The one word that caused the pension crisis! Blog Discussion

Former_MSE_Andrea

This is a forum discussion on Martin's 'The one word that caused the pension crisis!' blog which you can read here.

Clariman

An excellent blog entry. You should elevate it to an article IMHO. The trouble with the whole Personal Finance topic is that most industry professionals and PF writers over-complicate it and confuse things. You are so right to make the distinction between the wrapper and its contents.

Clariman

Cumbrian_Male

And of course the "Professional" fund manager that managed the fund that the pension trustees invested in still took their 1%-2.5% or whatever charge from those funds, not to mention the bid offer spread.

Fund totally mismanaged and commission still earned.

Andy_Davies

Problem is with pensions is lots of people don't understand the tax wrapper bit..

Now I'm not saying many of the fund managers/advisors don't share some of the blame (isn't that the problem when products are sold on commission)

When Gordon Brown changed some regulations in his first budget he removed tax breaks for pensions and charities that were worth over £5bn a year.

So over the last eight years he's cost pensions something like £40bn plus the effect of sock market being depressed because this money wasn't available to invest.

scoder

Private Pensions, s & s ISA's I reckon 80% of the punters still regard past performance as the be all & end all. Consistency is the key & how itchy the feet of the fund manager are

mcmurphy

i understand what Martin is getting at here but a pension mustn't be confused with an endowment. they are entirely different products with different rules governing their entire make up, from tax position to how you are able to take the benefits. whereas some personal pensions have been set up under with profit fund arrangements, many others haven't. this is the same with endowments, many of which are actually unit linked and not with profits based. an endowment is traditionally made up of an investment element (unit linked or with profits) with a life assurance element that is provided by a decreasing life assurance policy. i believe people should not be encouraged to see a pension as a dressed up endowment, because this has too many negative connotations (as well as being wrong).

memark

Interesting that Martin mentions "Equitable Life" in his blog, see below:

"The type of investment most people put their money in was called a ‘with-profits investment’ and these beasts promised to smooth out the returns in good and bad years. Yet in reality they were non-transparent investments no one could understand, which companies could easily massage the figures of to make them look better (look at Equitable Life)."

Strange but many journalists used to hold Equitable Life up as the bastion of all that was good in the financial services world because they didn't pay that dirty word called commission (at least not directly; they did to their own agents).

So, in many respects, journalists are almost certainly to blame for people losing £'000s because of their (unregulated) endorsements in their undeducated bleatings to the public at large who fell for it hook, line & sinker. Try taking them to the FSA's adjudication and get compensation out of a journalist, though.

The sooner journalists are regulated as well, the better. Perhaps they don't realise the power they have, perhaps they don't care. After all, if they can't be taken to task, why should they?

By the way, Martin's blog was slightly factually incorrect: what brought Equitable Life down was the guaranteed annuity rates that they couldn't honour because of the lack of reserves in their with profits fund (they basically hadn't anticipated people ever claiming on them). The regulator and the DTI knew about their reserves (or lack of them) for a long time as all insurers HAVE to make returns to these bodies every year.

tom_dog

It's property investment that is making the younger generation have to eat cold baked beans in a basement now as well as in the future.

And the basement is rented.

webwiz

I am amazed that nobody takes a macro-economic view of "the pensions crisis". Everyone takes it as read that there is a crisis because we are not saving enough for our retirement. But hang on a minute, saving or investing are just different words for lending. And for every saver/investor/lender there has to be a borrower. It's a zero sum game. From an individual point of view maybe some people are not saving enough, but in the aggregate it has no meaning. The net amount saved, in the aggregate, has to be zero! If everyone suddenly wanted to save (=lend) more where would the borrowers come from? Interest rates could fall to zero but cannot go negative (no space to explain why here) which is roughly what happened in Japan recently and also in Switzerland some time ago.

Look at it from a different point of view. Money is a proxy for goods and services. You can't eat it or wear it, only spend it. So forget about money and think about the total amount of goods and services produced and consumed. It is easy to see that society has to consume all the goods and services produced in the same time period. They cannot feasibly be stored for consumption later. (OK there are a few major infrastrucure projects like the channel tunnel, and there is also education, where the payback to society is delayed a decade or so but not by a generation). So the total amount for consumption will not be affected by the amount of individual saving or lack of it. If some people have saved a lot they will just get a bigger share than they otherwise would (unless Gordon Brown is still Chancellor in which case they would have done better to have spent their money). The failure to save enough might be a problem for individuals because it will mean they get too small a share of the total, but it will not affect the total.

There is no pensions crisis, and what is more it would be impossible to have one.

mayb_2

I have to agree with Martin that the missing word is the problem. We bought a savings plan with added life assurance which was due to pay out in a few years time and provide me with a lump sum for a pension. The representative failed to mention endowments, risk, stock markets - and so did the life assurance document. I was verbally promised a large return and took the company's word for it as they were a national company we had delt with for many years. We never received any information about the 'performance' of our savings plan until recently. We are now being told it was an endowment assurance and worth virtually nothing. That missing word has cost us a fortune. (Not treated the same way as a missold endowment mortgage - we have been fighting this case for over a year now.)

When I hear that the government is considering forcing people to pay into pension plans it makes my blood boil. Until we are guaranteed the pension will be paid out at the rate and the time agreed when you enter it, why should anyone invest in them. You are better off putting your money in premium bonds, or perhaps on the back of a horse, than trusting pensions these days - endowment linked or not. We can't all put our money into property and ISAS are a fairly new invention. Some of us are getting too old to start again when we thought we had these things covered and find we have been conned.

Until Martin comes up with a gauranteed, no tricks, no catches, no sorry we have changed the government policy, no sorry we are not giving final salary pensions anymore we have started another scheme, no sorry we can't afford that anymore, sorry you will not be able to retire until you are 103 or dead - method of investing in a pension, I will enjoy spending my money now and take my chances with the baked beans!:mad:

EdInvestor

Actually historically an endowment was the same as a pension or an ISA, it was also a tax wrapper.Up until 1984 there existed something called "Life Assurance Premium Relief" , which was a tax relief perk you got for investing in an endowment.

Curiously enough, endowment mortgages taken out in 1984 or earlier tend not to have shortfalls, unlike those taken out AFTER the tax relief was dropped.

The common factor between recent non-performing endowments and non- performing pensions as Martin says, is that they were both invested in With profits funds.[Those endowments and pensions which werre invested in something elese are mostly now performing OK.]

The demise of With profits is the underlying cause of the private pension problem of the last few years.WP was an opaque and very expensive old fashioned type of investment, closely related to mutual life companies, which died out in other countries 20 or 30 years ago.

Now it's dying out here.The problem with it was that it claimed to offer high returns and safety at the same time.The people who ran the funds put most of the money in the stockmarket, but also offered guarantees.

Eventually when the music stopped, the high returns were found to be a mirage.

Unfortunately, there's no such thing as a free lunch.