There are two ways for a Chancellor to promise £1,000 extra pension to us. The proper way is through the state pension, in 2022 the Government didn’t uplift the state pension by inflation meaning millions will be losing out for generations to come. To restore £1,000 pa to the State Pension would be to out Kwasi, Kwasi. The proper way is a non-starter.
There is also a dodgy way, that way involves getting a spreadsheet and inputting some growth factors for private equity against investing in cash.If you stretch time far enough you will come to an equation where 5% of your pension pot invested in a UK growth fund will give you an extra £1,000 pa at retirement, compared with putting the money under the mattress. Promising people an extra £1000 pa after badgering some pension firms to invest your pension better does not stack up as a promise.
Yet the Government chose to sell the Mansion House Reforms as £1000 on your pension
The shocking truth is that Jeremy Hunt is probably right!
Take the Hymans Robertson maxime that 10bps on the price of your default fund means a 10% increase to productive capital and a 10% increase in your pot at retirement. It’s not that far from Jeremy Hunts 5% to UK Growth = 12% more in your pot.
So why aren’t we doing this clever investment thing with our DC pots now?
Why have the DB pension funds some of us are in, not invest in this UK Growth stuff but load up instead with debt so they buy loss making Government debt?
Why can’t we and our DB schemes be invested by the Local Government schemes who have avoided buying gilts and invested in the clever stuff, done so well, while our gilt investments have done so badly?
Why are the people who took the risky strategies, prospered, and the people who put their money under the mattress, failed?
Risk is no longer bad for you!
For the past two decades – we have been told that if we are skint we shouldn’t take risk. Employers who were skint weren’t allowed to take on risk in their pension schemes without loading up with gilts. Savers who were approaching retirement were encouraged to take less risk and load up with gilts. LDI and Lifestyle between them may end up costing us collectively over £700bn , that’s a lot more than £1,00o pa off all of our pensions.
In the past two years we have lost money by not taking risk. Now the Mansion House Reforms urge us to take more risk. Same Government who made us de-risk is now making us re-risk!
An admission of failure?
The Government don’t seem to be taking any responsibility for touting LDI and Lifestyle through its “risk-based regulator” the Pensions Regulator.
Shamelessly, they have blamed everyone but themselves for LDI and the Lifestyle crisis’ of 2022. Indeed they haven’t even acknowledged that DC has had its own investement crisis which saw hundred’s of thousands of savers lose over 20% of their pot as they approached retirement.
For many DB schemes and for many DC savers, there is no time left to reap the rewards of taking risk, because they face the prospect of having to cash out what’s left of their DC pots just to get by.
“For you my friends – saving is over”
The Government is happy to promote a pensions boost from taking on risk to those who can, but keeps very quiet about selling a generation of savers down the swanny with the fake risk-free investments – gilts.
Risk is rewarded over time ? Only if you take it
There is a second admission of failure that we aren’t hearing from Jeremy Hunt or anyone else in Government. It is the Government policy of hunkering down on cost and charges for two decades.
First we had the stakeholder price cap, then the workplace pension charge cap and lately we’ve had a race to the bottom on price as employers pick up on Government policy that emphasised price over value until very recently.
The result is that many of us are in workplace DC pension funds that don’t take any risk but the market risk represented by an index of listed stocks. Most of our money follows market capitalisation away from the UK and to the US and emerging markets.
We take unwitting bets on currency as a result making the investment return we get a lottery. Then – once we become “mature savers” (over 50), we lose what little risk we’ve taken in return for “investment” in bonds, gilts and cash.
At a time when DB actuaries are considering people at the halfway point of their pension careers, we are de-risking people so that they can spend their last 40 years “risk free” or should I say “fake risk free”.
The truth is that most of us take on far too little risk in our DC investments and that’s not our fault, it’s the fault of the DC default funds we are in, funds created by trustees and pension firms – under the beady eyes of the regulators.
The prolonged failure of pension scheme regulation
To me, the Mansion House reforms are a welcome return to sanity after 20 years of investment insanity that lost us savers billions by our not taking on risk.
