Pension lump sum question
Discussion
sidicks said:
Obviously if you can achieve 5% yield risk free (cash) then annuity rates will be materially higher than they are now, so you're not comparing like with like...
I never said anything about it being risk-free. Annuities will always offer a poor yield, and you'll lose your initial investment to the provider. The trade-off is the security. I'll have several options. They don't include:
a) the government
b) annuities
Testaburger said:
I never said anything about it being risk-free. Annuities will always offer a poor yield, and you'll lose your initial investment to the provider. The trade-off is the security.
I'll have several options. They don't include:
a) the government
b) annuities
So if you're not considering 'risk-free' then you're not comparing like with like.I'll have several options. They don't include:
a) the government
b) annuities
Testaburger said:
I never said anything about it being risk-free. Annuities will always offer a poor yield, and you'll lose your initial investment to the provider. The trade-off is the security.
I'll have several options. They don't include:
a) the government
b) annuities
Annuities offer a decent yield relative to risk and the protection they offer from longevity risk.I'll have several options. They don't include:
a) the government
b) annuities
Not loosing your initial "investment" would result in a lower yield - annuities are intended to transfer wealth on to dependents.
sidicks said:
Optimistic!!
Best buy tables suggest a £100k fund would purchase an RPI-escalating annuity of just £3k (at age 60) and £3.5k at age 65, so you'd need a fund of more like £1.4 - £1.5m for your £50k 'public sector final salary' style pension....
Good research, but final salary (fs) pensions are valued differently.. *and* can get paid at 55. Let's assume that the lifetime allowance fs valuation remains 20 times for each £1 that you get paid each year (and doesnt get changed or 'revised'!). Best buy tables suggest a £100k fund would purchase an RPI-escalating annuity of just £3k (at age 60) and £3.5k at age 65, so you'd need a fund of more like £1.4 - £1.5m for your £50k 'public sector final salary' style pension....
If the Lib Dem suggestion that the lifetime allowance is reduced to £1,000,000, then a fs pension of £50,000 pa will bring the saver into quite a nasty tax situation. Those aren't bankers; those are surgeons and middle ranking military officers who have served us all well.
Many highly talented military officers will have to make a career decision a lot earlier and we'll lose some real talent to the private sector. In itself then, a potentially very bad situation, but in a wider context, at 55, the saver still has 10 years or more working infront of them. They will probably elect not to save via the pension wrapper but that in itself brings implications.
What if, for instance, they die prematurely? What would be a decent 50% survivors pension (an oft overlooked downside of the fs pension) becomes an even smaller 50% survivors (normally widow's) pension because not so much is saved within it.
Some of the rest of saved income is either sifted into an ISA or exposed to tax via non tax friendly wrappers where the state can get access to it more easily. Given that it's likely that the Lib Dems are somehow going to be involved in a future government, it's a real problem.
sidicks said:
How can you say something is 'poor' without making a comparison? And of course if you were to make a comparison it would help if it was a valid and sensible one!
Quite easily. It's my opinion, which, believe it or not, doesn't have to come with a comparison. I believe annuity returns to offer poor value. No comparison needed. Stop pretending to be on the Asburgers spectrum, and get on with the thread.
sidicks said:
How can you say something is 'poor' without making a comparison? And of course if you were to make a comparison it would help if it was a valid and sensible one!
Quite easily. It's my opinion, which, believe it or not, doesn't have to come with a comparison. I believe annuity returns to offer poor value. No comparison needed. Stop pretending to be on the Asburgers spectrum, and get on with the thread.
Ginge R said:
Good research, but final salary (fs) pensions are valued differently.. *and* can get paid at 55. Let's assume that the lifetime allowance fs valuation remains 20 times for each £1 that you get paid each year (and doesnt get changed or 'revised'!).
No research required, just knowledge based on 20 years in the industry....The fact is that the few schemes have a normal retirement age of 55, and hence retiring at that age would mean an actuarial adjustment would be applied.
You've highlighted the unfairness that final salary schemes are subject to different (i.e. unrealistic assumptions given the low interest rate environment) 'lifetime limits' than defined contribution schemes.
