The Great Debate UK

from James Saft:

Pension savers get the boot

From Dublin to Paris to Budapest to inside those brown UPS trucks delivering holiday packages, it has been a tough few weeks for savers and retirees.

Moves by the Irish, French and Hungarian governments, and by the famous delivery company, showed that in the post-crisis world retirees, present and future, will be paying much of the price and taking on more of the risk.

This goes beyond merely cutting back on pension benefits, rising to actual appropriation of supposedly long-term retirement assets to help fund short term emergencies.

Let's start with Ireland, which is kicking in 10 billion euros from its National Pensions Reserve Fund into an 85 billion euro package of support for its banks.

Trust me, this does not reduce the risk profile of the NPRF, which was set up as a sovereign wealth fund to help pay for state retirement benefits.

Putting aside jokes about sovereignty and wealth, of which there is appreciably less in Ireland than formerly, this is effectively a transfer of wealth from the Irish people to its banks. Or rather, to the institutions, mostly European banks, which hold Irish bank debt, none of whom as senior creditors will share in the pain.

In many jurisdictions if Ireland were a corporation and the NPRF part of the corporation's pension fund, then making such a move would be illegal, and quite rightly so.

Nick, Gordon and Dave – here’s how you win the silver vote

-Keith Edgar is managing director at Peverel Retirement. The opinions expressed are his own.-

Brown wants to be friends with Nick. Nick wants nothing to do with Gordon, but might end up as his best mate. Dave doesn’t think much of either of them, but the feeling is entirely mutual.

Welcome to the 2010 UK election; expected to be one of the closest fought for many years.

But while the three main political parties scramble to appeal to younger voters with TV debates and Twitter campaigns, they ignore the older generations at their peril.

At just under 10 million, the UK’s population of over-65s accounts for a fifth of the UK’s 46 million registered voters. Research conducted recently for Peverel Retirement by Opinion Matters found 34 percent of over 65-year-olds, some 3.3 million of the population, intend to vote for the Conservatives.

This group of Tory-voting pensioners is far larger than their peers who say they intend to vote for the two main other parties. We found only 14 percent and 13 percent of the same age group intend to back Labour and the Liberal Democrats respectively.

But here’s the twist in the electoral tale. One in five of over 65-year-olds admit they have yet to pledge allegiance to a particular party. This gives Labour and the Lib Dems a crucial bank of floating voters, many whom may have been swayed by Nick Clegg’s assured performances in the first national television debates between the leaders.

A call for a cross-party consensus on pensions

-Damian Stancombe is head of corporate defined contribution at Punter Southall. The opinions expressed are his own.-

Pensions were a prominent feature of the chancellors’ debate recently, and are becoming a key battleground in the run-up to the election. Perhaps more interesting for us, however, has been the reaction of UK plc to the pensions issue and any government-led ‘solution’.

Punter Southall recently undertook its annual Corporate Defined Contribution Survey 2010, one of the largest and most wide-ranging undertaken in its field.  Responses were received from representatives of a diverse spread of over 330 companies, and considered all aspects of pensions, but focused on defined contribution in the UK and influencing issues: from the current and future impact of economic conditions to the far-reaching effects of planned pension reforms.

The respondents included some of the UK’s largest employers, including 24 FTSE 100 companies and the survey conveys an authoritative range of opinions reflecting the views of UK plc. It revealed a strong sense of dissatisfaction with politicians for their seeming inability to bring about positive changes with regard to pensions. The feeling was that any future political change would have little or no impact on pension legislation, for better or worse.  This is borne out by the fact that 86 percent of respondents believe there will be a change of government at the next election, while 57 percent believe this will have little impact.

With only 14 percent of respondents believing a change in government will have a positive impact on pensions, we believe that this is a strong steer from the business community for government to establish a cross-party consensus solution.  This is seen as essential to achieve stability for non-state pension provision and bring an end to constant damaging intervention arising from conflicting policies.  Indeed this cross-party consensus may be even more important if, as some commentators have claimed, we may be heading towards a hung parliament.

Many companies are pleading for government to stop passing the welfare buck to them (essentially taxing them to provide it by forcing companies to make contributions to pension plans) and to stop legislating them to the point of distraction.

With employer duties and National Employment Savings Trust due to arrive in the near future, we asked UK plc for their opinions on the proposed changes. The recently announced NEST charges have come in for some criticism in the press for being grossly unfair.  In reality, when compared to the pensions industry prior to 2001 and the introduction of Stakeholder Pensions or the cost of schemes in other countries such as the U.S., a comparative charge of 0.5 percent is actually very reasonable.

The UK should not waste its fiscal crisis

–  The author is a Reuters Breakingviews columnist. The opinions expressed are his own  –

 The UK should not waste its fiscal crisis. As Britain embarks on its election campaign, this is a perfect opportunity to engage in radical tax and spending reforms designed not just to restore the country’s fiscal balance but to boost its long-term productivity and competitiveness.

