Pensions in Crisis
It’s been obvious for years that there’s a major problem with British pensions.
There have been the pension scandals – like the personal pensions mis-selling scandal of the eighties and ninieties and the plundering of the Mirror Group pension fund by Robert Maxwell.
However pensions have been featured heavily in the news recently for a number of reasons.
Background to the current crisis
The main reasons for the spate of recent news stories is as follows:
There’s the savings gap. This is an estimated £27 billion shortfall between what we should be saving for our old age and what we actually are saving.
There’s a problem with company pensions – whereby firms are saving money by changing their types of pensions from the first class Final Salary to the second class Money Purchase schemes.
(There’s also been a major review into company pensions, the Pickering Report, which was published in July).
Meanwhile, there have been continued problems with the reputation of the pensions/ insurance industry.
Then there was the Sandler report – a major government pensions review, published in July 2002, which dealt with personal pensions.
And currently there’s the Turner Report, yet another waste of public funds which simply spells out the obvious – that there’s a major problem (Doh !)
A cynic might be tempted to say it’s simply a cynical tactic by our wise politicians to get a bit of breathing space.
Its major findings won’t be published till after the next election c 2005. Now there’s a funny thing eh? Why would that be. Lemme think for a second. Oh here’s a wee theory.
It takes the heat off Blair to do something positive. The easiest thing to do will be to leave it to tomorrow’s politicians – when it will be too late.
If it became an election issue it might mean he has to commit to a plan. Far better to be able to say “Jeremy, I can’t prempt the findings of the Turner Report. When it comes out I promise you I will respond to it in full detail. And no, I never asked anyone to trust me on Iraq…” Ah bless.
Don’t bother watching this space. Start saving instead – probably in property where your money will be out of the clutches of the men in pinstripes.
We’re living longer
Added to this is the “problem” that we’re living much longer and enjoying active retirements
This is an issue because when you save for a pension it goes into a pot (your pension fund). When you retire you use this to buy an annuity – ie the regular payment you get – aka your pension.
Annuities are arranged on the basis that every £10,000 in your pension pot will buy, say, £700 a year to your annuity. So if you’ve got £100,000 in your pension fund you can get an annuity of £7,000 a year.
The pension companies work out how much they’ll sell the annuities for by estimating how long they’ll have to pay it for them.
In the good old days you would have known your place, smoked your fags and keeled over politely a couple of years after you retired.
The pension companies would make a tidy profit on you.
But now you’re probably going to be windsurfing in Hawaii on your 80th birthday. You could easily live to be over 100.
That’s good for you but it’s causing panic in the pensions world.
The Power of The Pensions Providers
Arguably some of these problems have emerged because the pensions / insurance industry is too powerful to be challenged and changed by the politicians.
Basically, contrary to the friendly image they spend millions on selling us, the pensions companies (aka the Insurance Industry) are cold-blooded businesses.
They are also extremely powerful. For example: the Labour government of 1945 used its huge parliamentary majority to create the NHS, nationalise the railways and the mining industry – all in the face of extremely powerful vested interests.
But the one business they decided to leave well alone was the insurance companies. Why? Good question.
It was central to the governments aim to improve the welfare of the poorer citizens. But they decided not to touch something as fundamental as insurance.
Bear in mind that these guys effectively own the country. They own your local high street (as part of their investment portfolios). They own your house (your mortgage). They’re extremely wealthy and let’s face it money is power.
Left to their own devices the industry has done very well for itself. But their customers – that’s you and me pal – have had a very bad service.
The industry has been allowed to get away with murder for too long.
The Point of this website
The reason we created this website was to try to shed some light on the extremely complex process of getting a pension. We’d heard of people who’d been paying into a pension for over 10 years, whose pension fund was currently worth less than what they’d actually paid in.
The money had gone on “charges” and bad investments. And this during a time of historically high investment returns.
The well-groomed white men in suits and their glossy brochures obviously can’t be trusted.
