Pension promises are never written in stone

standing stones

Now matter how much emphasis we put on the word “defined” , the benefit we get from a pension is not set in stone. This was pointed out to me by John Ralfe

Dennis Leech pointed out that DB promises aren’t set in stone either

No doubt this discussion could go on ad nausea but it won’t – at least on here. People who get pensions paid to them, know that things like RPI/CPI , the triple lock and GMP reconciliation and equalization will make differences to the amount they get paid as a wage in retirement. But they do not spend their lives worrying about the definitions of “defined” – that is for lawyers and actuaries.

A common way of looking at pensions

What experts forget, but pensioners understand, is that the certainty of a monthly payment into your bank account for as long as you survive on the planet is what counts most. This is why annuities are not dead, it is why the state pension is still what people think of first when you say “pension” to them, it is why pension pots are not seen as pensions but as retirement savings.

Just as we need a common definition of  value for money, so we need a common definition of pension and I insist that a pension pot is not a pension till it is integrated into a wage in retirement. Until then it is just a capital reservoir.

Accepting that pension promises are not written in stone

The future cost of paying a pension for life is always changing, even if the pension is guaranteed. So the amount of annuity you can buy from your pension pot changes from month to month. Here the change impacts the individual saver.

The cost to an employer of paying a defined benefit promise changes with inflation and predicted movements in mortality (like annuities). But here the balance of the cost (beyond your contribution) falls to the scheme sponsor.

And as John points out, the promise to us from the State changes. Our retirement date changes, the basis of pension increases changes and the Government can even choose to change the whole system , as they have done by creating a single state pension in 2015.

Anyone who stayed in the State Earnings Related Pension Scheme from start to finish has probably seen more change in the benefit promise than from any other part of the system,

So why do we worry so much about the funding of a small part of our pension system?

Funded DB pensions are a multi-trillion ticket for the pensions profession. They create legal battles over minutiae which are totally disproportionate to the value of benefits in dispute.

They support actuaries and lawyers, regulators, auditors as well as pension managers , trustees and of course the fund management industry.

But to their beneficiaries , they are but a part of the complicated jigsaw of retirement pieces that make up their picture.

The public are used to uncertainty, it is used to losing all its income at short notice and having to get another job, relative to the uncertainty of our wages prior to retirement, the uncertainties of our defined benefit pensions are chicken-feed.

Some perspective please

The arguments about the absolute certainty of paying a DB promise from the fund – the self-sufficiency arguments, make no sense to me at all.

None of us lives with the certainty that we will be alright whatever happens. We accept that the rules can change and we must change with them. The current pandemic has shown just how fragile many of the certainties we held on to are.

Which is a long way round to get to the main point. We need to understand the risk of things not happening, not just from the perspective of employers and regulators and the PPF, but from the individual’s perspective.

And the individual member of a pension scheme deserves our best endeavors to get the job done – the pension paid – in the fairest way possible.

Whether we are talking the State Pension or DB pensions or DC pots, there is systemic uncertainty about what pension gets paid.  Nothing is written in stone, agility is needed to ensure fairness and we need to have Plan-Bs when Plan A’s don’t work out.

Most people do understand the future is inscrutable , that things will turn out differently to what we expected. Living with this takes a sense of humour and a tolerance towards events. Otherwise we would go quite mad!

Rollright Stones

The Kings Men


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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