Ginge R said:
If the Lib Dem suggestion that the lifetime allowance is reduced to £1,000,000, then a fs pension of £50,000 pa will bring the saver into quite a nasty tax situation. Those aren't bankers; those are surgeons and middle ranking military officers who have served us all well.
Many highly talented military officers will have to make a career decision a lot earlier and we'll lose some real talent to the private sector. In itself then, a potentially very bad situation, but in a wider context, at 55, the saver still has 10 years or more working infront of them. They will probably elect not to save via the pension wrapper but that in itself brings implications.
There should be a level playing field between public sector and private sector (which simplistically means a level playing field between final salary and defined contribution schemes).Many highly talented military officers will have to make a career decision a lot earlier and we'll lose some real talent to the private sector. In itself then, a potentially very bad situation, but in a wider context, at 55, the saver still has 10 years or more working infront of them. They will probably elect not to save via the pension wrapper but that in itself brings implications.
Ginge R said:
What if, for instance, they die prematurely? What would be a decent 50% survivors pension (an oft overlooked downside of the fs pension) becomes an even smaller 50% survivors (normally widow's) pension because not so much is saved within it.
Some of the rest of saved income is either sifted into an ISA or exposed to tax via non tax friendly wrappers where the state can get access to it more easily. Given that it's likely that the Lib Dems are somehow going to be involved in a future government, it's a real problem.
The Lib Dems are a real problem full stop...Some of the rest of saved income is either sifted into an ISA or exposed to tax via non tax friendly wrappers where the state can get access to it more easily. Given that it's likely that the Lib Dems are somehow going to be involved in a future government, it's a real problem.
Testaburger said:
Quite easily. It's my opinion, which, believe it or not, doesn't have to come with a comparison. I believe annuity returns to offer poor value. No comparison needed.
Stop pretending to be on the Asburgers spectrum, and get on with the thread.
I'm equally entitled to the opinion that you don't appreciate the value provided by annuities, and saying that something is 'poor value' is implicitly an relative measure...Stop pretending to be on the Asburgers spectrum, and get on with the thread.
(and I don't need to make personal insults).
Edited by sidicks on Monday 17th February 15:30
Sidicks,
The military pension has a normal retirement age (NRA) of 55, no actuarial reduction. If f'rinstance, firefighters are injured in the line of duty, they don't get a reduction either, despite their NRA being higher. NHS staff, if injured mangarabbing patients, they're protected from one too. I stand by to be corrected on that final point.
Sorry if I didn't get the gist of what you were saying - using HMRC guidance, I didn't know how you need a fund of "more like £1.4 - £1.5m for your £50k 'public sector final salary' style pension". I don't think one size fits all, although the way that the "defined ambition" pension consultations are going, I am liable to be corrected on that one too!
Notionally, the 'pot' is a lot lower than that.. especially if you're getting divorced and don't mind paying for a damned good actuary! In respect of parity, in periods of high economic growth, a defined contribution pension will easily out perform a (state) final salary one, especially when inflation is low, as it was during New Labour's 'golden' (ha) years.
The military pension has a normal retirement age (NRA) of 55, no actuarial reduction. If f'rinstance, firefighters are injured in the line of duty, they don't get a reduction either, despite their NRA being higher. NHS staff, if injured mangarabbing patients, they're protected from one too. I stand by to be corrected on that final point.
Sorry if I didn't get the gist of what you were saying - using HMRC guidance, I didn't know how you need a fund of "more like £1.4 - £1.5m for your £50k 'public sector final salary' style pension". I don't think one size fits all, although the way that the "defined ambition" pension consultations are going, I am liable to be corrected on that one too!
Notionally, the 'pot' is a lot lower than that.. especially if you're getting divorced and don't mind paying for a damned good actuary! In respect of parity, in periods of high economic growth, a defined contribution pension will easily out perform a (state) final salary one, especially when inflation is low, as it was during New Labour's 'golden' (ha) years.
sidicks said:
The Lib Dems are a real problem full stop...
Ginge R said:
Sidicks,
The military pension has a normal retirement age (NRA) of 55, no actuarial reduction. If f'rinstance, firefighters are injured in the line of duty, they don't get a reduction either, despite their NRA being higher. NHS staff, if injured mangarabbing patients, they're protected from one too. I stand by to be corrected on that final point.
