The Trades Union Congress (TUC) exists to make the working world a better place for everyone. It brings together more than 5.6 million working people who make up their 50 member unions. I want unions to grow and thrive, and for them to stand up for everyone.
Here they are standing up for the 9m new savers into workplace pensions and the 8m existing savers who didn’t need to be enrolled.
TUC’s new research finds market volatility can cost savers up to £5,000 in their annual pension payment
A typical worker could be £5,000 a year poorer in later life if they retire after a bad year for pension funds rather than in a good year.
Male, median earner contributing to a defined contribution pension for 40 years
|Retirement year||Accumulated pension fund||Annual Income (£s)
(2017 annuity rates)
|Annual Income (£s)
(Historical annuity rates)
Green= highest , red = lowest.
Analysis of historic investment returns by the independent Pensions Policy Institute found that a pension saver’s pot size can vary by up to 40%, and it’s just the luck of the draw.
You can ignore the middle set of figures, they simply convert capital to income at this year’s rate and unsurprisingly show that the savers whose 40 years investments did best (2000, 2016 and 2017) would have given the best outcomes – simply based on a theoretical consistently applied annuity rate.
But life’s not like that. In the real (non-theoretical world) the person retiring with the biggest pot would have got the worst annuity ( and that’s before taking into account this person had to lose 16 years of inflation (between 2000 and 2016) as well as taking an absolute fall in income of 50%. Can you imagine seeing your pay fall from nearly8 £28,000 to £14,500 in the last 16 years?
The impact of investment returns on the workplace savings of women is similar. However, due to a pattern across the last 40 years of lower wages and savings for women workers, female retirees are likely to have greater reliance on the state pension. The analysis therefore focused on historic figures for median male earners.
This is how TUC General Secretary Frances O’Grady saw the numbers;-
“Someone who has saved all their working life should not have to play roulette with their pension fund. But if their retirement lands on a bad year, market volatility could leave them with a much poorer standard of living for the rest of their life.
“Every saver should be enrolled into a well-governed scheme that is able to cushion members from the worst markets can throw at them. And it is time to implement plans that were passed into law two years ago for collective pensions, which can be less volatile and more efficient than traditional schemes.”
And of course she is right.
The only way we can take pensions off the roulette board is by releasing them from the shackles of gilt returns. Back in 2000, you could buy twice as much pension for the same amount of cash, that was simply because of the returns (yields) you could get on a gilt – which were twice what you could get sixteen years later. With no market growth in the intervening period, you can see why someone’s annuity income fell by half -with no inflation proofing.
That is of course the nightmare scenario and it’s why virtually no-one in 2016 was buying an annuity, equity markets have increased by about 8% since this time in 2016 and annuity rates are picking up too. But that is not the point. Workplace pensions shouldn’t distribute such a weird dispersal of outcomes ( as Frances says).
The point of a any kind of collective pension is it can smooth these anomalies over time. People retiring in 2000 in a smoothed fund might expect less and those retiring in 2016 more. As Con Keating, writing in a blog last week points out, the redistribution in a CDC plan is between those in a generation, not between generations.
CDC is fairer, safer and more certain than DC. That is why it is the pension of the future. Obsessed as we are by freedom from pensions, we forget that what most people want is a wage in retirement that lasts the rest of their life. CDC can not only smooth market returns but it can insure within its own pool – the longevity risk.
But now I’m talking actuarial – and I’ll stop. Well done the TUC , well done Frances O’Grady and well done the Labour Movement for seeing what should be blatantly obvious.
I look to the distant horizon and CDC!