Posts Tagged ‘Pension’


As you know, we are ageing. We are all literally ageing, of course; there are no real life Benjamin Buttons out there. But as a country and as an economy we are ageing too, and that means there could be a pension problem in the future. The solution is obvious. We all have to save more, throw more money at our pensions. Or do we? A new report suggests that this approach may be flawed.

According to EuroFinUse: “Recent OECD statistics have cast a dark shadow over the aspirations of private pension savers. Over the last 5 years, real returns from private pension funds (after inflation) have been negative in many EU Member States. They have failed to hold their purchasing power, setting a gloomy outlook for tomorrow’s pensioners.”

In fact the real return (that’s after inflation) on five years’ pensions across Europe has been just 0.1 per cent over the last ten years and negative and minus 1.6 per cent over the last 5 years – at least that is what the OECD shows on the products and countries it covered.

EuroFinUse stated: “Despite such concerning results, the OECD still strongly recommends that citizens should make a greater contribution to personal pension provision. When advising people to save more, public authorities should bear in mind that pension saving products are in many cases destroying real value of citizens’ savings. This is why providers and public authorities should seek to protect the long-term purchasing power of savings, before advising citizens to increase those.” See: The Real Return of Private Pensions 

Actually, when you think about it, the report should not really come as a surprise. Many pension funds in an attempt to meet solvency laws, have been flocking to bonds, even though such bonds pay out lower percentage yields than inflation.

The truth is that many pension funds have been paralysed by the regulator into becoming so risk adverse that they threaten to bring down the economy. The economy needs risks; there is no such thing as risk free. The obsession with risk free in recent years has ironically created more risk.

That is why investing under your own steam, privately rather than via a pension fund is interesting.

And here is a thought to leave you with. A recent article in ‘Fortune’ magazine quoted London’s Tech City CEO Joanna Shields as saying that not so long ago her employees scoffed at stock options. They wanted pensions. She says that today that they all want to be the next Mark Zuckerberg. See: What London can teach Silicon Valley 

If you want a secure retirement, saving for a pension may be a partial answer, but stock options and investing directly, without the straitjacket of a pension fund and its requirements, may provide a better alternative

© Investment & Business News 2013

“The elderly are more likely to vote than the young.” That was what CityAM said this morning, in response to Ed Balls’ idea of increasing the retirement age.

Actually, Mr Balls was talking about ring fencing. The government is trying to make cuts, but certain areas are protected, will never be breached – never as in cross my heart hope to die, never.

So the NHS is safe. Education is safe, and state pensions are safe.

But maybe ring fences are a bit too solid, and never is too long a time frame. Part of the problem with the NHS is that the pendulum has swung too far to the other way since the bad old days of the 1970s. Back then doctors and nurses were grossly underpaid. Today many GPs are more like traffic police. They direct patient traffic to different specialists, but how much of what they do could be handled by well trained, experienced nurses?

As for nurses, maybe the entry level is too high. A better career progression path, with senior nurses taking on many of the tasks that used to be carried out by doctors is a good idea, but at the bottom end, maybe we need more SEN type nurses. So perhaps the NHS should be not so much be ring fenced, as have a new ring of confidence via a complete re-think on how it operates.

The NHS also needs a re-think in terms of the imminent retirement of the baby boomer generation, otherwise we have a nasty problem coming.

Talking of baby boomers retiring, did you hear the one about savings? It was told by Scottish Widows, and the story goes like this: one in five Brits are not saving at all; 40 per cent are not saving enough.

Is it right? Well, sort of.

It is true that the UK sits on a fault on the demographic tectonic plates, and the impending earthquake could be far more significant than anything fracking might bring. As things currently stand, the UK is heading towards a disaster of enormous proportions as the baby boomers retire, and find there isn’t enough money in the pot.

But what the UK really needs is a more dynamic economy, with more entrepreneurism. Greater savings may help if the money saved is used to fund investment and in promoting entrepreneurism. If, on the other hand, greater savings mean money sloshing around and lying idle, promoting consumer credit and mortgages, and pushing up house prices, then the catastrophe that is the imminent retirement of the baby boomers will be far more catastrophic.

