Do we value the money in our pensions?

Tinkering with complex structures can prove disastrous


It seems odd that something as universal as money, can be valued in such different ways. I am always surprised that my partner considers achieving discounts on her shopping a personal triumph while she is happy to squander fortunes at charity auctions on items we neither cherish nor use.

While those in pensions ponder “value for money”, we should remember that the value of money is relative to its purpose. For the purpose of charity, money is no object, when it comes to shopping , the price must always be right.

There is a feeling that what we own within our pension funds is “funny money”, not really ours. We don’t value the accrued value of pension promises until we have control of our pot and often that means emptying the pot into our bank account. The promise of a pension for life of  £10,000 is not as enticing as  £400,000 in our pension pot and that £400,000 becomes a lot more interesting when – after 55 – £100,000 is available as tax-free-cash. Money is not funny if it is spendable, it is deadly serious.

Much of what passes for “financial education” in the pensions space is little more than breaking down the barriers that exist in people’s heads about deferred spending. While pensioners come to value the monthly payments into their accounts from state or trustees, those who have salaries and other regular income find it hard to empathize with those who have no other wage in their retirement than their pension. They simply do not value the pension promise. This has led to many “de-risking exercises” which allow members of defined benefit pension schemes to exchange pension increases for cash today, or swap future pension for tax-free cash – often on disadvantageous terms to the member. The inherent bias towards achieved capital rather than a pension for life, has enabled many pension schemes to transfer liabilities to members for rather less than their cost on the sponsor’s balance sheet.

In practice, many financial education programs in the workplace have exploited the bias towards achieved capital and rather than promoting pensions, have led to the erosion of the pension promise. These programs have not met with regulatory approval, some large firms of pension advisers have lost their permissions to advise on pension increase exchanges and the area is increasingly a no-go zone for IFAs and benefit consultants.

I am writing this article on the first anniversary of Britain’s lockdown because of the current pandemic. Over the past year, we have had plenty of time to think about our future and for many of us, that has meant saving more into pensions and thinking more about the liabilities we may incur in later life. I think especially about the care we are likely to need to pay for- either for ourselves or for loved ones.

We have also had time to think about our lives in terms of future life expectancy. I have been publishing the work of the Covid-19 actuarial response group and know how popular their statistical analysis of the impact of the virus has been. It is not just actuaries taking an interest in mortality rates, the pandemic has brought us all a little closer to our own prospects for living.

Paradoxically, while the short term impact of over 100,000 excess deaths in the last twelve months has been to reduce pension liabilities both to companies and the taxpayer, the underlying trend (excluding Covid deaths) continues to fall. The CMI tables, used by actuaries suggest that post pandemic, the value of the pension will continue to rise as our life expectancies return to the relentless upward trajectory we have followed for the past two hundred years. Actuaries are split on how to account for short term mortality increases and if they are confused, it is unsurprising that so are we!

We have known for a long-time that a second behavioral bias against pensions , is people’s undervaluing their own life expectancy. On average men assume they will live 10 years shorter than the actuaries, for women it’s even longer. I do not have any experience of what it is like to exceed actuarial expectations of myself nor do I expect to have. My actuarial life expectancy is to live another 41 years, I will disappoint my insurance actuary if I die before 90 and my pensions actuary if I survive my 90th birthday. There’s no pleasing actuaries.

Taken together, our innate bias towards wanting “cash in hand” and our pessimism about our longevity has been one of the many reasons defined benefit schemes have passed from popularity in the past 25 years. We simply don’t value pensions enough for sponsors to want to meet their increasing cost. But our acceptance of a lower grade of pension promise, where the employer’s obligation is to subsidize our retirement saving through a defined contribution, has yet to see its outcome in later life.

Many people retiring in the next ten years will had have little or no chance of joining a defined benefit occupational pension and many who did, now have swapped their rights for the chance to self invest through a personal pension. While the actuaries suggest a prudent rate of withdraw from these SIPPs at less than 4%, the FCA’s retirement income study suggests the average drawdown is running at 8%. This is anything but prudent behavior but it’s behavior that is in line with people’s predilection for accessible cash and their denial of their own likely longevity.

Then there is the external bias within the financial services community to manage wealth rather than observe pensions. It is entirely natural for commercial organizations to want to – and believe they can – manage wealth for individuals more effectively than the trustees of occupational pension schemes. This bias is entirely without foundation in fact!  But it persists because advisers are both entrepreneurial and extremely self-confident.  Add to these bias’ the fiscal bias brought about by the recently abolished contingent charging and the distortion to transfer values of quantitative easing and you can understand why so many pension transfers happened.

The question that the financial regulators should be asking is whether these  freedoms are devaluing the money in pensions and – if so – whether pensions are worth the value the tax-payer offers them.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Do we value the money in our pensions?

  1. Peter Tompkins says:

    I enjoyed today’s post. I think I probably take more care over accumulating and wisely using Sainsbury’s or Tesco points for pennies off my weekly shopping than I do at looking at my retirement saving plans for hundreds of thousands of pounds. The immediate gratification of the triple points or the 50 pence off bananas really is a bit silly I agree.

    One small mistake I think in your piece. I think you are about 31 years off 90, not 41. But then I’m the actuary.

    On the level of drawdown, I probably take about 5 or 6% out at the moment but I would feel comfortable in taking 8% or so in an era when investment returns have been quite healthy, as they have in pensions generally in recent years. A question to ponder is whether people will be a bit more miserly or careful with their drawdowns if they go through a few years of declining returns.

    The FCA’s analysis needs drilling down. Are people taking the 8% to feed their income needs or is some of that 8% an accelerated drawdown to enable the consumer to have a larger than normal early holiday in retirement or to build an extension or garden room? If so, then a fall back to more like 4% might not be too painful.

  2. John Mather says:

    Until you illustrate pension pots in terms of income replacement at an age such as state pension age, where the reality of the impact on living standards is clear then the deception will continue to spell poverty for the majority. State pension gives 30% of NAW to match this your pot today needs to be £450,000 at a 2% indexed drawdown This means you need to be at the LTA level to achieve NAW This crude “fag packet” illustration is no fine academic paper but it is the real world. Clearly the industry is still perpetuating the myth that pensions outcomes can be solved at the level of thinking that created the current mess. Of course none of the institutions want to provide the data.

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