Posts Tagged ‘Retirement’

Chris Roberts

Recent articles confirming ATP’s attempt to launch a NEST comparative scheme led me to wonder what Federer, Djokovic or our own Andy Murray had to offer workplace pension reform……

On closer inspection (googling “ATP” and ignoring any tennis references) I was led first of all to a promising website called All Tomorrow’s Parties promoting concerts, and other hip cultural events featuring the likes of Portishead and Mogwai, but sadly, with nothing much to say about pensions. Further investigation (adding “pension” to my “ATP” google search) led to the Danish national pension agency, which made a little more sense. 

I must admit when I think of Denmark it brings to mind bacon, the little mermaid, the eponymous pastries and more bacon. Which probably says more about me than it does about Denmark. The Danish ATP (or Arbejdsmarkedet Tillaegspension, as they say in Denmark) runs one of Europe’s largest pension schemes. In 2009 ATP pulled out of the running to provide administration services to what were then described as personal accounts. At the time PADA suggested that providing such services did not fit with ATP’s commercial model. Two years later things have clearly changed.  Read more »

John Griffin

I was momentarily startled yesterday to read that S&P could be responsible for the meltdown of the US economy – I hadn’t realised that the reach of Spence & Partners stretched so far. I then realised, of course, that they were referring to the “other” S&P.

Standard & Poor’s, one of the three main credit rating agencies had decided to downgrade its ratings for US debt because it felt that the recently agreed debt-reduction plan, forced on President Obama by the US Tea Party, wasn’t going to do the trick.

The stance taken by S&P (the ‘other’ one), however, may not be well-founded. For instance, the other two of the three main agencies – Moody’s, and Fitch – are less pessimistic, and the yield on US 10-year Treasury bills is still lower than almost all other nations that still retain the AAA-rating, so lending to the US is still perceived to be a safe investment.

This put me in mind of the American US satirist, P J O’Rourke, who, loosely translated, once described economics as an entire scientific discipline of not knowing what you’re talking about. Who really is in a position to predict the future? Read more »

Neil Copeland

The term nanny state was probably coined by the Conservative British MP Iain Macleod who referred to “what I like to call the nanny state” in his column “Quoodle” in the December 3, 1965, edition of The Spectator.

I’m not sure when nanny took on the slightly pejorative sense of an interfering busybody dispensing unwanted advice and meddling where they have no business to meddle, as opposed to the the all singing, all dancing and not entirely unattractive Mary Poppins, spreading order where once there was chaos, joy where once there was sorrow and Dick van Dyck were once there were cockneys.

So if the concept of a nanny is slightly schizophrenic so too are my feelings towards the nanny state.

I like to strike the pose of a Libertarian (and indeed in my wilder imaginings, a Libertine), bridling with a righteous fury when I hear news of some interfering busybody or other lambasting the over 65’s for having a second glass of sherry of an evening, or suggesting that we should embrace the travesty of food without salt.

We have these do-gooders in the pensions sphere as well, as a recent article in the Sunday Times makes clear. The article states that: Read more »

Alan Collins

The writing hand of Mervyn King must be feeling the strain of the inflationary pressures in the UK’s economy. For six quarters in a row, the Bank of England Governor has found himself in the position of having to draft a letter to Chancellor George Osbourne to explain why the Government inflation target has been missed. It may be unfair to blame Mr King as many think that the Chancellor’s target is unrealistically low, including Mr Osbourne himself who seems to accept high inflation as a reality we have to live with for the time being.

High inflation is not always bad – it can encourage economy-boosting spending and more private investment in companies as many investors see stocks and shares as a better option than cash. Unfortunately, it also provides a lot of instability in the economy and the world of pensions. Over the last year, inflation has been the biggest issue on our radar, not least because of the contentious legislation to determine pension valuations based on Consumer Price Index (CPI) rather than the previous gauge of Retail Price Index (RPI) being introduced in the UK.