As for ring fencing state pensions, Ed Balls actually said that the idea of cutting money spent on stage pensions in some way was being considered, but probably the result will be a rise in retirement age, rather than less pension income for those who are retired.

And on the topic of the UK fiscal deficit and government borrowing, it seems there is a choice: carry on borrowing and risk creating a massive debt burden for the younger generation, or impose austerity and risk deepening the downturn, imposing a massive burden on the younger generation trying to build a career.

Mr Balls is as populist as any of the politicians, and no more likely to advance unpopular policies that are in the common good, than anyone else, but at least Ed Balls’ new plan tries to deal with one of the problems.

The baby boomer generation makes up a large chunk of the electorate, however, which means they want higher house prices, higher pensions, a lower retirement age, and none of this talk about fiscal stimulus, for that will lead to more debt, which is immoral because that will leave a debt for future generations to pay.

For more see, Baby boomers: The tyranny of the Baby Boomers 

© Investment & Business News 2013

Let’s hope you are sitting down because this may come as a shock. It turns out that a lot of Brits are not saving enough.

According to Prudential: “One in seven (14 per cent) people planning to retire this year will depend on the State Pension as they have no other pension.”

The Prudential analysis also reveals that nearly one in five (18 per cent) of those planning to retire this year will be below the poverty line. The Joseph Rowntree Foundation estimates that to be above the poverty line a single pensioner in the UK needs an income of at least £8,254 a year, yet 18 per cent of those retiring in 2013 expect to retire on less than this.

The findings also highlight a significant gender divide, with 21 per cent of women expected to retire below the poverty line in 2013 compared with 14 per cent of men. In addition, women are nearly three times more likely than men to have no other pension – 23 per cent of women retiring in 2013 will retire without a private pension, compared with just 8 per cent of men.

The truth is that the retirement of the baby boomers, something we are only just beginning to experience, will provide the single biggest challenge to the UK economy over the next few decades. Indeed the US and much of Europe face a similar challenge.

You could say that what is happening in the UK now happened in Japan 20 years ago.

What is the answer?

From a micro point of view it is for us all to save more. But if we all save more, the result may be recession and falling wages, which in turn may make it harder to save.

From a macro point of view we need investment into innovation, infrastructure and just in trying to create a more dynamic and stronger economy. Or we need more immigrants, which is not an idea that is likely to prove very popular.

© Investment & Business News 2013

According to data from the ONS, the number of people aged 65 or over in employment has risen from 890,000 in the first quarter of 2012 to just under a million in Q1 of this year.

According to a survey from NS&I, just under a third of Britain’s adults (31 per cent) do not know how they will finance their needs in later life, including such eventualities as long-term illness, nursing home or care fees and care of others, including partners, parents and siblings.

On the subject of retiring over 65, Nigel Green – who is the chief executive of the large IFA the deVere Group – said: “Naturally, it’s hugely positive if the over 65s who are working past the traditional retirement age are doing so because they choose to, but it’s totally different if they’re being forced to carry on working as they can’t afford to retire.” He said: “I suspect the majority are working because they have to.” He continued: “The ONS findings show once again that as a nation we’re simply not saving enough. There needs to be a radical shift in the savings culture.”

The NS&I research shows that “over a quarter of Britons (27 per cent) who have yet to consider financial planning in later life admit they do not want to think about such events. 23 per cent say they simply have not had time to think about their later life financial needs, and just under a fifth (19 per cent) prefer to take a short-term view of their finances and use the money they have for the present.

A further 12 per cent don’t consider that this situation will affect them in the near future and believe they will have plenty of time to consider such planning going forward, while 7 per cent of Britons do not consider later life financial planning as important.”

So what does that tell us?

Clearly we have to save more and we will, as the baby boomers wake up to their pension crisis in the making.

But if a large chunk of the UK populace starts to save more won’t that lead to recession? This is what happened in Japan 20 years ago, and we all know what happened next.

