Friday, June 28, 2013

recycle : wales@home pension article

With the sad demise maybe 18 months ago of Wales@home comment web site with some terrific articles about Wales stuff, its time to publish some of the articles I wrote here.

This was my 1st article I wrote and still I think has much worth saying which is still true 2 or 3 years later.  Reproduced here without the nice picture of the piggy bank !

I used it as a template for a presentation to a Professional Pensions conference in Manchester, it really did not go down well which I think was a valid result.

Choose a pension
Choose absolute return, multi-asset, a fund of hedge funds and 5% bid offer spread.
Choose from 1500 funds, none of which you have a clue as to how they work.
Choose lifestyle, drawdown or inflation linked annuities with matching whole of life cover.
Choose procrastination induced by choices you don't understand.
Choose an ill informed I.F.A. for 120 quid an hour and wonder who the pensions industry is set up to serve.
Choose mind numbing, all inclusive disclaimers to read and sign.
Choose your capital being slowly eaten away by commission, administration, dealing and management fees.
Choose a history of scandals, mis-selling and an industry hiding behind a raft of
opaque jargon and poorly understood legislation.
Choose a pension.

A work colleague chose something else. At 39, he does not expect to
draw a pension and makes no contributions. A conscious judgment based
on his current state of health and age of death of his male
relatives. A rational choice?  Maybe, but he is not alone. For their
own reasons, half of UK 35 year old workers make no pension provision.

Good reasons abound to be cynical of the UK pension eco-system, but
there is also much to commend. Millions in retirement are benefiting
as pension funds and insurance companies pay out and the state still
provides a modest pension.  Backed by a Pensions Regulator with sharp
teeth, governance standards in UK company pension schemes are now very
high and robust against fraud, with lessons learned from past scandals
such as Maxwell and Equitable Life. Giving and marketing of financial
advice to consumers is well regulated. The better off can access a
huge range of investment choice. The well informed can access
efficient low cost savings vehicles. Tax treatment on pension
contributions is very favorable. Company schemes funding against
liabilities is well understood and the Regulator takes action on
excessive deficit levels. Some fund managers are becoming more active
as shareholders on issues including executive pay. Blackrock, for
example, holds regular meetings with Amnesty International to
understand risks around working conditions for companies and countries
they invest in. The UK pension industry may be a few actuaries short
of fully funded, but the case to use a pension as the core of
retirement saving is still compelling.

The Royal Society of the Arts published a damming report in December 2010 
which makes my Trainspotting parody
sound positively glowing by comparison. The executive summary
commences with

        "The system of occupational and private pensions in the
      UK is not fit for purpose. It is not the low cost,
      trustworthy system which savers justly demand." 

Pension funds in the Netherlands pay out around 40% more on retirement
than their UK counterpart, courtesy of lower commission and management
charges on contributions. The difference funds a well rewarded army of
advisers, consultants, actuaries and fund managers. Complex and
outdated legislation stifles innovation and transparency. The tax
treatment of pension contributions is regressive, with the better off
gaining proportionally more.

The media reported pension crisis is today centered on scheme funding
levels and the balance of contribution between employer and
employee. Expect a gradual worsening of the pensioner crisis as some
outside final salary schemes must work to the grave, or have an
unexpected retirement in poverty, as their pension provision falls far
short of expectations.

Final salary pensions, the mainstay of large company and public sector
schemes, are undergoing well publicized changes. These include
shutting schemes to new members, moving to career average final
benefits, increasing member contributions or and offering a hybrid
of defined benefit and defined contribution.  UK company schemes are
collectively in deficit by 189 billion (85% funded) as of November
2010. The figure hides a huge variation in both deficit and company
support.  For example, the B.T. pension scheme has a deficit of around 9
billion. Part of a plan to plug the gap involves an agreement with
B.T. to pay over 500 million a year for the next three years.  Money,
in theory, which could have improved the UK's telecoms infrastructure
if no deficit existed.

In 2012 ten million workers currently with no pension will be
auto-enrolled and have contributions taken from salary unless they opt
out. A second development, positive for those currently
disenfranchised by the cost and complexity, is the National Employment
Savings Trust (N.E.S.T.). A not-for-profit investment organization,
set up to provide a low cost investment option for the lower paid,
self employed or employed by an S.M.E. N.E.S.T. has inherited a number
of handicaps courtesy of industry pressure, including a ban on
transferring in other pension fund pots and a payment limit of 3600
pounds a year.

In excess of 23 trillion dollars is invested in global pension funds,
with the UK pension funds holding around 2 trillion dollars. Where they
invest has a significant effect on the overall economy, from the price
of government borrowing to the availability of private equity
funding. Providing capital for green energy or infrastructure could
realistically play a larger part than it does today, benefiting both
pension savers and society.

Will increased tuition fees cause more indebted graduates to delay
making significant pension contributions until their forties thus reducing
the impact of the universes most powerful force according to Einstein,
compound interest.

One underlying cause of the ongoing western financial crisis is
deficit driven from consumption funded by Eastern savers. Reducing our
expectations and consumption, instead saving a higher proportion of
income is a tough sell. For this reason alone, good value, attractive
pensions schemes for all are critical and urgent.

If I were the 2011 new year pension fairy, the one change I would gift
to all elected politicians who take pension contributions from the tax
payer is a restriction that at least 50% will be invested in N.E.S.T, or
Group Pension Plans. My inner optimist wants to believe that by
having real skin in the game, the pensions industry would
be bludgeon to move beyond the myth that ever greater consumer choice
is sufficient.  Successful pension saving requires government,
employers, the pensions industry and the individual in equal measure
to take responsibility.


Dr. Clive King was born and brought up near Aberystwyth. Returning
after study and work in various parts of the UK, he lives with his
family in a small rural village. He has worked for global computer
systems companies for the last 15 years solving technical problems
worldwide. He is a Fellow of the Department of Computer Science at
Aberystwyth University, a Member Nominated Trustee of a large company
pension scheme and a past acting Chair of a Citizens Advice Bureau
branch. He is currently engaged in a mid-life crisis of completing the
Bob Graham Round. He writes in a personal capacity.

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