The recent announcement that CPI rose by 4.5 per cent over the last year compared with an increase in RPI of 5.2 per cent will have a direct economic impact on many pensioners. Those with pensions linked to RPI would gain by almost one per cent each year compared to those with pensions linked to CPI.  Assuming these inflationary rises continued at their present rates, the income of a pensioner currently earning £10,000 each year would rise to just over £16,600 per annum in ten years time under RPI compared with around £15,500 per annum under CPI.

Inflation as it impacts on pensioners is generally accepted to be currently relatively higher as the ‘basket of goods’ includes many items which have increased more rapidly recently, such as food and fuel costs. These tend to represent a greater proportion of income spend for a pensioner whereas other areas of expenditure which have been more stable or reduced.

The current high levels of inflation are highlighting the controversy over the move from RPI to CPI. We have already seen many public sector union leaders calling for a judicial review on this decision and the private sector is not exempt from this either. British Airways have seen three trustees of the pension fund in April resign because of the move from RPI to CPI.

Future movements in CPI are very difficult to predict.  Even over recent years, there have been a number of occasions that CPI has exceeded RPI so it can therefore not be ruled out that CPI could on occasion give rise to higher increases than are currently paid under RPI.  The basket of goods for CPI could also change – if, for example, housing costs are included, this could substantially close the current gap between it and RPI.

Looking at the impact of inflation from a different perspective, it can also have a roller-coaster effect on pension scheme payments and funding levels.  Inflation caps on pension increases are often overlooked.  Pensions may become significantly devalued if this cap applies for an extended period (irrespective of whether the inflation measure is CPI or RPI). Pension increases are generally capped at a maximum of 5% per annum, and so with inflation at its current level, capping at the 5% level would currently apply under RPI and remain a distinct possibility for the future.

While it would be bad news for pensioners and possibly the wider economy, a run of higher inflation is actually likely to improve scheme funding. Providing the actual inflation level exceeds any cap that a scheme has in place, it will be providing its members below inflation increases which, assuming investment returns do keep pace with inflation, will improve the overall funding of the scheme. The worst possible scenario for scheme funding is likely to be in a period of deflation whereby they would need to effectively pay out increases in excess of inflation and reduce scheme funding.

Perhaps the fine balancing act and the cause and effect implications of rising inflation explain the apparent willingness of the Bank of England and the Government to live with this situation, at least in the short term. However, the longer Mervyn King is required to pen an inflation letter to the Chancellor, the greater impact this will have on UK pensioners.

This article featured in the Scotsman on 24th June 2011.

Alan Collins

I’ve  never had an “ology”, but always fancied one. So I thought I’d have a go at futurology. Futurology is the study of possible, probable, or preferable futures for society and the worldviews that underlie them. There is a debate as to whether this discipline is an art or a science, or just a bit of fun indulged in by the weekend supplements on the Sunday closest to New Year’s Eve.

Obviously there is a spectrum in futurology.  I’d tend not to invest too much faith in those futurologists who cite their predictions as being the result of channeling Thrag, a 9,000 year old lizard-being from the planet Zoltar. But some approaches have a slightly more reputable pedigree , and are essentially the statistical collection and analysis of past and present trends with the goal of accurately extrapolating future trends. When they put it like that, it almost sounds like being an actuary!

So if I apply my ology to the pensions field what might I divine?

Well, what about past and current trends? Recently, Scottish Widows published their seventh annual report on the state of retirement savings across the nation.

The most damning statistic is not a new one – 20% of those surveyed are saving nothing for retirement in 2011, a slight improvement from 21% in 2010.  Also, the survey concludes that just over half of those surveyed are assessed as making enough provision for their retirement.  Somewhat worryingly, the threshold for qualifying as being adequately prepared for retirement, according to the study  is setting aside 12% of pay (including employer contributions) – I don’t think there would be many in the actuarial or financial advisory sector that would conclude that 12% of pay is enough.

The UK does not seem to fare well in retirement savings stakes versus other developed economies – the survey refers to a recent Chartered Insurance Institute report which estimated that the UK Retirement savings gap at £9 trillion.

