Finally

UK Pensions Update

On Monday 29 June, Ruth Kelly appeared before the Treasury Select Committe and was accused of gross complacency by David Heathcoat-Amory and others, mostly because her solution to fixing the failure of Stakeholder pensions is to make them more expensive so that more people will buy them! Of course she is also means testing the very people she is trying to encourage to save. As described here pension saving for the less well off (Gordon Brown has promised that this will reach 50% of the populationa! Must find cite/site for that) is a really bad deal.

James Daley in the Independent (No link as read via FT.com archive) pointed out the desirability of fixing the incentivisation for the lower incomed but this does not seem to be on the government agenda. On the other hand the pension reforms that will reduce the number of different tax schemes from 8 to 6 will switch annual contribution limits from roughly 15% to 100% of salary which is great for the well incentivised, even if the system will still be so complicated that advice will be needed to navigate it. That makes things even better for top rate tax payers.

David Willets talked some sense about means testing and risk management, although economically naive I fear and he seems to be another victim of annuity phobia. Different views of his talk here
and here. The latter will disappear behind a veil soon so here is the best bit:

Two Brains says that annuities lie at the core of the pensions crisis and that uncertainty over life expectancy makes them look unattractive to institutions and individuals alike. And annuities are unattractive because the incomes delivered are fixed according primarily to the income paid on government bonds at the time of purchase. Since no one can know for sure how long they will live, they cannot make an informed decision about whether it is wise to swap a lump sum for a lifetime of income.

If an individual lives for 25 years after retirement it can be assumed almost any annuity represents a good deal. If you live 25 days, it will not. The fact that annuity purchase is often compulsory does nothing to endear the instruments to the public.

Willets also says that the pension crisis is as serious as terrorism and global warming. I think it is too but I see the crisis in a different place. He sees the problem couched in terms of people managing to attain an incme two thirds their final salary from the age of 65. I see it as failing to prepare for the burden of keeping the poor an aged in decent conditions. That's cliches for you.

One James Bartholomew in a splenetic rant in the Telegraph, despite calling the Financial Times "statist" and thinking that the Labour Party not ending means testing or restoring the earinings link is more blameworthy than those doing away with them in the first place, manages to point out the seriousness of the shortcomings of government pension policy. He doesn't really talk about how to fund a better alternative.

More pension fund liability fun

Pensions hole may not derail M&S bid but perhaps it should. There is a £185m liability which shouldn't just go away because it is being taken over. There aren't enough details to know exactly what is at stake but insisting on making good the pension liabilities should not be thought unreasonable.

Amicus gets pension fear

An Amicus press release says some pretty blunt things about pensions and the lower paid:

Lower paid and part time workers could find themselves having no option but to pay up to twice as much into defined contribution schemes or through the government's stakeholder scheme in order to even have a chance of earning the same proportion of pension as higher paid workers who are more likely to be members of final salary schemes.

They also spot the tax issue:

Amicus is [sic] also wants an urgent review of the pension tax relief system which currently pays out £14 bn of tax relief every year but with half of that amount being paid to the top 10% of earners.

Roughly to achieve a pension of 50% of final salary will take a 15% annual contribution to a defined contribution scheme. With an average employer contribution of 6% and tax relief at 23% that's a perceived 7% cost.

Compare that to a 60ths final salary scheme with a 5% employee contribution for a top rate (40%) tax payer. That gives a two thirds pension for a perceived cost of 3%. Fantastic. It is indeed astonishingly regressive.

It seems to me that the main purpose of tax breaks for pension contributions should be to minimise the burden on the state of the retired. If that is indeed the accepted goal then the current system is an abysmal failure.

What do they want done?:

Amicus is campaigning on four key changes to the Pensions Bill to help restore people's confidence and to ensure people save over their working lives towards their retirement: setting minimum compulsory contribution levels for employers and employees, giving pensions the same legal protection as pay under TUPE, a legal requirement for meaningful consultation for pension scheme members and equal numbers of employee and employer pension trustees within schemes.