1. Quite right too.The military pension has a normal retirement age (NRA) of 55, no actuarial reduction. If f'rinstance, firefighters are injured in the line of duty, they don't get a reduction either, despite their NRA being higher. NHS staff, if injured mangarabbing patients, they're protected from one too. I stand by to be corrected on that final point.
2. What proportion of public sector pensions does the above represent? (I think it's the minority).
Ginge R said:
Sorry if I didn't get the gist of what you were saying - using HMRC guidance, I didn't know how you need a fund of "more like £1.4 - £1.5m for your £50k 'public sector final salary' style pension". I don't think one size fits all, although the way that the "defined ambition" pension consultations are going, I am liable to be corrected on that one too!
If I want an inflation-linked pension of £50k at age 65 ('public sector final salary' style pension) then I need a fund of £1.4m + to pay for it. Surely that's evident from annuity rates?Ginge R said:
Notionally, the 'pot' is a lot lower than that.. especially if you're getting divorced and don't mind paying for a damned good actuary! In respect of parity, in periods of high economic growth, a defined contribution pension will easily out perform a (state) final salary one, especially when inflation is low, as it was during New Labour's 'golden' (ha) years.
On average, the tax payer pays 2/3rds of the cost of a public sector final salary pension with the individual only paying a third. The only way the DC scheme will outperform is if the owner is prepared to take significant investment risk (and of course there is no guarantee).Ginge R said:
Sure, but the valuation of a FS pension is treated differently, thats the point I was (badly) trying to make.
DC v FS debate = far too late in the day for me ;-).
I know that - it's unfair as it treats FS pensions more favourably compared to DC pensions (particularly in the current environment).DC v FS debate = far too late in the day for me ;-).
I agree, 100%. But those are the terms of the debate which we should be having in this country. Forget all the rest about political differentials - we already have them, that battle's been fought and won.
Looking at things one level higher than that which the annuity provider hoists on the retail market, the Government Actuary Department (GAD) has already stated that it is changing the annuity conversion factors it uses to reflect improvements in longevity and in the discount rate (e.g. the forecast for long-term interest rates). The value of a full linked annuity at 60 paid from an occupational pension can be put at 23.6;1 . So your DB pension of £10,000 pa could be valued at 60 at £236,000.
The equivalent cost of purchasing a DC pension on the open market using an *individual guaranteed annuity* would be £321,000. (using a factor of 32:1). That’s a discount of 25% to the occupational scheme or put another way, the occupational is roughly 30% more efficient in the payment of its pension.
Occupational pensions are liabilities on the balance sheet. If they fall on an insurer’s balance sheet instead, such as you suggest, GAD is saying they are considerably more expensive.. and that's the point I was, as I said - badly, trying to make. If an bog standard occupational pension scheme wanted to “buy-out” your £10,000 pa pension, it would have to cough up an extra £85,000 to get you off its books and make you and your life expectancy the insurer’s problem.
We can argue all night about GAD’s assumptions, but it’s unlikely that you’d get better data or a more prudent methodology. These rates were designed for 5-10 years and none of the fundamentals in terms of the interest rates or life expectancy have changed since then, I keep a close eye on them, my clients require it.
So we have to assume that the differences in the cost of the pension payable are down to the differing discount factors being used by occupational pension FS/DB) schemes and DC insurers (both or which GAD approves). There seem to me (and I’m not an actuary, just a jobbing IFA) that two factors that can make a difference to the discount factor- investment returns and expenses.
Occupational schemes do not have to factor in a payment to shareholders, they should have a lower cost base not having to market themselves against competition and they should be able to work on their own longevity data and be able to make rather more accurate assumptions on the duration of their liabilities.
But a return to collective one size fits all would not benefit the insurers, it would mean much of the in retirement wealth of this nation was more directly invested and managed by trustees. Some collective schemes might be insured but it would be safe to say, some wouldn’t.
So expect to see a number of smokescreens over the next few months, shocking stories of market crashes and not unfair state policy leaving (military, in particular) widows penniless, etc - people who read my blog just before xmas will know my feelings about *that*!