There is some encouragement to be had relating to the impact of auto enrolment and NEST, with only 11% of those surveyed saying they will opt out rather than be automatically enrolled, so the future trend may be for more retirement saving but at a level, 8% in aggregate, that is unlikely to make a real difference to most people.

A proposal which has generally been welcomed in pension circles is the introduction of a flat rate state pension of £140 per week (in current terms).  I see one of the main positives of this proposal as being that additional savings would be rewarded and not offset against some state benefits as is currently the case.
Indeed, I attended the Actuarial Profession’s annual conference last week and Pensions Minister Steve Webb stated this aspect as a significant advantage of the flat rate pension system.  However, the survey suggests that there is a significant communications and financial education  challenge in convincing the wider public that the flat rate pension system will reward savings, as only 18% of those surveyed stated that the system would lead to them saving more.

The survey also details a high level of expectation on employers to engage in the retirement savings process.  70% believe an employer should provide access to and contribute to a pension arrangement.  More surprisingly, some 40% believe that employers offering a pension scheme should offer a full advice service.  My experience is that the number of employers offering such a service would be significantly less than this level.

Together with moves by the Pensions Regulator to encourage employer engagement in Defined Contribution arrangements and facilitate access for staff to open market options at retirement, it should now be an important consideration for employers to effectively communicate the benefits of retirement savings and also assist with retirement planning for members approaching retirement age.

Finally, to get another angle on the public view on retirement savings I consulted the comments section of the BBC website’s reporting of this story.  At last check, the story had attracted a staggering 327 comments, which at least shows that the public seems to be engaged on the topic of pensions at the moment.  However, comments such as,

“Saving – might as well spend it.”
“most people distrust pensions”
“Don’t bother with pensions – they are unsafe and unprotected.”,

illustrate that trust and belief in retirement savings is still far short of the level required to encourage the general public to engage in the process.  That, for me, is the biggest challenge facing the industry, and indeed our wider society, and a challenge which seems to be getting harder rather than easier over recent years. Financial education needs to be a priority for the UK, and our industry is well placed to play its part, but the Government also has a leading role to play.

So what sort of future do we want?  A future where all our citizens have a meaningful income and standard of living in retirement? Or, in extremis, a dystopian, ageist future in which the state provides for retirement but can only do so by permanently “retiring” everyone reaching a particular age?  I’m afraid, based on the current evidence that, unless we can change society’s behaviour radically, our future is more likely to resemble Logan’s Run than Utopia.

Alan Collins

If asked about my political views, liberal is not a word that would ever feature in my response. No subscription to the Guardian newspaper here.

However, on reading the discussion paper from Philip Booth and Corin Taylor for the Institute of Economic Affairs (IEA) on “How the older generation should suffer its share of the cuts”, I have had to reassess my thoughts on the virtues of beard growing and sandals.

In short, the paper recommends the abolition of a number of benefits currently provided to older people, namely

  • Certain non-cash benefits (free bus travel, free TV licences and the winter fuel allowance);
  • Married couples allowance for older people;
  • The age adjusted tax-free income allowance; and
  • The earnings link to state pensions (which hasn’t even been re-introduced yet!);

The paper also recommends the state pension age is increased to 66 in 2015, a reduction in public sector pension contributions and an accrual rate of 1/45th for future build up of state pension entitlement. Wow – don’t hold back now guys, say what you really think!

Given the need to reduce the national debt, it is right that ancillary benefits paid to pensioners such as free bus travel and free TV licences come under scrutiny. However, it is unlikely that a government of any persuasion is likely to threaten the winter fuel allowance.

I welcomed the proposal in October 2010 to consider a universal state pension of around £140 per week and so would view the proposed use of an accrual system to be a retrograde step.

The comments on the triple lock of increases applying to the state pension seem flawed. Firstly, the price inflation element of the lock changes to CPI from 2012, which is expected to be less valuable than RPI. This fact seems to have been missed, though it does not appear to affect the estimated cost saving.

The estimated cost saving on excluding the link to earnings also assumes wage growth of 2.5% per annum above inflation, which is certainly higher than I would expect – therefore the saving is likely to be significantly less than the reported £5.6 billion per annum.

