There’s a great article in today’s Times which takes a look at what DB Trustees have been doing with the money that’s been “entrusted” with them. It comes at the topic with the good sense you’ll get from a financial adviser who chooses a risk free benchmark , it’s the good sense you’ll get from Martin Lewis and Paul Lewis for whom risk free is putting t he money in an easy access deposit account. Here’s what financial adviser “Ondra” found.
Savings interest v final salary pension funds
Average annual returns since 2020
| Top easy access accounts – average rate | 3.23% |
|---|---|
| One-year fixed rate savings – average rate | 3.72% |
| USS pension scheme | 1.70% |
| Airways pension fund | -1.73% |
| BT pension fund | -6.80% |
| Shell contributory pension fund | -3.50% |
| Railways pension fund | 2.3%* |
“Part of the reason that the British economy has been so emasculated is because of an obsession with eliminating risk,”
said Michael Tory, the chairman of the financial advice firm Ondra.
He is right. We have decided that risk free is doing badly with investment because we’re doing well with our liabilities. We aren’t doing “well” our liabilities (to pay pensions till death) have not changed, we are simply measuring them at a different discount rate. So pension deficits have turned into surpluses despite the fund failures detailed above.
We are not the happier for abandoning DB pensions. Of course , we are aware that the consequence of abandoning certainty has been unhappiness for pensioners , those approaching and those some way from retirement. This is a statement from Standard Life
People may feel guilty that they are not/have not done enough for themselves , this despite auto-enrolment into workplace pensions which came in 2012-18.
How we put things right
So if we can’t stand uncertainty and can’t afford certainty, what can we do? I suggest that we need to put our trust in investment.
sang David Byrne back in 1980, Toby Nangle asks the question Byrne sang next..
If you looked at what’s most available to most trustees of pension schemes, you would probably find yourself with US equities, which Toby suggests have offered a ten year return of between 6-7% since 2013.
Of course we could see the same numbers from the UK if our money made our money stocks perform again.
We ought to ask ourselves why we think that negative returns on assets are satisfactory so long as funds are in surplus. We do you know- even though positive returns seem to be there for anyone. But this is the argument of Megan Harwood-Baynes in the Times
Leading pension funds are missing out on billions of pounds by playing it safe with their investments, experts have warned, with many returning less than high street savings accounts.
Measures in November’s budget placed a huge emphasis on investing, including the planned drop in the cash Isa allowance for under-65s, as the chancellor tries to stimulate the British economy.
But some defined benefit (DB, also known as final salary) pension funds, which guarantee their members a set inflation-linked income in retirement, are returning as little as 1.7 per cent a year on billions of pounds of investments. These schemes argue that they are “fully funded”, meaning that they have enough money to pay out on their promises to members. They say this means there is no need to raise high returns or take risks that could involve losing money.
Megan Harwood-Baynes
She’s right , Toby Nangle’s right and Michael Tory is right. Just who thinks the waste of opportunity from the likes of these big pension schemes is prudence? It is not prudence, it is a waste of money.