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.
While no one should be foolish enough to talk of 100% certainty – and I think you’re not a fool, Henry – this sounds/reads a bit like the PPF’s 90% of benefits “promise”, which of course is neither guaranteed nor indexed nor uncapped.
I also thought the PPF planned to deliver by 2030, let’s say end of, which is 15 years away, not 20. Not that the Express or the PI or even the PPF should claim to know either way; uncertainty again.
Nevertheless, I take this opportunity to wish you a guid new year, whatever happens.
Well I leave these complex forecasts to the experts and suspect that the 20 year number is from Redington- though I hope Dan, Robert or one of their team will clarify- they seem to have prompted the article.
If my blog has a theme (other than an aspiration to restore confidence in pensions) it is that we need as a nation to a better understanding of the risks of running our of money in retirement. I’m hoping that the more pensions are discussed (including in the Daily Express), the more likely we are to be conscious of those risks- and hopefully the less likely we are to fall a prey to them.
Hi Henry (& others)
I must admit, I certainly didn’t wake up this morning expecting to be quoted in the Daily Express!!
Very happy to clarify the working behind the numbers they quoted, it is fairly simple stuff. I would note that our full report is coming out in the next couple of days, and this should hopefully give a fuller explanation of some of these points. The 20 year figure is simply the length of time we would project it to take for the UK DB pensions industry (as covered by the PPF index) to be fully-funded, on average, on a conservative “self-sufficiency” basis. At this point the industry would (on average) have enough money to invest in relatively secure assets and meet all its future liabilities without further contributions.
In arriving at that figure we have assumed the current level of aggregate contributions continue (c£20bn per year) and that assets returns are in line with our views on returns over that time frame, given the current asset allocation. Of course, that is a central projection and there is a pretty large confidence interval around that given the amount of risk being run.
The PPF target mentioned is for the PPF itself to be “self-sufficient” with respect to the liabilities it will need to cover, which is somewhat different.
To your point Henry, I absolutely agree that the 20 year figure is not really “new” news, and that the tone of the article in the Express is somewhat sensationalist. The emphasis in our piece is slightly different as you’ll see when we put it out.
Dan
“Express is somewhat sensationalist”, surely some mistake!
The hand that feeds..Daily Express! Well Dawid and Rob have finally gone mainstream – thanks to Dan the man! Who’d have thunk it!
Ah, right, so you want a world where people pay into pensions, EXPECTING A PENSION at the end of it (the FOOLS!) and one that pays up the promised amount, at the promised time, to be a thing of the past, do you?
You want a world of NO GUARANTEES at all?
One where people just pay, then get ripped off by Pyschopathic/Sociopathic £Sharks who like to tell these people what IDIOTS they all are for EXPECTING to have what they were not only PROMISED, but paid for!
Right, got it………
A World run by Cutthroats, Crooks and Conmen, where the only thing that is actually TRUE in a Contract are the 3 letters which start the word off, this being C..O..N.
Well, you know what, Henry, my Darlin’ Dad got in RAF plane against ALL of his gentle nature, to ensure that folks who think like this NEVER got to rule the world, EVER.
Sadly, they now have, so nothing means anything any longer. There is no shame, no conscience, no guilt, no compassion…just humans who have NO LIGHTS on in these areas of their brains, thinking up more and more Con Jobs they can sell to truly decent people, so that they can laugh, all the way to The Bank Of Crooked Bastards, in side-splitting mirth…laughing because The Good Men And Women True BELIEVED them in the first place!
I tell you what, THIS post, more than ANY other gives out a GUARANTEE for SURE and that guarantee is that YOU and YOUR ££££BUDDIES will NEVER understand the rest of us out here, never have compassion, never suffer guilt over what is done to us…
What Irritating Little Buggers we all are though, ain’t we, for we just WILL NOT roll over and go along with this Crookedness ANY LONGER!
We will NOT STOP talking of The Time Of Honour & Integrity, where a man’s word WAS the contract, before The Con Men & Women moved in on contracts, making them ALL into CONtracts, not worth the paper they’re written on, nor the mouths they come out of, because Nothing Means A Thing any longer in The Brave New World Of Fininancial Feckers whose ONLY reason for getting up in the morning is to make yet MORE £moneymoneymoney…..
A POX upon all those who do NOT honour an agreement, a contract, or their word….
They are throwing many truly wonderful people into hell, enjoying it as they do so….
Karma WILL Katch Up though….it ALWAYS does in one form or another….
What a truly sad and sick country we have become.
Oh, England, my England, what hast become of thou?