I'm not sure why they don't suggest a flat rate of tax relief, I'm surprised but actually pleased that compulsion is on their agenda, the TUPE rules seem naturally fair, the consultation requirements are, from this article, vague and the pension trustee requirement seems rather modest.

WH Smith: Pension liabilities as senior debt

At last a good use for corporate poison pills. Provisions introduced to protect WH Smith's pension funds from corporate raiders attempting to use it to finance a takeover have made liabilities to it effectively senior debt. So even though they don't appear on the balance sheet, VC's have had to treat them as if they did.

In general this is not the case and the sad pattern is: Company runs into trouble, doesn't pay its pension contributions, company goes bust with pension fund in deficit, Existing pensioners get first claim on remaining assets, unretired pensioners get nothing.

There is no law to make it this way but the FT suggests poison pills were quite popular in the eighties s some pensioners may be better protected than they, or rather I, thought.

Cash for Pensions Contributions?

From the FT, Towers Perrin have issued research that says that a quarter of companies are thinking of introducing a cash alternative to pension contributions and 14 per cent are thinking of making it the only option.

I can't imagine that money going into pension funds and I can't imagine wealthy employees giving up the tax breaks so this would turn into a disaster when the recipients retire.

Positive feedback from pension funds

Roger Urwin of Watson Wyatt says, as far as I can tell, that the shortening maturity of pension fund liabilities caused by the closure of final salary schemes, itself caused by a combination of rising bond markets and falling equity markets will cause a divestment from equities mostly infavour of the bond market! The reasoning makes sense and Roger Urwin has the advantage of being one of the people that makes it happen.

Roger Urwin, global head of investment consulting at Watson Wyatt, whose clients include half of the top FTSE 100 companies, estimates that most of the biggest corporate funds will cut their equity holdings to around 20 per cent of their overall investment portfolio - down from about 60-70 per cent at the moment.

This substantial shift, undertaken over the next decade or so, has been prompted by companies' decision to close their final salary retirement schemes to new entrants in response to the ongoing pensions crisis.

The article points out that defined contribution schemes replacing the final salary schemes will not necessarily change their asset allocation and will pick up the liabilities of the younger people missing from the closed final salary schemes. With luck that should offset the effects somewhat.

Even so contributions to DC schemes are blow what they would need to be to match equivalent final salary liabilities and according to Bill Gross of Pimco, another man capable of fulfilling his own prophecies, US investors are increasingly switching bond investment to, among others, UK bonds it suggests a powerful force one way in the market. On the other hand is the UK immune form the pressures that Gross identifies working in the US? Certainly not all of them. How to tell how much this is in the market at the moment.

Pension Credit -- 10 per cent for the bureaucrats

Steve Webb and the LibDems are briefing about the cost of delivering the Pension Credit. Apparently it costs £4 per claimant per week which is about ten per cent of the average amount claimed and more than is actually paid to 65,000 of the claimants.

That does not include the people who don't claim it because it is so complicated or because it feels like charity. Ten per cent is an astonishing figure. It ought to be enough to discredit the system even if the investment disincentives implicit in the means testing were not an even more serious problem.

It would be nice if Mr. Webb were to share his research on this matter with us but I can't see it on his site.

Grey Revolution

Old people ask for more money but nobody does the sums.

Why does anybody talk about a pensions crisis? Crisis suggests something acute and spectacular and that's the last thing that is happening with pensions as usual. Apparently these people were complaining about the abolition of the earnings link in 1985!

Women losing out in retirement shock

Research shows that women get poor pensions.
Maybe enough attention paid to this will persuade people to think more seriously about dealing with poverty and less about means testing. On the other hand this usually means more nonsense about discrimination. Women do not monetise their labour ery well, live longer and retire earlier than men. Since most pension arrangements depend upon all three for good reasons, most pension schemes do not serve women very well. Rather than pretend that schemes do and use them to tax male pensioners at a random rate, there should be an open discussion about where the money ought ot come from.

This discussion ought to include the level where redress ought to be made, between state minima and corporate pensions, changing behaviour before retirement and who needs to pay it.

Visa move to beat population drop

Scotland takes demographic action.