Where does all the money go?


Ok guy – have a look at this picture.

household income slide.jpg

It’s a very odd way of looking at money (especially the cash benefits – which for most will be the various family, disability and general living allowances).

But it makes its point, which is that most of us are not being ripped off by the state. Those of us who consider ourselves in the squeezed middle would find, if someone from the institute of fiscal studies did an analysis of our financials, that we were broadly getting from the state, what we were giving to the state and that the final income we received was – net of taxes and benefits- in line with the income we started out with.

I will come back to that first box on the left as it is an important one. Some of us get no state hand outs in our pocket, but we still get paid by the state. The pay is deferred and comes in state pension. The value of our state pension has sky-rocketed over the past ten years (under the triple lock). A simple computation based on the valuation of defined benefit schemes suggest that the state pension is worth just over £200,000, more than most people’s equity in their property and more than most people’s pension entitlements (unless they are working in the public sector).

This is how the state sorts out your pension

The truth is that the burden we are – as we get older- is born by the financial asset we are – when we are working.

This is a hugely inexact science but it’s important that people know that there are scientists- financial scientists- behind the scenes working this all out.

There are actuaries , whose job it is to work out the present value of future liabilities and make sure we are putting away enough to meet the promises we are making for us tomorrow.

There are statisticians, at the Office of National Statistics, whose job it is to make sure the data the actuaries are using is accurate.

There are politicians, whose job it is to work with these civil servants and come up with a politically acceptable

solution that can be sold to us- the people paying the taxes

And then there are the taxpayers, who generally feel we are being ripped off but who grudgingly accept that we have only ourselves to blame!

Sometime  it goes wrong- like for WASPI

When you get a blip in the distribution of fairness, as has happened to the WASPI women (for instance), then it is right that there is outrage. Everyone knew and nobody said and the WASPI women found out too late for anything to be done about it (or so Government would have us believe.

The WASPI women will keep fighting for fair shares and good luck to them. I support their indignation though I’m not going to fight their fight for them. They’ve got Ros on their side after all.

But what I am interested in doing is raising people’s awareness of how the system works. It works very differently from the defined contribution system that the Government, employers and the financial services industry is pressing upon us.

Defined contribution works very well as a means of building up an entitlement, the more you and your boss contributes, the bigger your pot.

But it works very badly when you are trying to spend your pot, because it cannot cope with the vicissitudes of life, death and the unpredictability of financial markets.

Life- there tends to be too much of it after retirement, much of it very expensive and unrewarding (go visit a nursing home).

Death- it comes too soon for some, they save all their life and find themselves in the grave before they can enjoy their pension.

Markets- unpredictable and unfair. One person can ride the wave of financial good fortune, another gets destroyed when the wave falls on his or her head.

Forcing us to swim in a rip-tide with no lifeguard.

The idea that we are on our own and should be on our own in the spending of our pension pots is fundamentally at odds with the concept of the welfare state from Beveridge on. It is also fundamentally at odds with common sense.

For those who live too long, there is a need for more money, for those who live too short, there is little need for money at all. The best way to ride rough seas is in a boat, a big boat that can ride the waves and not get crushed by them.

We are in love with the idea of going it alone but we have not invented a way of providing each of us with the right craft to ride through the storms of retirement. Neither the individual annuity or individual drawdown will do.

Infact – to use a topical analogy- requiring most of us to manage our private affairs in the last part of our life through drawdown is akin to forcing people into a rip-tide on a beach with no life-guards.

Macro or Micro?- we are better together

I have endless arguments with John Ralfe on twitter which come back to the same thing. No system of welfare can work on exact fair shares. We all have to accept that we may get more or less according to our needs. But the point of welfare is that everyone’s needs are met in the end.

What we have at the moment is a state pension system which – blips like WASPI apart – is working reasonably well. We have brought the state  pension back to reasonable levels and though we will have to turn the triple lock off soon, it has done everyone a big favour.

What we have at the moment is a private pension system which is over-protective of people’s security on one hand (the DB system), but offers no security at all on the other (the DC system). If the only way you can get security from DC is by buying an annuity at today’s rates – forget security!

We desperately need to equalise the lots of those in DB and DC pensions and return to the idea of DA. Defined Ambition can provide a way for those with DC pots to spend them from a collective pool – which protects them like a big ship through the storm.

Big pools can insure people against living too long , dying too soon and against getting wiped by the market. DA is not only the solution for DC but could be – with general consent, a way to make some forms of DB sustainable.

Where does all the money go?

Despite my picture of a job’s worth of civil servants and politicians, the state pension system is very efficient. Money comes in  and money goes out with minimal interference from the private sector. State pensions are clean and efficient and if properly controlled, very effective.

Where all the money goes is in the ridiculous attempts we are making to make everyone their own chief investment officer. It goes in the enormous intermediated faff of SIPPs and drawdown, through DFMs and model portfolios, through the absurd inefficiency of the fund management industry and ultimately through the unnecessary costs of financial advice needed to keep this whole ridiculous edifice going.

Let’s get back to collective pensions run by fiduciaries for the benefit of the many. Let’s make sure that all the money being saved through auto-enrolment isn’t wasted. Let’s get the Defined Ambition legislation out again and renew our endeavours to provide proper pensions for those “just getting by”.

target pensions

Targeted not guaranteed pensions

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to Where does all the money go?

  1. Mike Otsuka says:

    What explains your choice of focus on defined ambition rather than collective defined contribution (CDC)? I think many more private occupational DB pension schemes might be saved if employers had the option of switching over to CDC, as their liabilities are in theory as limited as they are under individual DC. But workers still reap the benefits of longevity-pooling and investment-risk-pooling and the greater scope for collective investment of the fund into return-seeking assets that pension targets rather than guarantees provide.

  2. Terence P. O'Halloran F.C.I.I. Ch FP says:

    Henry, you need to check the figures in this item. The boat that is being floated is the TITANIC. I have run the maths and yours is nowhere near the truth. You are not related to Jerry Corbin by any chance?
    The true deduction , by the state, for pensions is 18.8% of NI able earnings (25.8% less 1% NHS less appx 6% social benefits) Employer PLUS employee. The article does not reflect that.

    You should add to that for completeness the 7% across the board Auto-Enrolment contibution rate from 2019 (currently 2%) which will primarily end up in government coffers through a fixed interest environment (for safety).
    It is a Pay As You Go scheme, workers funding current retirees.

    Defined Benefit pension schemes suffer from continual government interference and regulatory diktats dating back to the 2objection to pension scheme surpluses and restriction on employer contributions, through the removeal of ACT and the ongoing removal of £5.4 billion (appx) each your since 1998.

    It is fine advocating socialist views, but at least do it honestly.

  3. henry tapper says:

    Point of information – defined ambition is a broad term for third way schemes including CDC – as CDC is confusing people, I’m sticking with DA for now.

    I am not sure where we are disagreeing Terence

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