John Ralfe, Ros Altmann and the cost of central heating.

henry tapper

7 years ago

John Ralfe kindly promoted my article on the lack of diversity in the AE review.

The AE review and the pension stitch up. https://t.co/8585n7hOEL via @henryhtapper is spot on

— John Ralfe (@JohnRalfe1) February 11, 2017

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Responsible John

By happy coincidence, I can promote an article of John’s in the FT. You may not have access to the FT online so let me quote John’s conclusion to an article “Don’t cash in your final salary pension scheme (link below)

But most people are not so wealthy and their pension is a large part of their overall retirement wealth, so those guarantees are very valuable. Despite eye-watering multiples for cashing in, do not think now is a clever time to take the money and invest in equities.

The higher expected return of equities versus bonds is just the reward for the risk of holding equities. It is not a guaranteed “free lunch” or a “loyalty bonus” for long-term investors.

John and I agree on how he got to his conclusion, he asks the $64m question

So how can I decide if the higher expected return of shares versus bonds is worth the higher risk I am taking?

and concludes that most people cannot manage the risks inherent in equity investing – at least not when they’re in need of regular long-term income.

John is writing on behalf of ordinary people, the ones who are beguiled by pension freedoms, freedoms that are already proving illusory. The people who may struggle with their heating bills in years to come.

Irresponsible Ros

Ros Altmann is also writing about transfers this week; she too is writing for ordinary people but her conclusion is radically different. Writing for FT Adviser she concludes

More DB transfers could prevent care ‘disaster’

Ros seems to have adopted the position that the pensions we have been promised from funded DB pension schemes are an unnecessary luxury that had better be dismantled and used for social care. I do not agree with Ros and I’ll focus on just one of her statements to explain why

She argued that a £50 a week final salary pension could be worth around £100,000 as a transfer value.

As an income, she said this might not be worth a great deal, but as a lump sum, it could be “hugely” beneficial in helping to pay for care

But that £100,000 transfer value isn’t exchanged for nothing. That £50 per week will be around for ever, the £100,000 is only around before the pension is in payment.

The direction of travel is obvious, granting property rights on DB pension in payment – a freedom that is as illusory as the prospect of a secondary annuity market.

Ros has, I fear, lost touch with the importance of £50 pw to pensioner households. I travelled on a bus yesterday talking to a pensioner who was about to walk home in the middle of the night for 40 minutes.

You’ll be cold- I said.

Not as cold as when I get home – he said

Haven’t you got central heating – I said

I have but I can’t afford to keep it on – he said

I am not belittling the problem of funding our long-term care bills, I am preparing to help fund those of my parents (which is precisely why I didn’t take a lump sum but chose to draw my pension as pension).

I don’t want to see homelessness , or see those who have homes unable to heat them, I don’t want people giving up their heating money in their fifties and sixties to fund for potential social care.

Meeting the costs of central heating

What we need, is a way to help those who have cash (in a DC pot) convert cash to income. Taken as a workforce, most of us in Britain have only one source of guaranteed income in retirement – out State Pension. Most of us will have a pension pot which is unlikely to afford us the luxury of £50 pw.

We should be focussing our energy on finding ways to give people that £50 pw from an average DC pot. Currently the average DC pot is around £35,000.

There are two ways to do this

Encourage people (and their employers) to put more in so that the pots are bigger
Find ways for people to take more out of the pot, than they can get from bonds (annuities)

The AE review is rightly looking at question one (despite its failings in composition and TOR).

The Pensions Act 2015 put in play the collective mechanisms we could use to create better collective pensions.

We are addressing how to increase the pot, now we must address how to make the pots pay. When we have addressed the primary need, income in retirement, then we can address the secondary need, insuring against rising healthcare costs.

John is right, we must keep our current DB pensions infrastructure in place, both at a personal and societal level, we need pensions

Ros is wrong, we should not swap pensions for cash. We need to find a better way to solve our care funding problems , than by turning off the heating in our houses.