The good news
Thankfully the Labour government have started to tackle the mess that is the British financial services industry. Despite our cynical comments above
They’ve established the Financial Services Authority to regulate – ie be in charge of – the industry.
(Previously there were several regulators which added to the general confusion. The chances of your complaint slipping between the different stools was high).
But the biggest change to pensions is the recently issued Stakeholders which are consumer friendly, fair and cheap pensions.
In the bad old days personal pensions were very expensive – you could easily pay 5% of your pension fund a year in charges. So if you had saved up 100,000 you would pay £5000 a year in charges.
They also lacked flexibility. If you wanted to change your payments or transfer to another pension you paid through the nose in penalties. Basically once you’d signed up to a personal pension they had you by the short and curlies.
However with the new stakeholder you can sign up and start saving without worrying too much about exactly what you’ve committed to.
This is because they’re highly flexible.
You can vary the amount you pay in or transfer to another company without penalty.
Also the charges are low. A stakeholder pension is only supposed to charge a max of 1% a year. (So if you’ve saved ?10,000, you only pay ?100 in charges.
But there’s still a major problem
This concerns the lack of take up of Stakeholder pensions. Despite the better deal they represent we still aren’t bothering with them.
This is probably because the whole subject of pensions remains too complex. And we’ve heard too much over the past few years to trust the industry (the Stakeholders are run by the usual suspects – the big name insurance companies etc).
Plus it’s easy to put off saving. Party on Today for tomorrow we die.
Can we expect any real change?
We can’t really rely on the leadership of the politicians because those in power Today will have retired in twenty years time.
When the pooh hits the fan, and a starving, white haired mob is storming Whitehall, they’ll be sunning themselves in Tuscany.
To be fair to them the Labour Government has started to take the problem seriously. But there have now been over 10 enquiries and reports into the pensions problem since it came to power in 1997.
However, from the general spin surrounding it, it seems that the latest one, the Turner report is going to do the trick and lead to some real action.
However that’s what everyone said about the last big report, The Sandler report. The recommendations Mr Sandler made were exactly what the insurance business had been fighting tooth and nail to avoid for over 15 years.
He wanted the onus of making sure that you’re being sold the right type of pension to be on the companies who provide them.
At the moment the salesmen (IFAs) are the ones who are regulated. If they sell you something inappropriate it’s their problem.
Despite having all the evidence in front of them – and they do know because they check all your application paperwork very carefully – the pension/insurance company can effectively profit from your misfortune and not be held liable.
If regulation changes from the salesman to the product providers themselves – that will be a major move.
However over two years on from that report the government is hiding behind yet another one, the Turner report. It is saying much the same thing. Its interim findings were published in October 2004.
However the full findings are being held back until after the next election c 2005 thanks to a special deal by the Noo Labour government. This suggests that the politicians are already planning to ignore it. But don’t worry. It’s OK because their pensions are sorted.
Ideally the government is eventually going to make it compulsory for everyone to save in a safe easy-to-understand pension.
This is what they did in Australia after a similar crisis. And it’s working. Rather than dithering around and having to become a pensions experts before dipping their toes into the shark infested waters, the Ozzies simply get their pension taken off their payroll and don’t have to worry about it.
However a problem is that Tony Blair seems to be completely in thrall to big business, be it the dubious Private Finance Initiative, or declaring Genetically Modified food to be safe – before anyone actually knew it was. (Remember that? One of the early signs.)
And you can’t get much bigger business than the insurance companies.
So whether he has the political courage to upset the sharks in suits and say it’s time to stop making a profit out of people’s need to save for old age remains to be seen.
So when’s the change going to happen?
Regardless of what happens you can expect any changes to take years – probably longer. (You see the Government need to “consult” with the industry.)
So how does this affect you / What should you be doing Now?
If you’re concerned about starting to save for your retirement the best thing is to start saving as soon as possible. For every month you wait the effect on your eventual fund will be significant.
So don’t wait around. Do something now.