Looking at things one level higher than that which the annuity provider hoists on the retail market, the Government Actuary Department (GAD) has already stated that it is changing the annuity conversion factors it uses to reflect improvements in longevity and in the discount rate (e.g. the forecast for long-term interest rates). The value of a full linked annuity at 60 paid from an occupational pension can be put at 23.6;1 . So your DB pension of £10,000 pa could be valued at 60 at £236,000.
The equivalent cost of purchasing a DC pension on the open market using an *individual guaranteed annuity* would be £321,000. (using a factor of 32:1). That’s a discount of 25% to the occupational scheme or put another way, the occupational is roughly 30% more efficient in the payment of its pension.
Occupational pensions are liabilities on the balance sheet. If they fall on an insurer’s balance sheet instead, such as you suggest, GAD is saying they are considerably more expensive.. and that's the point I was, as I said - badly, trying to make. If an bog standard occupational pension scheme wanted to “buy-out” your £10,000 pa pension, it would have to cough up an extra £85,000 to get you off its books and make you and your life expectancy the insurer’s problem.
We can argue all night about GAD’s assumptions, but it’s unlikely that you’d get better data or a more prudent methodology. These rates were designed for 5-10 years and none of the fundamentals in terms of the interest rates or life expectancy have changed since then, I keep a close eye on them, my clients require it.
So we have to assume that the differences in the cost of the pension payable are down to the differing discount factors being used by occupational pension FS/DB) schemes and DC insurers (both or which GAD approves). There seem to me (and I’m not an actuary, just a jobbing IFA) that two factors that can make a difference to the discount factor- investment returns and expenses.
Occupational schemes do not have to factor in a payment to shareholders, they should have a lower cost base not having to market themselves against competition and they should be able to work on their own longevity data and be able to make rather more accurate assumptions on the duration of their liabilities.
But a return to collective one size fits all would not benefit the insurers, it would mean much of the in retirement wealth of this nation was more directly invested and managed by trustees. Some collective schemes might be insured but it would be safe to say, some wouldn’t.
So expect to see a number of smokescreens over the next few months, shocking stories of market crashes and not unfair state policy leaving (military, in particular) widows penniless, etc - people who read my blog just before xmas will know my feelings about *that*!
Ginge R said:
I agree, 100%. But those are the terms of the debate which we should be having in this country. Forget all the rest about political differentials - we already have them, that battle's been fought and won.
Looking at things one level higher than that which the annuity provider hoists on the retail market, the Government Actuary Department (GAD) has already stated that it is changing the annuity conversion factors it uses to reflect improvements in longevity and in the discount rate (e.g. the forecast for long-term interest rates). The value of a full linked annuity at 60 paid from an occupational pension can be put at 23.6;1 . So your DB pension of £10,000 pa could be valued at 60 at £236,000.
The equivalent cost of purchasing a DC pension on the open market using an *individual guaranteed annuity* would be £321,000. (using a factor of 32:1). That’s a discount of 25% to the occupational scheme or put another way, the occupational is roughly 30% more efficient in the payment of its pension.
Occupational pensions are liabilities on the balance sheet. If they fall on an insurer’s balance sheet instead, such as you suggest, GAD is saying they are considerably more expensive.. and that's the point I was, as I said - badly, trying to make. If an bog standard occupational pension scheme wanted to “buy-out” your £10,000 pa pension, it would have to cough up an extra £85,000 to get you off its books and make you and your life expectancy the insurer’s problem.
We can argue all night about GAD’s assumptions, but it’s unlikely that you’d get better data or a more prudent methodology. These rates were designed for 5-10 years and none of the fundamentals in terms of the interest rates or life expectancy have changed since then, I keep a close eye on them, my clients require it.
So we have to assume that the differences in the cost of the pension payable are down to the differing discount factors being used by occupational pension FS/DB) schemes and DC insurers (both or which GAD approves). There seem to me (and I’m not an actuary, just a jobbing IFA) that two factors that can make a difference to the discount factor- investment returns and expenses.
Occupational schemes do not have to factor in a payment to shareholders, they should have a lower cost base not having to market themselves against competition and they should be able to work on their own longevity data and be able to make rather more accurate assumptions on the duration of their liabilities.