It is, of course, necessary to cut the deficit, which is currently running at an unsustainable 12 percent of GDP. It is also important that spending cuts rather than tax rises bear the brunt of the belt-tightening. Otherwise, the UK will find that companies and rich people are increasingly driven off-shore.

The two main political parties — the Labour government and the opposition Conservatives — broadly buy into this. However, neither party has spelt out what spending it would cut and where it would raise taxes. Nor have they given any inkling of seeking to take advantage of the crisis to push through deep-seated reforms. They are unlikely to do so during the coming campaign, fearing that too much detail will scare the voters.

GUIDING PRINCIPLES

Nevertheless, the next government, faced with the immensity of its fiscal challenge, will be forced to slaughter at least some sacred cows. What then are the principles that should guide it?

First, simplicity. The current tax system is a patchwork quilt of loopholes, allowances and special arrangements. This is an incentive to engage in elaborate contortions to avoid tax.

Why the bulk-annuity market won’t revive

- Richard Jones is principal at Punter Southall Transaction Services. The opinions expressed are his own. -

A bulk annuity buy-out is an insurance contract which allows a defined benefit pension scheme sponsor and its trustees to absolve themselves of their responsibilities in regard of the accrued liabilities to members.

During 2005 and 2006, the buy-out market saw new mono-line insurance providers challenge the more established and diversified market players such as the Prudential and Legal and General. Despite the attractiveness of certain aspects of this insurance product, the premium required makes buy-out too expensive for many pension schemes.

Successive government statutes establishing stricter regulation, more transparent accounting disclosures and substantial movements in asset markets have made defined benefit pension schemes an increasingly unwieldy and frightening animal for companies to manage on their balance sheet. Buy-out provides a means to remove this risk: reducing the likely volatility of contributions and the exposure to longevity and investment risk.

Further benefits from a company’s perspective are that insurance companies may potentially have more efficient administration systems, and lower investment transaction costs due to large aggregate fund sizes. From the member’s perspective, the credit rating of an insurance company and the stringent oversight by the FSA may provide a better guarantee of benefit promises being met, than had they continued to be sponsored by their employer.

However, the transfer of pensions risk to an insurer is expensive. An insurance company faces the very same risks as a sponsoring employer of a pension scheme, but is encumbered by additional regulatory constraints associated with operating within an insurance regime and the obligation to make a profit. As a result the cost of purchasing annuities has historically been prohibitively expensive to most.

To generate interest in the market some of the new participants priced aggressively. Legal and General continued to compete, whereas some of the other players such as Lucida, Rothesay Life and Prudential appeared to cherry pick deals. This led to deal volumes rising to 2.9 billion pounds in 2007 and 8 billion pounds in 2008.

Second rate annuities can harm your income

-Bob Bullivant is chief executive officer at Annuity Direct. The opinions expressed are his own.-

There are two distinct phases in building a pension – first comes the process of building up a pension fund – the so called accumulation phase. The next part is actually turning the money saved into an income for life – or pension, the so called decumulation phase.

When it comes to buying an annuity there are many things to consider and getting any of them wrong can have serious implications for your pension income. The first thing that needs to happen is a proper forensic review of your existing pensions. This will include a report on any penalties that might be imposed by your pension company.

These might include early retirement penalties or in the case of with profit funds market value adjustments. The report will also consider if you are entitled to a guaranteed annuity rate as part of the policy as guaranteed rates are often much higher than rates generally available in the open market. Older policies may also have life assurance cover or premium waiver benefit attaching to them and if so then the impact on the cover of taking the pension must be understood.

Add all of this together and it becomes clear that there are many potential pitfalls. The interesting thing is that if you want to move pensions before retirement the FSA insists on all of these issues being investigated. The same requirement does not apply at retirement and so you are very much on your own unless you take professional advice.

Armed with all of this it is time to move to the next phase. This is where specialist skills are required to get the right income. There are a number of ways to generate income in retirement including income fund withdrawal which is a highly complex area and the rules about adviser selection outlined below apply equally to this area. For anyone wanting guaranteed income in retirement the selection of an annuity must be done with great care for the simple reason that it can only be done once. Obtaining the best rate and most appropriate options is therefore essential.

Once again there is a need for careful selection. Anyone with a health or lifestyle issue or who is a smoker should complete a medical questionnaire. There are over eight providers in the market for enhanced annuities and it is important that all of them see the questionnaire. There can be a significant difference between the top and bottom rate as a result of a provider’s view of medical conditions. Recently, one provider took such a stark view of a medical condition that it offered £7800 more per year than other providers.

The Pensions battleground: stalemate or truce?

-Simon Banks is a principal at Punter Southall. The opinions expressed are his own.-

This summer we have seen the closure of many “defined benefit” pension schemes, which provide benefits based on a formula linked to salary.  They are closing because they are reliant on employer support and have either become too expensive, or have grown too large relative to the employer.

Most employees will probably outlast the business currently employing them, so a shift away from a pension model reliant on employer support may seem sensible to many.  The problem is that “defined contribution” schemes, usually offered as a replacement, can be ill-suited to those lacking financial confidence.

