The Times - Labour Plans Pension Raid

hugheskevi

£40bn a year?

Net present value.

In cashflow terms it is ambiguous - it is probably reasonable to assume that the £80bn private sector saving is spread over 15 years (approximating a deficit recovery period). The unfunded schemes will be longer, but due to discounting it may well be that a large percentage of the impact is felt within 15 years.

Anyway DB schemes are around £375bn in deficit. So there's far bigger concerns for those who are members.

That is on the PPF s179 basis, ie, after reducing the pensions of those below NPA from 100% to 90% and changing to statutory minimum revaluation and indexation.

Back on 31st March 2014 that deficit was £39bn, and in comparison full-buy deficit was £553bn. Assuming full-buy cost has also increased by c£300bn, that is a full buy-out deficit of about £900bn.

That is a big number by any definition. Still, it is all driven by liabilities, and the comfort is that assets are at record highs. If gilt yields increase those huge numbers will fall away.

So there's far bigger concerns for those who are members.

For many members the cost of the RPI/CPI change is probably similar to the pension they would lose if their scheme entered the PPF. Typical loses when a scheme goes into the PPF, taking into account the change to statutory minimum revaluation/indexation, would be 25-30% of the pension value. That is quite a plausible loss for a deferred member below NPA who has their revaluation and indexation changed to CPI.

Thrugelmir

hugheskevi wrote: »

If gilt yields increase those huge numbers will fall away.

With a corresponding capital loss. Rising interest rates are going to hurt fixed income stock holders.

bigheadxx

hugheskevi wrote: »

Studies showed the impact was much lower than the original £5bn a year, more like £2-£3bn p/a. So that is something like £50bn, not including compounding.

In comparison the RPI/CPI legislation change took £200bn out of pensions, so surely the message should be BEWARE of a Con/Lib Dem coalition?

Which relates in the main to public sector pensions which have not been funded. If they had we would not have any of today's problems but some slightly less well off baby boomers and that would never do.

hugheskevi

With a corresponding capital loss. Rising interest rates are going to hurt fixed income stock holders.

About 25% of DB scheme assets are in gilts. Still enough to hurt though, especially as higher gilt yields would almost certainly feed through to higher corporate yields which would then cover about 44% of assets.

Which relates in the main to public sector pensions which have not been funded.

It will be about half, probably the impact will actually fall in the main to funded schemes - £80bn private sector (all funded), £120bn public sector but including the funded LGPS.

If they had we would not have any of today's problems

Whether they are funded or not wouldn't really change very much. It is the fact they are guaranteed that is the problem (and hence escalated in cost as longevity increased). Regardless of how they are funded, it is a transfer of goods and services from the productive population to the retired. How the transfer is arranged doesn't matter much empirically - in theory it should (higher savings should mean higher investment which should mean more growth) but empirically there is little evidence for this.

There are arguments that funded pensions can invest overseas and that changes the nature of the transfer. Personally I think these are strong arguments, particularly as DB schemes have been shifting their equity holdings toward overseas allocations. Still, that is against a declining holding of equities overall, and most fixed and index-linked interest holdings (which have been expanding to replace the declining equity share of investment) tend to be domestic.

jamesd

spartacus173500 wrote: »

Thanks Jamesd - my pension pot is with AEGON. Do I have to stay with them or can I 'shop round' like an annuity?
Are there any potential differences from different companies and can I research these online or do I have to go to a 'broker'?

You can shop around. There are major potential differences between companies in fees and ranges of investments. Hargreaves Lansdown is relatively inexpensive in drawdown-specific costs from April but has a 0.45% platform fee so it's less attractive for higher value pots.

You're really close to the prudent limit for getting a transfer done and drawdown started by April 5. Some will fail to get the transfer done in time at this point. That's not too bad provided you can afford to make a direct payment into a scheme and put that into capped drawdown while waiting for the bulk of the money to arrive. Even this is not something that you can leave until the last day of the year because it takes some work by the pension business. Best to leave an absolute minimum of two weeks for getting capped drawdown in place.

This is also now around the busiest time of the year for firms so it's a particularly good time not to push the response time requirements close to the limits.