But a return to collective one size fits all would not benefit the insurers, it would mean much of the in retirement wealth of this nation was more directly invested and managed by trustees. Some collective schemes might be insured but it would be safe to say, some wouldn’t.
So expect to see a number of smokescreens over the next few months, shocking stories of market crashes and not unfair state policy leaving (military, in particular) widows penniless, etc - people who read my blog just before xmas will know my feelings about *that*!
Looking at things one level higher than that which the annuity provider hoists on the retail market, the Government Actuary Department (GAD) has already stated that it is changing the annuity conversion factors it uses to reflect improvements in longevity and in the discount rate (e.g. the forecast for long-term interest rates). The value of a full linked annuity at 60 paid from an occupational pension can be put at 23.6;1 . So your DB pension of £10,000 pa could be valued at 60 at £236,000.
The equivalent cost of purchasing a DC pension on the open market using an *individual guaranteed annuity* would be £321,000. (using a factor of 32:1). That’s a discount of 25% to the occupational scheme or put another way, the occupational is roughly 30% more efficient in the payment of its pension.
Occupational pensions are liabilities on the balance sheet. If they fall on an insurer’s balance sheet instead, such as you suggest, GAD is saying they are considerably more expensive.. and that's the point I was, as I said - badly, trying to make. If an bog standard occupational pension scheme wanted to “buy-out” your £10,000 pa pension, it would have to cough up an extra £85,000 to get you off its books and make you and your life expectancy the insurer’s problem.
We can argue all night about GAD’s assumptions, but it’s unlikely that you’d get better data or a more prudent methodology. These rates were designed for 5-10 years and none of the fundamentals in terms of the interest rates or life expectancy have changed since then, I keep a close eye on them, my clients require it.
So we have to assume that the differences in the cost of the pension payable are down to the differing discount factors being used by occupational pension FS/DB) schemes and DC insurers (both or which GAD approves). There seem to me (and I’m not an actuary, just a jobbing IFA) that two factors that can make a difference to the discount factor- investment returns and expenses.
Occupational schemes do not have to factor in a payment to shareholders, they should have a lower cost base not having to market themselves against competition and they should be able to work on their own longevity data and be able to make rather more accurate assumptions on the duration of their liabilities.
But a return to collective one size fits all would not benefit the insurers, it would mean much of the in retirement wealth of this nation was more directly invested and managed by trustees. Some collective schemes might be insured but it would be safe to say, some wouldn’t.
So expect to see a number of smokescreens over the next few months, shocking stories of market crashes and not unfair state policy leaving (military, in particular) widows penniless, etc - people who read my blog just before xmas will know my feelings about *that*!
Ginge R said:
I agree, 100%. But those are the terms of the debate which we should be having in this country. Forget all the rest about political differentials - we already have them, that battle's been fought and won.
Looking at things one level higher than that which the annuity provider hoists on the retail market, the Government Actuary Department (GAD) has already stated that it is changing the annuity conversion factors it uses to reflect improvements in longevity and in the discount rate (e.g. the forecast for long-term interest rates). The value of a full linked annuity at 60 paid from an occupational pension can be put at 23.6;1 . So your DB pension of £10,000 pa could be valued at 60 at £236,000.
The equivalent cost of purchasing a DC pension on the open market using an *individual guaranteed annuity* would be £321,000. (using a factor of 32:1). That’s a discount of 25% to the occupational scheme or put another way, the occupational is roughly 30% more efficient in the payment of its pension.
Occupational pensions are liabilities on the balance sheet. If they fall on an insurer’s balance sheet instead, such as you suggest, GAD is saying they are considerably more expensive.. and that's the point I was, as I said - badly, trying to make. If an bog standard occupational pension scheme wanted to “buy-out” your £10,000 pa pension, it would have to cough up an extra £85,000 to get you off its books and make you and your life expectancy the insurer’s problem.
We can argue all night about GAD’s assumptions, but it’s unlikely that you’d get better data or a more prudent methodology. These rates were designed for 5-10 years and none of the fundamentals in terms of the interest rates or life expectancy have changed since then, I keep a close eye on them, my clients require it.