The battleground between government and the pensions industry is therefore over “shared risk” schemes.  These have been suggested as a middle-ground option that would be less onerous for employers and yet provide some useful guarantees to employees.  The government regards these proposals as tainted by self-interest, and is optimistic about what member training and communication can do to improve ‘defined contribution’ schemes.

This stalemate, if it continues, will benefit nobody.

I think people want:

•    To have a retirement income that is, at least, similar to their peers •    One that is reasonably predictable, with regular updates as it builds up •    A higher flat pension (with discretionary indexation when markets permit), rather than a low but fully-indexed pension •    Clear communication of what is guaranteed and what is not

The great annuity scandal

- Steve Hunt is Managing Director of independent annuities broker Rockingham Retirement. The opinions expressed are his own. -

The concept of an annuity has not changed in hundreds of years. In fact the first annuities sold were probably during Roman times where ‘annua’ were sold for a fixed period or for life; but today’s mortality is unprecedented in history. An annuity was never designed to be paid over 30 years, or even 20 years for that matter.

What concerns me a great deal is the number of people who are going to be living in poverty in 10 years’ time because they have bought an annuity. Or the number of widows forced into poverty because their husband had bought a single life annuity.

Let me explain why. Inflation may not be a problem now, and who knows when it will return, but return it will – that is a given. The vast majority of annuity sales are level (and a great many single life). At just 3% inflation an annuity paying £500 a month in 10 years will reduce to £370 a month and at 5% inflation to just over £300 a month. And God forbid we get back to good old 1975 when it hit 24%. Mind you, 24% inflation would significantly help the government’s debt problem! Now there’s a thought.

With so many final salary schemes now closing, the de-accumulation risk of retirement is also being passed to the members themselves who are ill equipped to make the right or indeed informed decisions; in fact, I am not sure many Trustees themselves are.

Decisions made on de-accumulation may be the most important decisions in someone’s entire life and once made are usually totally irrevocable if a whole of life annuity is purchased. It’s like taking out a 30 year mortgage which can not be changed in any way for the entire 30 year term!

The current retirement income process is scandalous and needs to be changed – and quickly; what is currently allowed to happen really beggars belief.

Pensioners must shop around to get best annuity

- Stephen Hunt is managing director of Rockingham Retirement. The opinions expressed are his own. -

If we keep going the way we are, disaster looms for millions of over-60’s in the United Kingdom.

The same way that a comment about having licked the boom-bust cycle was not only totally wrong but rather crass and irresponsible. The same is true about having beaten inflation.

Yes, we may be in a period of very low inflation — even deflation — but to think that inflation is not going to return at some point in the future I think is as flawed as believing we have beaten the boom-bust cycle. Coupled with a government policy of printing money, inflation is as inevitable as the Tories getting back into power. And if inflation comes back on the Tories’ new watch they can always blame Labour.

You have to remember that with so much debt in the UK and the U.S., global inflation won’t do respective governments any harm in the long run as far as their debt is concerned.

Let’s consider the facts. We have a hugely aging population. The baby boomers are all approaching retirement and the ratio of pensioners to workers will reduce significantly, putting a huge financial burden on those in employment. So don’t expect too much of an income in retirement from the state on the government’s pay as you go system.

So what about private incomes? Well, largely due to Mr Brown, many final salary schemes have now converted to money purchase. Now, in a final-salary scheme most had index-linked income, which is rapidly becoming a thing of the past. Many have now switched to what are called defined-contribution schemes or money purchase, which means the person retiring has to buy an annuity. “What’s the problem with that?” I hear you ask. Let me give you a list:

Why BT’s pension line is out of order

– Neil Collins is a Reuters columnist. The views expressed are his own –

It is a quarter of a century since the ground-breaking privatisation of BT. Unfortunately, it may not be many more years before a reluctant government is forced to take the company back into state ownership.

The new BT annual report, 169 pages of it, gives only a few hints of the scale of the problem facing what John Ralfe recently described as “a badly run hedge fund that happens to own a phone network”.

Ralfe is an independent consultant and something of a maverick in the arcane world of pension deficits, but he has a point. The directors claim that BT will make enough to grow the (reduced) dividend, invest in the business and support the pension scheme, all at once. It’s far from clear how.

The real horrors are in note 29 to the accounts. The BT Pension Scheme was closed to new entrants eight years ago, but it is still a millstone around the company’s neck, with an estimated present value of its liabilities at 33 billion pounds.

This is marginally down from the 2008 figure. Unfortunately, the value of the fund available to meet the liabilities has slumped from 37 billion to 29 billion pounds, as the managers scrambled to rebalance the fund away from equities in a falling market.

Ralfe reckons the true position is much worse, because BT’s retired engineers are going to live longer, and the rate at which future liabilities are discounted is “wishful thinking”. On his sums, the deficit is 11 billion pounds — half as much again as BT’s current market value.