Some of the other figures seemed to have been produced like a rabbit out of a hat. For example, apparently a conservative estimate of the annual saving on increasing the state pension age to 66 by 2015 would be about £5 billion – this figure is provided without any justification.

The paper does make some bold suggestions in the pensions arena which are certainly worthy of further consideration. Firstly that the full costs of all pension promises should be revealed. I agree that the current cost is being pulled down by over optimistic assumptions about future investment return and await with interest the release of Lord Hutton’s report on 10 March. The removal of final salary linkage is not enough to stem the tide of rising costs and any move to Career Average accrual is only postponing more difficult decisions for a later date.

Secondly, the paper recommends that individual organisations and councils are allowed to negotiate individual pension arrangements with their employees. This would certainly test the value of pension provision – how much more salary would a public sector employer be prepared to offer in return for lower pension contributions? If NEST is enough, then why shouldn’t organisations be allowed to offer more salary in return for lower pension contributions?

In times of economic difficulty, it would seem that suggestions on how to save money are becoming more aggressive. And I am all for a bit of debate, I just think the debates surrounding some of the more outlandish ideas contained here are likely to be short.

Neil Copeland

Will the recent European Court of Justice (ECJ) ruling over gender-based pricing of insurance products result in a rebirth of Haruspicy?

Pretty much since the Enlightenment we have got used to approaching the world in a logical fashion. The Oxford English Dictionary says that scientific method is: “a method of procedure that has characterised ….. science since the 17th century, consisting in systematic observation, measurement, and experiment, and the formulation, testing, and modification of hypotheses.”

Over time observations and measurements of life expectancy have been made, formulated  and tested and a hypothesis developed which says that women live longer than men.

Hypotheses tend to represent the generally accepted position. Hypotheses are subject to periodic retesting and where, after rigourous testing, a hypothesis appears to no longer adequately explain an observed phenomenon then it can be replaced by a new hypothesis which offers a better or more complete explanation. Whilst no hypothesis would ever be held to be an eternal truth, neither would it be discarded or ignored without a compelling rationale to do so.

The learned members of the ECJ, however,  appear to have overturned the current hypothesis on life expectancy, not because compelling statistical evidence has emerged which suggests the hypothesis is not valid, but on a whim because it is not “fair”, whatever that means, and objective justification no longer seems to be a defence.

So it looks like we will be faced with the outlawing of gender based pricing by the end of 2012, and I’ve been trying to think of alternative approaches which insurance companies could use to help them price their products, and I’ve come up with Haruspicy. Read more »

Sean Browes

I was sat in a pub with a friend recently and the conversation got round to pensions. It went something like this:

Friend – I’ve been thinking about putting some more money into my personal pension. Last time I looked into this, the maximum I could put in was 15% of my gross taxable earnings in any one tax year. Is this still the case?

Me – Ah! Things have changed. It’s all been simplified now. You can put in as much as you want …

Friend – Excellent!

Me – … except, if you go over your annual allowance, you’ll get hit for some pretty severe tax charges.

Friend – Oh … so how much ‘tax relieved’ contributions can I put in?

Me – Depends on your Pension Input Period.

Friend – My what?

Me – The actual Revenue definition is ‘the period over which you measure the amount of your pension saving’.

Friend – So not the same as a tax year?

Me – It could be … but not necessarily. In fact, it pretty certainly won’t be.

Friend – So what’s the maximum if my Pension Input Period ends after April 2011?

Me – Depends ….if it’s before 14th October, then, technically, £255,000 but the maximum contribution after 14th October 2010 is limited to £50,000. … unless.

Friend – Unless?

Me – you have unused relief from any of the three previous years. The Government has put in place some transitional arrangements which means you have a notional £50,000 for each of the last three years. If you haven’t used it all, you can carry it forward.

Friend – So, if I’ve put nothing into my pension in the last three years I could put in £150,000?

Me – Yes … except … how much do you earn?

Friend – £135,000 a year.

Me – Ah!

Friend – Ah?

