500,000 pensioners who will get no help from the Government.

If you have purchased an annuity in the past three years of are likely to purchase one in the next three years you will be buying into pension conversion rates artificially depressed by the Government‘s quantitive easing program and by insurance companies fearful of impending legislation from Europe.

If you had someone batting for you , as companies with defined benefit pension plans have, you might have got a little help.

Not before time, we heard yesterday that the Pension Regulator had finally got round to easing the valuation process for 300 company pension schemes that could not afford to crystallise their pension deficits at current depressed bond yields.

But for you there is no such help.

If you watched Louis Theroux‘s fantastic documentary on the true cost of senile dementia, (BBC2 -April 26th 2012), you would be in no doubt we cannot abandon our elders.

For three years I have been shouting “train crash– train crash” to the pensions industry. Trains are crashing all around us but we do not hear of the casualties, nor will we. The disaster we are creating for ourselves right now, will not appear for five or even ten years.

Let me explain why.

When people retire , they can take 25% of the pension fund they’ve built up as cash. This cash can support you for a few years but it will likely run out in five or ten years if you lean on it for holidays , cars and house repairs.

When it runs out , most people will fall back on their state pension (thankfully properly linked to earnings growth), their old company pension (properly linked to CPI or maybe RPI) and the pension from the annuity they bought (typically not increasing at all).

Put another way, if you are relying on your purchased annuity income, by the time your tax-free cash runs out, it may have been so eroded by inflation that it will be worthless.

Why didn’t the class of 2009-12 purchase properly linked annuities? The answer is usually because the cost of linking annuities to prices is so high that people cannot afford to. We take illusorially high levels of initial pension at the expense of future-proofing income in years to come.

I predict that by 2015 when the awful truth of today’s train crash becomes public. We will look back at the complacency of the Government and the Pension “Industry” today and ask the reasonable question “why didn’t you predict this coming?”.

Just like we look back at the Government and the banking industry and their behaviour between 2003 and 2007.

There is a way out of this. There’s a way to provide the safety net that Bill Galvin and the Pension Regulator are offering collective defined Benefit plans. It is called Collective Defined Contribution (CDC) and if you haven’t read Kevin Wesbrooms’s article on the shameful way we’ve ducked the challenge and the opportunities it presents…you can read it here.

If you have just bought an annuity or are about to, this news may have come too late but the news is this. The pension you will be offered , even if you do the right thing and properly explore the open market, is some 25% lower than the pension you’d get for your money if you retired in Holland or if the Dutch CDC system was adopted here.

The CDC system is not without risk but the risk is mitigated by CDC being a mutual arrangement where the risk is spread ”collectively” . The costs are also spread collectively meaning you participate in the economies of scale available to large companies.

The likelihood is that the majority of people relying on DC pensions purchased today will find themselves in 15 or 20 years time with private pensions dwarfed by their basic state pension.

Dwarfed by a dwarf!

What that will mean is the Government stepping in to provide income support to the people it failed to help when it mattered – when they purchased their annuity.

With stupefying short-sightedness, today’s Government is failing to help the 500,000 retirees of 2012 and passing the problem to Government’s of the future.

It is up to those of us who care about funded pensions and want to restore confidence in the future of the pensions, to make sure that the disaster we are currently creating, is at least partially avoided.

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About henry tapper

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