It should also be taken as an admission – 20 years late – that the road to de-risking is a cul-de-sac. Many pension vehicles are still stuck down that cul-de-sac and the sooner they consolidate or sell themselves to an insurer or superfund the better.
In his speech Hunt talked of the price of failure
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Analysis shows a difference in returns between schemes over a 5-year period of up to 46% in some cases. This means that a saver with a pot of £10,000 could have notionally lost £5,000 over a 5-year period from being in a lowest performing scheme.
The pension firms that have failed over the past five years are the firms that hedged their natural sources of risk – their cupboard is bare, they face extinction from the VFM framework.
The firms that have prospered have exposed members to market risk and found new markets where that risk is manageable to member’s favor.
But these are schemes that have the size to have budgets for the kind of restach needed to take risk.
Shamefully, many large workplace pensions have scale but take no risk.
It is time to get tough on such firms and time to have a new broom at the regulator that let them (and their DB counterparts) destroy so much value.
I’m glad that the Government has belatedly come to its senses over Pension investment. I grieve for the millions who have paid the price to keep wanted risk off the table.
Give it 5 years of inflation and your £1000 will but you groceries for a week
If the dangers of LDI are not understood how on earth will funds invest expertly in VC?
The individual members might be better investing in SEIS and sharing the risk with HMRC
They might then be able, over time, to learn the difference between investment and donation
Everyone seems to forget that “risk” has both a downside and an upside.
Off theme, but-
Why on earth should a closed pension scheme seek to hedge its mortality risk. In the short term scheme experience will outweigh any changes to mortality assumptions. In the long term any increase in pensioner longevity will be so heavily discounted that it becomes irrelevant against the other more immediate cash flow “risks” faced by the scheme.
I agree with your piece, but isnt this not so much a U-Turn as a completely different policy. I was under the impression that the 5% “target” for unlisted securities is effectively the VCT, EIS and SEIS space. Mr Hunt seems to think that the world in which very few people have more than 65% of their portfolio in mainstream global equities which if well diversified enough will never offer up permanent capital loss (barring WWIII, in which case, who cares). The way regulation and government policy collide is rather like allowing a child to have a water pistol, getting fed up with not creating any real fire power, so giving them the keys to a nuclear submarine. Mr Hunt is a winner from PE, but thats a rare experience, not the norm. Offering the framed certainty of 12% into everyone’s pension seems to run contrary to any lessons every being learned at any time by anyone in Government. This is all about funding for friends PE ventures.
Imagine what we would all think if an IFA used similar rigour in advising clients. Allocating all your pot to UK growth using the quited figures would increase your pot by 2.4x. To get these outcomes there must be some other kind of pot involved !
Never allocate all your pot into the one thing, whether that be locking into sovereign debt of a post colonial high inflation State, or “growth” (albeit if you tell me this is allocated over the 100-200 largest global corps paying annual dividends and participating and reacting to global supply change challenges, then I know what I’d prefer…?)
The PPF is a good thing. TPR has been cataclysmically bad for DB Pensions and UK GDP.
But bad laws, introduced without sufficient oversight or challenge lead to bad outcomes.
Way way back in the very early days in the establishment of the TPR it was said to me by someone closely involved in the drafting of the regulations bringing TPR into being, that the remit was to ensure that a certain CoExch would not face the embarrassment of any pension scheme failure clouding his ascension. Hence the excessive powers granted to TPR, the piercing of the corporate veil, the myopic remit (to protect the PPF) – a result of a “tell me what powers you want”, going unchallenged.
Further mistakes like putting bankers in charge of PPF/TPR followed, and a lack of whole system oversight have led to where are now, which to be frank, is in a bit of an unfunded mess (on a macro basis, overloading on UK Gilts is exactly the same as unfunded!), suitable only for feeding bankers bonuses, as we strip out 20% away from members on the route to buy-out?
And the actuarial profession, giddy at having invited to the party, nodded this all through without a comment on concentration risk. So much for diversification. Gilts as risk-free is not an axiom, it was assumption to simplify working with big spreadsheets.