An interesting observation from Gerry Barwell in 140 characters
When I interview consumers on AE/ wider pensions – the barrier of mistrust is significant. Less so in the young but for 40+
Which gives us the opportunity to speculate on what generates trust in pensions and why experience is “trust degenerates” with age.
When I was 25 in 1987, the personal pension was launched. It seemed the answer to our dreams
- A simple tax structure with tax relief up front for the lower earners
- Unlimited investment options
- Portability from job to job
- The option for an employer‘s contribution
It was as if all our Christmases had come at once.
Back then annuities were bought at 1 for 10; £100,000 bought £10,000 of income
We illustrated investment growth at 13%- according to the rule of 75, money would double every 6 years.
So there were charges but these were insignificant compared to the illustrated returns.
Wind forward 25 years. There has been no growth in equity markets for nye on 13 of them, annuity prices have doubled, your £100,000 barely buys you £5000 of pension and a 2% charge on your pension represents one third of your anticipated return. Money is now expected to grow at half the original 13%, money now doubles every 12 and a half years.
Employers have long since stopped contributing to personal pensions unless you are the Chairman , CEO or own the shooting match. Instead of portable pensions , we have “operation small pot” designed to stem the fragmentation of people’s pension holdings between multiple personal and occupational arrangements.
To cut a long story short, the vision I and my colleagues had for Personal Pensions and FSAVCs has been shattered like the dream for financial empowerment that drove it. People have long since given up being “Sid” and decided they have better things to do than become their own chief investment officer.
The magic of my vision has been besmirched by scandal after scandal, pension mis-selling and the Equitable Life collapse on the retail side, Maxwell , ASW and the countless broken promises to occupational pension scheme members at the corporate end of the spectrum.
It is not hard tos ee why experience tells people not to trust pensions.
But there is something worse than this, worse than the failures and the scandals and the shattered expectations. This the failure of nerve to call time on the failed experiment and move back to what Frank Field called our “Economic Miracle” the system of not-for-profit occupational pension schemes that set out to provide proper pensions for the staff of the companies in the UK– great and small.
The failure of these schemes is only partial. Millions are enjoying great pensions arising from the contributions and prudent management of these plans over the past fifty years. Many of the larger schemes are still open and with the public sector, it is still the expectation that whether the promise is funded or unfunded, the link to a salary based guaranteed pension forms an essential part of the working covenant.
Nevertheless , the concept of future accrual within corporate schemes is broken and will not easily be fixed so long as shareholders have to absorb risks not just of investment markets but of changing demographics explicitly the seemingly inexorable increase in people’s life expectancy.
With a broken DB sector and a distrusted DC promise, the time is ripe for a new vision, something that reverts to the best of the past but employs the technology of the present. Though market conditions are tough and demographic challenges tougher, the prospect of “ambitious pensions” as laid out by Steve Webb, should be enticing to pensions people keen to win back ailing support.
For me, the saddest failure is the failure of nerve among my generation to put some ambition back into what we do. There is risk averse and risk reverse and we are driving the pensions bus to the back of the cul-de-sac. We urgently need to find some forward gears.
People are looking for some pensions leadership. They may be getting some from Steve Webb and from Gregg McClymont and Ed Milliband at this week’s Labour Conference. But there is precious little thought leadership coming from the major actuarial firms, or the life insurers or the IFA community and this saddens me.
Across the North Sea there exists a model that is producing 50% more income from its DC accumulation than in the UK. We laugh at it, laugh at its lack of guarantees and shun it like some leprous sore on the face of our pristine system. Except our system is no longer pristine. “The Older I get, the less I trust my pension” – my father’s phrase.
Please God I do not live so long – at least without some more ambition than my generation are showing!
- Scale and scalability- why L & G is the cuckoo in the Nest. (henrytapper.com)
- Getting CEO’s and Chairmen “comfortably” relaxed about pensions. (henrytapper.com)
- Too important to hide;- why the Government has to investigate pension default charges (henrytapper.com)
- Send in forensic actuaries to sort out these “rip-off” pensions! (henrytapper.com)
- Maybe consumer cynicism about pensions is right.. (henrytapper.com)
- TESCO extra pensions (henrytapper.com)
- “The first cut is the cheapest” – transferring legacy pensions (henrytapper.com)
- An amnesty on pension charges is not the answer! (henrytapper.com)
- Can we get our business leaders to bother with pensions? (henrytapper.com)
- Abusing the voice of the people – a call for better pensions (henrytapper.com)
My complaint is that pensions are still too opaque and too complicated. This probably originated with DB pensions where contributors were told to put a bit of cash into their scheme and not worry about the rest since lots of clever actuaries and investment advisers would take care of it and anyway the ultimate pension was simply based on final salary. That was the gloss but if you scratched the surface a myriad of detailed rules, questionable assumptions and convoluted fee arrangements quickly became visible. If it had all worked then we would be happy but DB has failed spectacularly and similar long term products such as endowment policies horrendously underperformed: My own 25 year endowment is about to mature with a near 30% shortfall against the original projection. And you wonder why there is lack of trust!
In a DC world everything should be simplified. Put money in and you get a return based on that plus investment performance. We are all getting used to ISA’s and increasingly SIPPS which are very transparent and fairly easy to understand. In order to gain trust the pensions industry needs to reduce complexity and not be too clever with investment return and other actuarial assumptions. And happily success in this regard would actually be a reduced need for pension advisers……
Oh, one other thing, part question part addition to my argument. I never really understood SERPS, “contracted in/out” and Protected Rights. Can I forget about all this now?
The breakdown in trust between the various parties involved in pensions has led to this complicated system of checks and balances we know as pensions regulation.
The root problem is not the regulation but the need for it. Were we to truly adopt priniplce based regulation based on common sense with an eye to the common good. Most of what you see could go.
So long as distrust continues, so will opacity both in the products and the regulation. Which is why we need these open debates- not between pensions people but between people like you who can observe and comment – as always – with perception!
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