The Great Debate UK

Europe’s bigger crisis waiting to happen

By Kathleen Brooks. The opinions expressed are her own.

So it looks like Greece has staved off default for another few months at least. Investors are breathing a sigh of relief and buying up risky assets like the world is a rosy place again.

The markets always suffer from a chronic case of short-termism, but once a sovereign debt crisis takes hold it is very difficult to reverse. Investors may be concentrating on Greek, Irish and Portuguese funding needs for the next 24- 36 months now, but it won’t be long before investors start to scrutinise longer-term liabilities that are currently being clocked up for the next 10,20 even 30 years.

The bigger beast that threatens Europe’s solvency is the demographic and entitlements crisis. While a lot is known about Europe’s aging population, the scale of the problem and its urgency are not well understood.

The IMF predicts that Greece will have the second highest growth in pension costs as a percentage of GDP in the G20 by 2030. Spain and Belgium aren’t in great shape either. Interestingly, by 2030 Italy and Germany will actually see their pensions’ costs start to fall, but that is because their populations are aging so fast that the bulk of their pension spending will be done in the next 10-15 years.

In Germany and Italy the demographic damage is done.  Research from Eurostat predicts that by 2040 there will be less than two people of working age for every retired person in Germany and Italy that compares with just over three today. In France things are slightly better as there will be just about two workers for every retired person. These statistics tell a bleak story, with this type of demographic shift it is inevitable that living standards will deteriorate in the next decade or so.

The fiscal crisis of the future could also have a domino effect. Once investors realised there was an enormous hole in Greece’s public finances they started to punish Ireland, Portugal, Spain and even Italy saw its bond yields rise. In the future investors may start to punish the credit markets of those countries with poor demographics.

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.

Considering defined contribution pension pros and cons

-Damian Stancombe is head of Corporate Defined Contribution Pensions at Punter Southall Group. The opinions expressed are his own.-

Three things to keep in mind for defined contribution pensions:

Higher earners

Pension plans help build financial security in retirement, and in the face of a looming pensioner crisis the government continues its efforts to increase the number of savers. There is one exception: if you earn more than 150,000 pounds all bets are off.

In April 2010, we will see these high earners lose their tax-free allowance and suffer further through the introduction of a 50 percent income tax rate. A year later, an effective charge of up to 30 percent on all pension contributions will bring an immediate cost for a benefit realised later in life.

This substantial change to pension tax relief may dramatically affect the suitability of pension saving when compared with other investments and disengage the decision maker in the company from pension provision.

Employers would be well advised to ensure pension scheme members are aware of these changes, along with the thorough “anti-forestalling” rules already in place. They may also wish to review traditional pension provision as an effective reward strategy for key employees.

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.

from DealZone:

Should Ken Lewis get his payday?

Ken Lewis started at Bank of America 40 years ago, working his way up from junior credit analyst to the CEO suite. His employment contract at the nation's largest banks obviously predates the government's bailout of Bank of America. Yet pay czar Kenneth Feinberg may have a say on whether he cashes in on retirement benefits and accumulated compensation worth $125 million.

Some argue it is simply inappropriate for Feinberg to try to tackle Lewis' retirement package.

"A fair reading of the situation would be he is getting what he is entitled to and game over," said Alan Johnson, a Wall Street compensation consultant.

But to many, Lewis is a poster child for the crisis that struck Wall Street banks last year, nearly collapsing the financial sector and resulting in taxpayers spending hundreds of billions of dollars to bail out firms like Bank of America.

"The Obama administration has to use every tool at its disposal to fix the pay problem, particularly the golden parachute for failed executives," said Richard Ferlauto, director of corporate governance and pension investments for the American Federation of State, County and Municipal Employees, one of the largest U.S. labor unions.

Should Lewis get his retirement package in full? Leave your answer in the comments section.

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:

Age against the job machine

- Michelle Mitchell is Charity Director of Age Concern and Help the Aged. The opinions expressed are her own. -

Reports in the media about job losses are commonplace these days, with young people’s struggle to find work dominating coverage. Yet at the other end of the age spectrum, the lives and future prospects of older workers have been set in turmoil by the recession.

Unemployment among older workers has increased by nearly 50 percent in the last year and for many people in their 50s, the repercussions of losing their job now will be felt long into their retirement. As their working lives are cut prematurely short and their ability to pay into pensions becomes impossible, they face the double whammy of financial hardship now and a retirement blighted by poverty later.

Although the reasons for the high number of job losses among this group vary, many over 50s feel their age is a factor in employers’ decisions about who to hire and fire. Our research shows nearly one in four over 50s fear that if their employer decides to make cut backs, they will be forced out because of their age.

Despite legislation being in place to protect workers under 65 against age discrimination in the workplace, in reality, the attitudes of employers and wider society hasn’t kept pace with the law.

For those that have lost their job, the future looks bleak: because the odds of finding another job are sadly stacked against older people. Unemployed men aged 50 plus only have a one in five chance of being in work two years later. For many over 50s, this is the first time they have been without a job since they entered the workplace many years ago and the skills needed to find a new job in today’s marketplace are very different.

They are faced with new buzz words and jargon, job searches conducted online, a move away from the reliance on references towards “skills-based” interviews. While these new skills to get back into work can be acquired, those in their 50s are at an immediate disadvantage and it can prove daunting and demoralising.

The plight of middle-aged investors

- David Kuo is director at The Motley Fool. The opinions expressed are his own. -

What is the one thing that young investors have but older investors would give their eye teeth?

This isn’t a trick question and nor does it have anything to do with body parts.

The answer is time. Older investors may have more money, more experience and more investing knowledge than younger investors. But the thing that older investors don’t have on their side is time – time to correct mistakes should anything go wrong with your investments.

In particular, time has to be a key consideration if your investment forms a vital part of your retirement portfolio. That is why older investors are regularly urged to rebalance more of their portfolios to less risky investment the closer they approach retirement age. If you are wondering how to rebalance a portfolio, there is a handy rule of thumb that may help. It’s only a rule of thumb so it will have limitations depending on the length of your digit.

It simply states that the proportion of your investment portfolio allocated to cash should be equivalent to your age expressed as a percentage. Put another way, you can afford to take more risk with your investment the younger you are. But as you get older you should start shifting more of your money into cash.

So, 25-year-olds should have no more than 25 percent or a quarter of their portfolios in cash; 33 year-olds should only have a third or 33 percent of their investments in cash, and so on.