The one word that caused the pension crisis! Blog Discussion

memark

EdInvestor wrote:

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.

Not entirely true...

The point behind with profits investments was to smooth investment returns. In good times, some of the investment profits were held back so that in bad, a positive return could still be granted (the "reversionary bonus"). At the end of the term, or if you died beforehand, the insurance company would add up all they've given you by way of annual bonuses and how much they'd truly earned on the underlying investments and, because they're conservative creatures by nature, there would usually be a final bonus (the "terminal bonus).

So, what went wrong with them?

It might surprise a lot of people to learn not a lot really. No, I'm not being deliberately contentious either.

The recent problem with the endowments linked to mortgages was largely a result of people being panicked.

Remember, these plans are designed to be held until maturity and insurers do penalise people for early surrender. Heavily.

I'm also not denying some people were sold these plans becasue of the heavy commissions that came with them, particularly when other vehicles such as PEP/ISA mortgages with their tax advantaged status might have been more appropriate. Heck, even the repayment, capital and interest may well have been.

The problem was, for those people with them - well advised or not - they were getting projections at the regulator's insistence at one of the worst possible moments in recent history as far as stock market investing has gone: it's not that long ago the FTSE100 was languishing at the 3300 level (just before we invaded Iraq, remember).

People who were missold their endowments and successfully complained had their compensation assessed and fixed at a bad point in time for the underlying investments. I wonder if, for those that continue to hold their endowments to maturity, and a surplus ensues whether they will return any compensation?

The Regulator's also not blameless in all of this. Standard Life, traditionally a high equity holder in its with profits fund, was forced to offload billions of pounds worth of equities by the FSA at precisely the time it should have been holding. Had they done so, the policyholders would have all been considerably better off now markets have recovered.

Don't believe me? Well, a few years back someone tried to force Standard Life to demutualise and the potential payouts were projected to be thousands higher than they will if it goes ahead this year. Why? Because the regulator forced the sale of all those equities in favour of more secure fixed interest investments. When the recovery happened, it was too late.

marklv

Hmmmm. We can talk about investments until the cows come home, but the simple truth is that all investments go up and down constantly and it is only the moving average that gives you an indication of the direction. Investments, whether the stockmarket or property are NOT a guarantee of a comfortable retirement because there is a big risk, and the risk cannot be removed! Only the government can provide a guaranteed return, and that is why it's such a disgrace that in this country we do not have decent state pensions. The only solution is to increase the top rate of taxation and ensure that the basic state pension - and the second state pension - provide a living wage for the elderly. All else is a gamble.

Employers have now virtually all done away with the only proper retirement benefits worthy of being called 'pension schemes', that is the final salary pensions. In their places what we have is glorified savings schemes that will generate pots of cash that the government will not even let you spend - because it wants you to buy an annuity, one of the worst things you could ever do with a lump sum! Given that to have an index linked income for life at 60 you can only count on around 4% of the cash pot as an annual income, this means that you'll need a pension pot of £1 million to generate £40K a year!! MADNESS! Chances are that most people on average incomes will be lucky to have £200K as a final cash pot, and what will they get for that? £8K a year. Great!
What the government needs to do is - first of all - force companies to contribute at least 10% of salary towards employee pensions, and employees to contribute 5% minimum, then allow the retirees to take as much as 60% of the pension pot as a tax free sum and the remainder to be used for an annuity that should be TAX FREE. This would give retired people the opportunity of investing in things that have tangible value, i.e. houses, not annuities that will expire upon the person's death.

marklv

scoder wrote:

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

Yes, of course. I know that they always say past performance is not a guarantee of blah, blah, blah, but what else do you have to go on? How well a fund is managed? But how can you quantify that?

mayb_2

memark wrote:

Not entirely true...

The point behind with profits investments was to smooth investment returns. In good times, some of the investment profits were held back so that in bad, a positive return could still be granted (the "reversionary bonus"). At the end of the term, or if you died beforehand, the insurance company would add up all they've given you by way of annual bonuses and how much they'd truly earned on the underlying investments and, because they're conservative creatures by nature, there would usually be a final bonus (the "terminal bonus).