So we have to assume that the differences in the cost of the pension payable are down to the differing discount factors being used by occupational pension FS/DB) schemes and DC insurers (both or which GAD approves). There seem to me (and I’m not an actuary, just a jobbing IFA) that two factors that can make a difference to the discount factor- investment returns and expenses.
Occupational schemes do not have to factor in a payment to shareholders, they should have a lower cost base not having to market themselves against competition and they should be able to work on their own longevity data and be able to make rather more accurate assumptions on the duration of their liabilities.
But a return to collective one size fits all would not benefit the insurers, it would mean much of the in retirement wealth of this nation was more directly invested and managed by trustees. Some collective schemes might be insured but it would be safe to say, some wouldn’t.
So expect to see a number of smokescreens over the next few months, shocking stories of market crashes and not unfair state policy leaving (military, in particular) widows penniless, etc - people who read my blog just before xmas will know my feelings about *that*!
In short, the differences in assumptions between DB schemes and DC schemes / annuities is due to an inconsistent treatment (and a regulatory environment that fails to properly take into account risk (on the DB side) ) rather than any inherent difference in the actual cost of providing those benefits.Looking at things one level higher than that which the annuity provider hoists on the retail market, the Government Actuary Department (GAD) has already stated that it is changing the annuity conversion factors it uses to reflect improvements in longevity and in the discount rate (e.g. the forecast for long-term interest rates). The value of a full linked annuity at 60 paid from an occupational pension can be put at 23.6;1 . So your DB pension of £10,000 pa could be valued at 60 at £236,000.
The equivalent cost of purchasing a DC pension on the open market using an *individual guaranteed annuity* would be £321,000. (using a factor of 32:1). That’s a discount of 25% to the occupational scheme or put another way, the occupational is roughly 30% more efficient in the payment of its pension.
Occupational pensions are liabilities on the balance sheet. If they fall on an insurer’s balance sheet instead, such as you suggest, GAD is saying they are considerably more expensive.. and that's the point I was, as I said - badly, trying to make. If an bog standard occupational pension scheme wanted to “buy-out” your £10,000 pa pension, it would have to cough up an extra £85,000 to get you off its books and make you and your life expectancy the insurer’s problem.
We can argue all night about GAD’s assumptions, but it’s unlikely that you’d get better data or a more prudent methodology. These rates were designed for 5-10 years and none of the fundamentals in terms of the interest rates or life expectancy have changed since then, I keep a close eye on them, my clients require it.
So we have to assume that the differences in the cost of the pension payable are down to the differing discount factors being used by occupational pension FS/DB) schemes and DC insurers (both or which GAD approves). There seem to me (and I’m not an actuary, just a jobbing IFA) that two factors that can make a difference to the discount factor- investment returns and expenses.
Occupational schemes do not have to factor in a payment to shareholders, they should have a lower cost base not having to market themselves against competition and they should be able to work on their own longevity data and be able to make rather more accurate assumptions on the duration of their liabilities.
But a return to collective one size fits all would not benefit the insurers, it would mean much of the in retirement wealth of this nation was more directly invested and managed by trustees. Some collective schemes might be insured but it would be safe to say, some wouldn’t.
So expect to see a number of smokescreens over the next few months, shocking stories of market crashes and not unfair state policy leaving (military, in particular) widows penniless, etc - people who read my blog just before xmas will know my feelings about *that*!
The regulation is consistent, and that's the problem - private *and* public pension funds were both sold with unrealistic expectations but now that the chickens are coming home to roost and the cost is building up, governments & insurance companies are creaking under the strain.
There is no single point of blame, Wall Street, the High Street or State Street. I suspect everyone took their eyes off the ball either through politicians buying/selling votes with short sighted and insanely self serving policies, financial services becoming the disgusting thing that it was allowed to become, or consumers spending too much and not saving enough - in particular, throughout the 90s.
We have to go back to basics. Pound for pound (and thanks to Beveridge), the basic state pension is still probably the most efficient way of paying a retirement income we know of. The infrastructure works well and politically it is the one benefit, apart from the NHS, that brings us together. What is there not to like about the basic state pension, why is it not expanded upon?
