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.
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.