good years with guaranteed benefits and are now relying on contributions into a retirement savings plan about which they know little. Much as they would like to feel confident , much as their companies and their pension providers tell them they should feel confident – the point is they don’t feel confident.

They feel like you feel if you are being squeezed, you feel your pips are squirting out of the sides, paying for all kinds of state benefits for Stream Three and for handsome guaranteed pensions for Stream One. The chance is that they are paying more in income and council tax  and national insurance and the plethora of unhypothecated indirect taxes towards other people’s retirement than they are towards their own.

And what’s worse, they sense, fear , feel that what they are going to get in retirement isn’t going to be very much and if they are retiring in 2012 they are going to be right.

The Government have said to the private sector

 “ you go and sort yourselves out- you have the ABI and the NAPF and the ACA and the PMI and hundreds of other consultative bodies who are busy making sure everything is going to be right.

You have actuaries and accountants and fund managers and fiduciary managers and goodness knows what. You go and take care of yourselves”.

And because the Government about thirty years ago fell in love with the market economy which told them what they wanted to hear (eg we can look after ourselves) and because they believed that given a fair wind the market would educate the private citizens it looked after to look after themselves (which they called the “Financial Capability Agenda”) we would all make sure that the market acted in our best interests,

And what happened?

 “The rest is silence”.

Money swam upstream into the bankers and fund managers and actuaries and accountants and lawyers pockets and what trickled downstream into the pockets of those who weren’t on the insidehas seeped through the river bed till there is barely enough water flowing to get to the places that need irrigation let alone sustain them for a generation.

Too late and too little has been the Government’s response. Stakeholder Pensions started out a fearless attempt to get free market pensions to share the wealth to all stakeholders it failed. Auto-enrolling for the firms that need intervention  is unravelling in front of us but much worse, the millions who will be retiring from these free market pensions, personal, stakeholder , occupational who will need to cash their savings in and buy annuities are going to be forced to use what little money remains (after charges) to buy an income stream based on 2% bond yields , pay a massive insurance premium to cover Solvency II and as likely as not fall prey to a rapacious insurer who offer rock bottom annuity rates which people accept because there is almost no-one out there to tell them any different.

You will not read about this in any ABI statement, you will not hear about the disastrous take-up of the OMO from members of their schemes from the NAPF, nor will you find anybody in the pensions industry banging the drum for change. That is because their is an overwhelming peer pressure on people who know this is wrong to keep quiet and keep up the status quo.

As I have been told on many occasions

“get on with your day job”

Sorry, but I am a pensions consultant that is my day job. My day job is to maximise DC outcomes and if I see my clients flushing 30-40% of their pensions down the drain, shouldn’t I be shouting or whisleblowing or at least blogging about it?

Well of course I should. but much more importantly I, and those who I know feel as I do, should be doing more, we should be organising ourselves into a powerful lobbying group to make sure that the great work done by the RSA and other organisations that pointed the way to a better form of DC a collective DC model – comes to life and is supported by Government.

The reform of the annuity system proposed by the likes of Tom McPhail, Alan Higham and myself is a first step, in tandem we should be beating on the DWP’s door not just to ease the plight of the half a million who will buy annuities in 2012 but the many millions who will be retiring from Stream two between now and 2020.

We cannot afford to waste another year talking about it. This year we need to do something about it.


I hadn’t read Jeremy Warner’s peice in the Telegraph till after writing this morning. You can find it here. The peice itself is very similar in content (though rather more moderate and polished!). What interests me is the 116 comments from Telegraph readers clearly fed up with being squeezed. Like I said- TIME FOR ACTION

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in annuity, Bankers, corporate governance, dc pensions, de-risking, EU Solvency II, Fiduciary Management, FSA, Henry Tapper blog, Liability Driven Investment, Martin Lewis, NEST, pensions, Personal Accounts, Retail Distribution Review, Retirement and tagged , , , , , , , , , , . Bookmark the permalink.

10 Responses to Sorting the pensions of the “squeezed middle”.

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  5. Owen Hewlett says:

    Couldn’t agree more Henry.
    Members not getting advice at retirement and locking into current annuity rates is tragic. Also good to see you highlighting the situation for those being forced to pay for other people’s pensions at the expense of their own – wait for the removal of higher rate tax relief on contributions, and it will get even worse for them.

  6. henry tapper says:

    The Annual and Lifetime Allowances have effectively done for approved pensions as a tax-planning tool. I don’t think the threat is on tax but from low long term interest rates (liabilities), improving mortality assumptions and from the ever increasing cost of the guarantees.

    The best news in some time is the Pension Minister’s interest in what he calls Aspirational Pensions (collective DC). Watch that space

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