I enjoy the free market, but if not me, I hope my children appreciate what Steve Webb is doing. That we are restoring it to its rightful place as the bedrock of our retirement benefits is impotent too to second tier pensions, whether they are DC or DB. We have to draw the line under this malaise somewhere and stop shifting it to the right.
Maybe we need to redefine the compromise that we have, between the certainty of self-sufficiency with our aspirations of pleasure and enjoyment. If we don't start saving now, if we look for excuses, we can have no excuse. If we aspire to affluence and happiness now, why would we not aspire to be spared destitution in our dotage?
There is no single point of blame, Wall Street, the High Street or State Street. I suspect everyone took their eyes off the ball either through politicians buying/selling votes with short sighted and insanely self serving policies, financial services becoming the disgusting thing that it was allowed to become, or consumers spending too much and not saving enough - in particular, throughout the 90s.
We have to go back to basics. Pound for pound (and thanks to Beveridge), the basic state pension is still probably the most efficient way of paying a retirement income we know of. The infrastructure works well and politically it is the one benefit, apart from the NHS, that brings us together. What is there not to like about the basic state pension, why is it not expanded upon?
I enjoy the free market, but if not me, I hope my children appreciate what Steve Webb is doing. That we are restoring it to its rightful place as the bedrock of our retirement benefits is impotent too to second tier pensions, whether they are DC or DB. We have to draw the line under this malaise somewhere and stop shifting it to the right.
Maybe we need to redefine the compromise that we have, between the certainty of self-sufficiency with our aspirations of pleasure and enjoyment. If we don't start saving now, if we look for excuses, we can have no excuse. If we aspire to affluence and happiness now, why would we not aspire to be spared destitution in our dotage?
Ginge R said:
The regulation is consistent, and that's the problem - private *and* public pension funds were both sold with unrealistic expectations but now that the chickens are coming home to roost and the cost is building up, governments & insurance companies are creaking under the strain.
How can you claim the regulations are 'consistent' when FS world can use an annuity factor of 23.6 whereas in the real (DC) world the fact is more like 30?Ginge R said:
There is no single point of blame, Wall Street, the High Street or State Street. I suspect everyone took their eyes off the ball either through politicians buying/selling votes with short sighted and insanely self serving policies, financial services becoming the disgusting thing that it was allowed to become, or consumers spending too much and not saving enough - in particular, throughout the 90s.
We have to go back to basics. Pound for pound (and thanks to Beveridge), the basic state pension is still probably the most efficient way of paying a retirement income we know of.
How can you possibly say that? we've no idea what the true cost is, we simply defer the cost onto future generations, hence we have a £5 trillion liability.....We have to go back to basics. Pound for pound (and thanks to Beveridge), the basic state pension is still probably the most efficient way of paying a retirement income we know of.
Ginge R said:
The infrastructure works well and politically it is the one benefit, apart from the NHS, that brings us together. What is there not to like about the basic state pension, why is it not expanded upon?
Because you can't create money out of nothing - these pensions aren't affordable if people actually had to pay the true cost.Because of a) the discount rate, and b) we do know what the tab is going to be and the regulation *is* consistent, and that's the trouble. But the calculations are different.
One of the tricks used to make the situation look rosier than it is has been using an unrealistical accounting device used for measuring the value of future liabilities in today’s money. It has enabled politicians for years to get away with allocating less money for pension funds and more for buying votes in marginal constituencies, appeasing single issue fanatics and overseas wars.
As (let’s use a topical example) firefighter pension liabilities will span decades, amounts of money which will be paid in the future need to be converted into present-day money in order to estimate their cost.. a sort of reverse engineering.
Going back to your question, you'll know that this is done using an accounting device called a discount rate. As the discount rate has the biggest single impact on the overall size of the liabilities, it is a very important number. Using a high discount rate makes the future liabilities appear to be smaller, and thus the case for painful reforms in the present day less urgent.
In calculating the figures mentioned, the Office of National Statistics (ONS) used a discount rate of 3% (as mandated by Eurostat, the European statistics body). However, a discount rate of 1% – potentially in line with our average rate of real economic growth over the next few years – would paint an far bleaker picture than that which is already bleak enough thank you very much!
