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.
John Ralfe – Don’t cash in your final salary pension scheme – https://www.ft.com/content/9bfda9b2-ec9e-11e6-ba01-119a44939bb6
Ros Atlmann – More DB transfers could prevent care disaster – https://www.ftadviser.com/pensions/2017/02/10/more-db-transfers-could-prevent-care-disaster-altmann/
For those in need of long-term income, we need to see more funds which pay out all of their net income at regular intervals (not just once a year), whether invested in bonds (which pay interest), equities (some of which pay dividends) and properties (which earn rents).
There are too many accumulation funds where the managers get to keep the income earned, and then in some cases fail to maintain the value of that income or lose part of it altogether. Allowing managers to retain any income also sometimes means they may disregard income in their pursuit of “market returns”.
And for the avoidance of doubt, I am not advocating “income funds” or “high yield bonds”. The corollary of what you and John agree on for those who need income to live on in their old age is that they also need their capital to be protected from permanent loss. John Ralfe may view this as justifying investment in high quality government and corporate bonds only. Others may find alternative solutions in which the capital value of their investment is not only protected but may even experience modest growth over time.
Henry
Totally agree with your blog but one thing you did not mention in taking a DB transfer is the loss of spouses benefits on death.
When my mother was in a care home 10 years ago it was costing £1200 a month and that was in the North East, a £100k therefore is not going to last very long. So when the spouse dies there may be nothing left for the widow/widower as it has all been spent on fees. At least with a DB pension there would be a continuing income stream, albeit 50%, but at least its money..
In encouraging people to take DB transfers you are potentially creating a further problem down the line ie surviving spouses who’s only income is the State pension.
I agree Henry, every individual who reaches retirement age will need an income for life.
You then have to consider potential loss of spousal benefits!
Whilst the percentage of people needing long term care is likely to increase, not everybody will need care and some may require ‘home help’ rather than long term residential care.
So my very simple brain says a lifetime income is the priority, in any event this income will be used towards payment of any care needs,
Andy