© Investment & Business News 2013


As a species there is one thing we are lousy at. We think we are unique. We come up with an idea to solve a particular problem, and rarely does it occur to us that across the economy others are behaving in much the same way, and have come up with a similar idea.

Collective behaviour can have the effect of nullifying our actions; it can even have the opposite effect to what we had originally intended.

So that’s us. You and me. We are victims of this. It’s like a virus, and it has a name too – it is called the fallacy of composition. It has infected humanity since we came down from the trees. But you would expect more from regulators, wouldn’t you? Alas the regulator of the European pension industry – which goes by the snappy title of the European Insurance and Occupational Pensions Authority – has contracted a nasty dose of the fallacy of composition. It is one of the reasons why the economy can’t get out of the rut it has got itself into.

Back in 1997 it happened with Long Term Capital Management (LTCM). They came up with an algorithm that was a sure fire way to make money. It couldn’t fail, or at least the chances of failure were so minuscule that they were effectively ignored. What LTCM did not factor into account was what would happen if other investors applied a similar approach. The crisis that ensued was like an early preview of 2008, and nearly brought the global economy down to its knees. The IMF made a similar mistake. It congratulated the banking industry on the innovation called mortgage securitisation, and said that as a result of this the chances of banking crisis had reduced. It was a victim of the fallacy of composition. When the majority of mortgages were subjected to securitisation, the result was that –because banks took on more mortgages as a result – risk increased. You know what happened next.

We have an economic cycle for much the same reason. When market research shows demand is greater than supply in an industry, the company which commissioned the research increases output, but they rarely factor in competitors having access to similar research. Output rises, the industry sees boom, but then production exceeds demand and recession follows: companies cut production, demand exceeds supply, until research emerges showing demand is greater than supply.

So that’s the composition of fallacy. Across the economy it applies to savings. In a recession, companies and households reduce risk, save more, and the recession gets deeper as a result.

When banks reduce risk en masse, the result is less lending, the economy stumbles and the very thing banks were supposed to reduce, then rises. The fact is that all banks are insolvent. No bank can survive calls from all of its depositors to withdraw their money. If all banks collectively agreed to increase risk by lending more to wealth creators, the result would be a stronger economy and the chances of a banking crisis would fall.

If all pension funds put less money into ultra-safe, low yielding assets, and invested in infrastructure, and funded company investments by buying equities, the result would be an improving economic outlook, and pension funds would rise in value.

But under solvency II regulations, pension funds are required to reduce risk. So they have no choice but to pump more money into government bonds, and because government bonds pay out such incredibly low yields, they have to buy an awful lot of bonds in order to meet their commitments. That means they have to raise more money, and companies have to pump more profits into pension schemes and less into investment. The economy deteriorates as a result. And pension fund find they have an even bigger deficit.

The EU Commission wants to see European pension funds put money into infrastructure. The European Insurance and Occupational Pensions Authority has considered its request, and given the following statement: “Any preferential treatment of a certain asset class might result in a build-up of risk concentrations in the sector with the associated higher level of systemic risk.” In other words, they’ve said no. The irony in this statement is the use of the two words systemic risk. Actually, the fallacy of composition is the cause of systemic risk.

The National Association of Pension Funds (NAPF) has looked at the implications of forcing UK pension funds to follow solvency II rules and fears a £450 billion pension deficit will follow as a result.

Joanne Segars, chief executive of NAPF, said: “The EU plans for UK pensions come with a clear and unpalatable price tag. Businesses trying to run final salary pensions could be faced with bigger pension bills to plug an astonishing £450 billion funding gap. This would have a highly damaging effect for the retirement prospects of millions of UK workers.” She added: “This project has been conducted at breakneck speed due to the EC’s ludicrously tight timetable. This cannot be the basis for formulating a policy that could undermine the retirement plans of millions of people both in the UK and across Europe.”

She is right, but wrong about the problem. The problem is not that the European regulator is enforcing a “ludicrously tight timetable”, it is that it has fallen victim to the fallacy of composition.

©2013 Investment and Business News.

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