Another year,another sensational headline from your “pension puncturing” Daily Express.
It’s not a new story, its facts are from the Pension Institute study published last year. So long as interest rates remain low, pension liabilities will be inflated and pension deficits will loom.
We have the best pensions in the world because we guarantee every penny, down to the last basis point of the consumer price indexes baked into our entitlements. If we didn’t have guarantees on everything, we’d have CDC, a system where employers pay in a set amount and people get out whatever the fund can afford.
Sooner or later we reach a crunch, we have the guarantees , with the risk of them sinking the sponsor (the employer) or we don’t. If we move to a system of conditional indexation, where pension increases are dependent on there being money to pay for them, we no longer have the best pensions in the world, but at least we know they will be paid.
So here’s a choice
Would you rather have 100% of your benefits with 90% chance of them being paid or would you rather have 90% of your benefits with 100% chance of them being paid?
It’s the kind of gamification that’s become very trendy.
Here’s another one.
If I promised to pay you a pension for twenty years, would you rather have that pension paid between 60 and 80 or 65 and 85?
That’s an easy one – you’d rather have the money up front- cash in the bank (Frank).
But if it was your bank (Frank) would you be so sure?
Are pensions in crisis?
So long as we have an expectation that we are entitled to guarantees- we will be in crisis. If we were to guarantee house prices increased by inflation every year,we would have a housing crisis- same with the stock-market, same with wages.
We simply cannot expect that things will happen as we want them to, because someone ,somewhere used the G-word.
The only two guarantees are death and taxes.
Why 20 years?
Presumably, Redington, the pension consultancy “leaking” this news, has worked this out as the length of the “glide-path” to “buy-out” for its typical client – the large corporate Defined Benefit Scheme. But huge as the liabilities of these schemes are, they represent only a tiny percentage of the overall liability we have in the UK for our elderly.
Those in the schemes quoted in the article represent the lucky ones, behind them- in varying degrees of relative penury – come the rest of us!
In reality, the duration of the pensions crisis will be determined by the time it takes for us to work out we cannot afford guaranteeing things , the cost of which we do not know – nor the guarantors. That duration could be short – if we wake up and smell the coffee – or it could be much longer- if we continue to kick cans down the road.
The irony of immigration
Let me explain..
Those who want guarantees on the state pension age, on pension indexation and on the payment of benefits need to be aware that those guarantees not only have to be paid for, but generally have to be paid for at the expense of something else.
There being only one Treasury, one UK system of taxation and only one UK population, these guarantees will have to be paid for by our children. Or (ironically) by the immigrants to this country who are the main source of hope that we will have the money to pay the benefits in 2020-30-40-50.
It’s ironic-because the bulk of the prejudice against those arriving on our shores – is from those who have it all to lose. Little do they understand, that without the endeavour of those arriving from the Middle East, Africa and the poorer end of Europe, the money to pay for our declining years, simply won’t be there.
Entitled and spoiled by it!
The loudest and most strident voices in our society are those of the “entitled generation” those – like me – in our fifties and sixties who have had it all. We are the great beneficiaries of Britain’s post war posterity, we have enjoyed the peace dividend earned by our parents and grandparents. We have benefited from free schools and free higher education. We are the most entitled generation this country has ever seen.
And now – some- just some- of our entitlement is being pulled back. We are no longer getting the free tax-ride of by-to-let, we are not getting our state pensions guaranteed from 60, few of us are accruing defined benefits from our jobs and it looks as if the over-generous tax hand-outs to the most entitled- will be taken from us on March 16th.
Much as it make readers angry. We really must take a step back and ask ourselves if we are not behaving like spoiled children. Generations to come may well condemn us as just that.