Me – In that case you are deemed to be a high earner so the maximum contribution you could make before 5th April this year is £20,000.

Friend – £20,000?

Me – … or maybe £30,000.

Friend – Sorry?

Me – This is your Special Annual Allowance – it was introduced as an anti-forestalling measure by the previous Government when they attempted to restrict the tax relief for high earners. If you can demonstrate that you have made irregular contributions in any of the last three years with an aggregate value of £30,000 or more … your Special Annual Allowance is £30,000. Otherwise, it’s £20,000 … or, in some cases, between £20,000 and £30,000.

But, you see, the new Government then decided to stop messing around with tax relief and just limit the amount of tax advantaged contribution you could put in. So, the anti-forestalling measures are no longer required and have been removed under legislation, effective from the start of the next tax year.

Friend – But they still apply to this tax year?

Me – Oh yes! By the way, the tax charge is slightly different if you were to exceed the Special Annual Allowance –the Special Annual Allowance Charge effectively arises by restrciting the tax relief available on contributions in excess of the Special Annual Allowance to your basic rate so, in your case, it amounts to 20%. The Annual Allowance Charge is 40%.

Friend – (adopting glazed expression) I see (not really seeing at all). What about after April?

Me – Assuming you pay £20,000 before April 2011, between £30,000 and £130,000, depending on how much unused relief you’ve got available.

Friend – I’m not sure when my Pension Input Period runs from or to. What if my current Input Period ends before the 5th April? What would the maximum [tax relieved] contribution be?

Me – Hey, fill your boots, £255,000! Except ….

Friend – Except?

Me – You’re a higher earner so ….

Friend – I’m restricted to £20,000?

Me – Yep, anything over that would be subject to the Special Annual Allowance Charge.

Friend (with a hint of irony) – Well, thanks for clarifying that. I have another friend who’s in a defined benefit scheme – he asked me to ask you the same question.

Me – (Pause to reflect on the question) … did you see the football last night?

As the saying goes ‘you couldn’t make it up’. Actually, that’s not true, this is clearly a made up conversation (those of you who know me will know that I don’t go to pubs very often these days and I don’t have any friends).

The message, sadly, is not made up. There is a great deal of complexity around the reduction in the Annual Allowance from April this year and associated transitional arrangements. As intimated, there are added complications for Defined Benefit arrangements.

Up to now, the annual contribution limits have been generous and unlikely to be infringed except by all but the highest earners or those making large, one-off contributions. However, there is now significant potential for large numbers of active members to get tripped up by these legislative changes. For any type of scheme, trustees and/or employers should be communicating to members/employees, certainly in advance of April.

Individuals might want to seek the advice of their scheme administrator if they are a high earner (earning in excess of £135,000 per annum) and/or are making significant contributions. Alternatively, feel free to contact me or your usual Spence & Partners contact.

Greig McGuinness

In the past couple of weeks “The NEST phrasebook” has been released to assist with the clear communication of pension issues and encourage public engagement in retirement savings by improving levels of understanding of the products on offer.

Far be it for me to question how public funds are spent or the need to make pension literature more user friendly. In fact, one of our aims, especially in our blogs, is to demystify the world of pensions. However, there are a few clear rules:

Firstly: the interpreter must understand the subject in the first place.

Secondly: the layman should be given some credit and not patronise him.

Thirdly: the cure should not be worse than the ailment.

Does changing the term “trivial commutation” to “Taking your retirement pot as cash” suggest an understanding of the finer details or the audience? The additional explanation is unlikely to be remembered and suggests that the only way to fully commute a benefit is on the grounds of triviality.

Does the layman need to be told that a “Fund” is usually made up of shares and other financial products? If so does this explanation tell him anything more? And would you expect the same layman to know what a gilt is? That’s a term that NEST thinks needs no further explanation.

Now whilst I support the effort and can see what is being attempted in the previous examples I see no reason why an employee should be redefined as a worker, auto-enrol should become automatically enrol, pension commencement lump sum should be re-named “cash lump sum taken when you purchase a retirement income” and probably most shocking the term pension should no longer be simple enough. A pension now needs to be described as “the regular income you receive when you open your retirement pot”.

