Friday, 18 April 2014


There may be trouble ahead... retirement pensions will increasingly become unaffordable in the coming years, whether it's the state retirement pension or company and private pension schemes

It's Friday. It's financial. It's Friday Financial with JULIAN SAYER.

It's official. The UK state pension is worst in Europe.

It's been a busy two weeks looking after my six year old during the Easter holidays, but that's the conundrum of modern life. One of my pet hates is the lack of time modern life gives you; investing your most precious commodity (time) into the teaching of your greatest asset (your children.) So I am afraid this week's blog will be a short piece.

How a society looks after it's young, old and most disadvantaged says everything about it. This Government's continued attack on the most disadvantaged continues relentlessly. The poor, unemployed, handicapped, young and old are all suffering with reduced income, while the rich and multinationals continue to flout the tax laws stashing trillions of pounds in off shore tax heavens. This week I want to take a look at what's happening in the pensions industry, how it's affecting the pensioners now and how it will affect you when you retire in the future.

Having worked in the industry for twenty odd years, one thing I know for sure, is that this Government will continue to reduce the amount of pension you are going to receive in the future. Everything points towards it, an ageing population, reduced tax revenues, low employment levels, and longer life expectancy. In the UK we were once the envy of the world with our well run state and private pension schemes, and those lucky enough to have worked in the "golden generation" have reaped the rewards and are enjoying the benefits of these schemes. Sadly, just like our other world renowned institutions like the NHS and Railways, our pension system will be run down and hived off for the profit of the few, and to the detriment of the many.

First, I want to take a look at what the Government offers you, and then how the private sector is coping with the pension promises they have made.

After a long hard slog of broken promises, legislation changes, and Government cuts, it's now official: the British state pension at a maximum £110.15 a week is the most miserable in Europe.

Compared to average income, as a percentage, even Hungary and Slovenia offer better pension benefits. British workers on average earnings typically get a state pension worth 32.6% of their working wage. If you compare this state pension to other countries, it doesn’t look good. Italian workers, can expect 70% of their working salary when they retire. In the developed world, only Mexicans receive less proportionately from the State pension than British workers.

The average European State pension is worth 40.6% of average earnings. If you want to retire comfortably on State coffers compared to those in work, one of the best countries is Austria, at 76.6% – or the Netherlands, even better, at 90.7%. Many Europeans also retire earlier than their British counterparts. This will have to change as the rest of Europe grapples with austerity, and as we have seen in the UK, pension benefits are an easy target for cash strapped Governments.

It's clear and apparent that here in the UK you will be forced to look after yourself, the state can no longer afford to take care of its citizens, as they pander to the Multinational tax evading companies.

Traditionally, there are two sorts of pension schemes, public and private. Public sector workers are almost 10 times more likely to have "gold-plated" final salary pensions than their counterparts in privately owned companies, official figures show. So how do private schemes stack up? There has been a relentless attack on private pension schemes over the last 30 years. In an effort to reduce costs and boost profits for the corporate gods, final salary pension schemes are all but dead in the private sector. I do think it's only a matter of time before the axe falls on these public sector final pension schemes. You are already seeing their benefits eroded, the fire service, police, the NHS and teachers have all seeing their own contributions increase and or retirement age increasing.

In the private sector Final Salary schemes were rolled out by big employers after the war, and rapidly became the norm for workers of all on all sorts of salaries. In 1963, £1 in £4 of all pension savings in the private sector was in a final-salary type scheme. By 1979, which was the peak of this form of pension saving, this proportion had rocketed to £9 in every £10. Then came the great reversal. Just like the Government pension schemes, increased lifespans, successive changes to legislation which made the arrangements more costly to employers, and poor investment returns came together to make the schemes unaffordable.

As companies continued to chase profits, costs need to be cut, and in difficult economic times, the easiest way to cut costs are to reduce salaries and benefits, and this is never more apparent than over the last seven years. Salaries have been stagnating and pension contributions eroded. Just one example of many is given below;

It's obvious that you are continually expected to look after yourself in every respect, the hiving off of pension schemes into private hands offers an awful lot of money to the well connected winners of yet another Government sell off.

Once in private hands, your once safe guaranteed pension is open to all the vultures of the City’s money men. You are expected to know all about management charges, growth rates, allocation rates, annuity rates, mortality drag, and all sorts of financial jargon meant to confuse the unwary.

The big problem over the coming years with this, is that this new world of low interest rates means growth rates will suffer. Many pension plans assume they will earn 7% to 8% annual returns, an assumption which is far too high.

In reality, public and private pension funds will earn an annual return of 4% or less in the coming years due to near zero percent interest rates and financial repression. This in turn, could well cause bankruptcy for many of the final salary pension schemes. This will push everybody into money purchase pension pots, causing you all difficult decisions, in an area few can grasp.

These pension funds are a traditional mix of equities and bonds which in my view will under-perform in the coming years. Many stock markets appear overvalued after quantitative easing driven rises of the recent years. Bonds offer all time record low yields and are at all time record highs in price. They will fall in value in the coming years, as interest rates go up.

This is a heady mix of problems for the Government and the pension industry. In my view there is only one outcome, .........more broken promises, longer working life's and more money for the city fat cats.

In the UK, total Government spending would have to be cut by more than 25% or the NHS and benefits expenditure slashed by around 50% compared with the level implied by current policy, if the UK is to avoid tax increases and all spending is to be met out of tax revenue in the long run. Some measures have been planned in the UK which will address the situation, such as a proposed rise in state pension age, but these measures are being implemented slowly and are inadequate on their own. If you really want to sleep you can read the conclusions here they are frightening;

In Europe the situation is far worse, they are more reliant on state benefits and the retirement age is often far lower.

Governments are pushing you further away from your family, further away from retirement, and asking you to work harder for the corporate good.

Happy Easter, you voted them in.


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1 comment:

  1. Succinct. How sad. Thank you Julian.
    Thirty years in the NHS has given me a small measure of independence, pension wise.
    I feels saddened about our future generations managing their retirement on the inadequate state pension.
    I don't vote. I don't have the answer.
    Happy Easter to you too.
    P.S. Love the opening paragraph, precious commodity and greatest asset.