So, what went wrong with them?

It might surprise a lot of people to learn not a lot really. No, I'm not being deliberately contentious either.

The recent problem with the endowments linked to mortgages was largely a result of people being panicked.

Remember, these plans are designed to be held until maturity and insurers do penalise people for early surrender. Heavily.

I'm also not denying some people were sold these plans becasue of the heavy commissions that came with them, particularly when other vehicles such as PEP/ISA mortgages with their tax advantaged status might have been more appropriate. Heck, even the repayment, capital and interest may well have been.

The problem was, for those people with them - well advised or not - they were getting projections at the regulator's insistence at one of the worst possible moments in recent history as far as stock market investing has gone: it's not that long ago the FTSE100 was languishing at the 3300 level (just before we invaded Iraq, remember).

People who were missold their endowments and successfully complained had their compensation assessed and fixed at a bad point in time for the underlying investments. I wonder if, for those that continue to hold their endowments to maturity, and a surplus ensues whether they will return any compensation?

The Regulator's also not blameless in all of this. Standard Life, traditionally a high equity holder in its with profits fund, was forced to offload billions of pounds worth of equities by the FSA at precisely the time it should have been holding. Had they done so, the policyholders would have all been considerably better off now markets have recovered.

Don't believe me? Well, a few years back someone tried to force Standard Life to demutualise and the potential payouts were projected to be thousands higher than they will if it goes ahead this year. Why? Because the regulator forced the sale of all those equities in favour of more secure fixed interest investments. When the recovery happened, it was too late.

We have a with profits endowment not linked to a mortgage - it is paying less than fifty pounds a year in profits and is probably not going to pay out a terminal bonus at all - if this endowment was performing at 8% from now until maturity it still would not meet its target and was projected to shortfall by around 2/3rds of the amount promised at the point of sale. We were advised to cash this in because to continue paying in to it would be throwing good money after bad and we would probably make more money by putting it under the matress. Are you saying that this is happening because of a panic in the market place, bad timing and over payment of compensation?

MSE_Martin

Hi folks,

Thank you for a really interesting debate above - I enjoyed it. I thought I would respond to a few points.

1. Journalists are to blame

The idea that 'journalists recommended Equitable Life' and are therefore to blame does rankle with me. Journalists are not a homeogeonous group, I often disagree with what I read in the papers - and I'm a journalist. Many did recommend Equitable life - but to put this down to 'journalists' rather than the individual journalists doesn't work for me.

Personally I never recommended Equitable life, or even discussed it. And I know many who didn't.

2. Endowments aren't with profits.

Yes of course you're quite right. This was less about the technicalities though and more about the fact that if there'd been a specific name for the investment as there was in the mortgage world, things would've been different. How about 'Pension Overdownments'

3. Equitable Life wasn't brought down by figure massaging
True, but that wasn't the point, the point was simply that within with profits funds it was easier to massage the figures. Equitable Life going bust is a totally separate issue. I was slightly confused by this cross reference, perhaps its simply because Equitable has so much baggage surrounding it - its difficult.

Anyway please do continue the debate, I find it fascinating reading

martin

memark

MSE_Martin wrote:

Hi folks,

Thank you for a really interesting debate above - I enjoyed it. I thought I would respond to a few points.

1. Journalists are to blame

The idea that 'journalists recommended Equitable Life' and are therefore to blame does rankle with me. Journalists are not a homeogeonous group, I often disagree with what I read in the papers - and I'm a journalist. Many did recommend Equitable life - but to put this down to 'journalists' rather than the individual journalists doesn't work for me.

Personally I never recommended Equitable life, or even discussed it. And I know many who didn't.


martin

Maybe so, Martin, but what of all the people who work in financial services that may never, ever have sold any endowments? They are being treated as a homeogeonous group, having claims encouraged against their industry and giving it a worse name, not least of all by your good self?