Also, we must not forget to remove any potential age discrimination by referring to “on/approaching retirement” rather than “in later life”. Apart from the fact that people tend to retire in later life the very definition of retirement is much more fluid and therefore the term itself is quite complicated. Does retirement mean stopping work, reaching a particular age or, as should be the case, the time at which you “open your retirement pot” regardless of age or employment status? NEST either does not know the answer or thinks that everyone else does.

It’s not all bad; the phrasebook does include some positive suggestions. It is probably a good first step but needs to go further and should have benefitted from some further input from those within the pensions industry who specialise in explaining how retirement benefits work.

Unfortunately, pensions (not least because of the regulatory framework) are complicated and whilst any attempt by government to simplify things should be welcomed, a glossary of common terms, no matter how simple, is not the answer. Until we have a truly simplified regulatory system, which will probably be preceded by porcine avionics, appropriate professional advice is a must for both employers and employees (sorry, workers), NEST and auto-enrolment are on their way and responsible employers should seek advice on how they will be affected before it is too late.

Valerie Hartley

Recently I read with some interest figures showing that different generations of women are witnessing an altering pension’s landscape, with many of today’s young adults not saving enough for their retirement. Tell us something we don’t know!  As most of us do know, the earlier they start, the better off they could be. However, by turning their backs on saving for a pension young people are increasing their chances of facing poverty in old age.Official figures also show that the number of women aged 22 to 29 in the UK who are signing up for a workplace pension has fallen for four years in a row, marking the most rapid decline of any age group.

It is apparent that people are often waiting for decades after starting work before they consider how to pay for retirement. It has since emerged that experts are now warning that a new scheme to ensure employees get into the savings habit will be insufficient and offer workers a false sense of security.

Latest figures from the Office for National Statistics show that currently more than half of the UK’s single pensioners have a pension income of less than £10,000 per annum, and the UK has an ageing population. By 2034, 23% of the population is projected to be aged 65 and over, up from 15% in 1984. An estimated eight million workers have no pension provision and face having to rely on the state pension and benefits to pay for 20 years or so of retirement.

The Survey shows that less than 40% of men and women aged 22 to 29 contributing to a scheme offered by their employer.  These workers are missing out on a pension provision that is generally the most generous of pension policies, compared to a personal pension plan where there is often no employer contribution.

For today’s 20-somethings, pensions have fallen down the priority list as they face up to more pressing financial concerns. In the past the pension system assumed that women did not need a pension, they needed a husband!!  One woman in particular was quoted in the Press as saying, ‘I am struggling to pay off my debt and so at the moment every penny of my monthly salary is needed for rent, living and debt.  After my debts are cleared I think the focus at my age is to start saving to invest in property. This seems more relevant and urgent than a pension at this point in my life.

Is it the case that the only people in their 20s who think about pensions are those who sell them?  Pensions Minister Steve Webb expressed his concern that complications, as well as poor awareness of the pension system, has turned many young people away from thinking about how they will fund for old age. Most young people starting in a job do not get around to thinking about pensions for years because when young you think you will live forever and a pension is something for your granny. Other people assume that their home will be their pension.

No-one is expecting 20-somethings to become pension geeks, but what we do want is to demystify it, make it simple and ask the question, what sort of standard of living do you want when you are old?.  A new system that will automatically enrol people into a workplace pension scheme will get young people into a savings habit and it will also tackle the dividing line between pension provisions depending on people’s choice of career. At present, workplace pension scheme take-up is more than 90% in public sector jobs such as public administration, defence and social security, compared with just 6% in shorter-term accommodation and catering work.

Some people argue that an entire change of culture is needed to make pensions affordable.  We are all expected to live longer, not such a great prospect if we are all going to be poorer. It doesn’t need to be that way but people do need to rethink the way they approach later life. Perhaps this could mean working part-time during pension years? Who knows, but one thing for sure is that without adequate savings many people may no longer have the choice other than to stay at work.

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