It smarts a little when one finds that one is tarred with the same brush, particularly when one may have done everything within one's power to be quite the opposite.

MSE_Martin

Point well made memark.

mayb_2

I think that the real point here should be that whatever the vehicle used to provide you with a pension - it should actually provide you with the pension that you were paying for.

Look at this another way. If you went into a car sales shop to buy yourself a Bentley and gave the salesman the money for a Bentley - you would be a little bit disconcerted if he gave you a Corsa instead - and then to add insult to injury told you that is all that your money could buy you now and no there wasn't any way of getting your money back!

The crisis in the pensions industry has been caused by the fact that people now know that they will probably not get what they have been paying for if they invest in one. This is a very real financial disaster to those people taking their pensions now and not in a situation to alter what has happened to them. It is also a deterrent to anyone taking out a pension as they have seen what might also happen to them.

We all know that we need to make provision for our retirement as the state has made it very clear it won't be doing much for us, but what should we do? Pay for it and not get it or don't pay for it and not get it? Even if the financial markets are improving now there is no gaurantee that will be the case when your turn comes to claim your pension.

memark

mayb wrote:

I think that the real point here should be that whatever the vehicle used to provide you with a pension - it should actually provide you with the pension that you were paying for.

Look at this another way. If you went into a car sales shop to buy yourself a Bentley and gave the salesman the money for a Bentley - you would be a little bit disconcerted if he gave you a Corsa instead - and then to add insult to injury told you that is all that your money could buy you now and no there wasn't any way of getting your money back!

The crisis in the pensions industry has been caused by the fact that people now know that they will probably not get what they have been paying for if they invest in one. This is a very real financial disaster to those people taking their pensions now and not in a situation to alter what has happened to them. It is also a deterrent to anyone taking out a pension as they have seen what might also happen to them.

We all know that we need to make provision for our retirement as the state has made it very clear it won't be doing much for us, but what should we do? Pay for it and not get it or don't pay for it and not get it? Even if the financial markets are improving now there is no gaurantee that will be the case when your turn comes to claim your pension.

Yes, and there was no bigger crooked salesman in all of this than the UK government.

The way they have cut back on SERPS, several times, raided pensions schemes and piled on legislation year after year it's no wonder many employers have decided to close decent final salary schemes. After all, why should the government renege on their pension promise and shift everything on to the private sector?

Listen, for those of you that think your employer owes you a living, more than 50% of the UK's working people in this country are employed by small businesses. Another fact the government tends to forget when legislating.

Small companies do not have bottomless purses to pick up the bill whenever the government decides here's something else we can abandon all responsibility for AND blame someone else AND expect them to pick up the bill. That might be fine for the likes of the big banks, petrol companies, etc making £billions but it just doesn't wash when you look at the actual employment demographic.

You and you alone are responsible for your financial well being, now and planning forward to your retirement.

If you want to live off more than the breadline state pension, assuming one exists by the time you retire, of course you make provision now. In fact, it should be one of the first things you do when you start work, even if it is only a small start.

As for financial markets improving and the guarantee - or rather the lack of it when you come to retire that they will still be so - financial prudence suggests one should not be staying invested in such volatile funds right up to the last minute. It is perhaps best to consider gradually removing the investment risk in the last, say, 10 years before you actually retire by switching funds bit by bit to something more cautious each year in preparation. (Not that any of this is intended to be investment advice, of course, just a bit of plain old common sense).

mayb_2

I get what you are saying memark but unfortunately we have only 10 years left before retirement and we thought we had this covered. Frozen pension plans, redundancies, missold endowments and a missold savings plan for a pension (no compensation for that one as it was not attached to a mortgage) have left us with nothing to fall back on - no savings and a large part of the mortgage still to pay. We are not the worst off here either - many have had their pension schemes withdrawn just at the point of retirement. What are we supposed to do if the goverment wont pay a decent pension either. We did all the 'right' things and we are still in the poo!

I would be hard put to advise my sons to invest in anything other than property or put it under the matress and buy a large dog!