It’s a little like the new Hinkley power station deal which we heard before xmas. We have forward fixed the price of energy, if we get that wrong we (the UK taxpayer) will be subsidising the French taxpayer for decades. And that's where it differs with other types of schemes. Even within the funded/unfunded arena, there are different regs.
Longevity assumptions are also important when projecting the future cost of pension liabilities, as the cost of pensions obviously goes up the longer you expect people to live. Longevity assumptions have persistently been underestimated in previous estimations of pension costs.
We must be honest (with ourselves) about using a realistic discount rate to account for our public sector pension obligations so we can see what the costs of these is likely to be in the future. Pension promises should be adjusted so that public sector workers are not given a significantly more generous deal than that available to private sector taxpayers, without whom the system could not function.
Public sector pensions, as contractual and legally binding obligations of the UK government, is debt just like gilts and should be properly included in public finance statistics.
But what is the option? We have failed to predict accurately and we can either continue to hide our heads in the sand or we can face up to the reality. What we have sow, we shall reap. And boy.. we are reaping it. We cannot undo the present or the past. We can just try to draw a line in the sand that many of us would wish to buty our heads in and we have to face up to addressing the future.
The Centre for Policy Studies (which I concede is a right leaning think-tank) claimed last year that the immediate cashflow shortfall in public sector pensions will be around £32 billion in 2017, meaning that each of Britain’s 26 million households will have to pay £1,230 to fill the gap. This compares with an annual bill of £850 per household in 2012 . However, that’s the good news. The cashflow shortfall is the difference between pension contributions by the UK’s public sector workers and the amount being paid out to people who have retired. This figure for the total public sector liability is almost £5 trillions.
Yes, our public sector pension liability is £5 trillions. That means we could make 5 million people into millionaires if we had no public sector pension debt liability. What is ‘just’ one trillion? A thousand billion, that’s what.. or a million million. Forget trying to relate that to images of coins stretching to the moon or pound coins being grains of sand on the beach – to put it into context, the government provided £37 billions of funding to bail out the two companies that comprise the former Northern Rock. Indeed, the UK’s £1.2 trillion public sector pension liabilities will not be paid in full, according to three quarters (75%) of economists polled by the Intergenerational Foundation.
Why? Because the £3.8 trillions that will have to be spent on state pensions only has a very weak relationship between the amount of money an individual has paid in through their National Insurance contributions and the benefits they are eligible to receive. In other words, it’s like the legalised Ponzi scheme I mentioned, with others.. it's the biggest there is. The money that we are paying in now goes towards paying the pensions of those who are retired.
The danger is, those currently aching to strike aren’t going to be able to have their pensions in payment funded by the next generation because there won’t be so many jobs and the taxation revenue won’t be as high (watch Despatches the other week on Channel 4?!). And there are more and more people too; the birth rate is rising again but there are fewer and fewer jobs.
This represents a huge burden which we are passing on to our children and grandchildren. And if our kids aren’t saving like mad for their retirement and wasting their money instead, they need their heads examining.
We only have to look to America to see the effects of unfunded public sector pension schemes. As The Economist pointed out in its recent coverage of Detroit bankruptcy, the problem of unfunded retirement benefits extends far and wide. Across America, authorities were guilty for years of trying to placate public sector unions by offering them pension and healthcare benefits which were much more generous then they could really afford, to be paid for by future generations of taxpayers who couldn’t have any say in these decisions.
And that’s what we’re doing, and that is why the Hutton Report was the catalyst for change.. especially as Gordon Brown and Tony Blair put as many people as possible on the public sector wage bill in the 1990s. And which is why David Cameron and George Osborne are trying to rebalance the public/private sector.
Unless we do something about it and take responsibility for ourselves, it’s going to hurt – even more. I am sure we agree on that, as we do most of this, if not all.
One of the tricks used to make the situation look rosier than it is has been using an unrealistical accounting device used for measuring the value of future liabilities in today’s money. It has enabled politicians for years to get away with allocating less money for pension funds and more for buying votes in marginal constituencies, appeasing single issue fanatics and overseas wars.
As (let’s use a topical example) firefighter pension liabilities will span decades, amounts of money which will be paid in the future need to be converted into present-day money in order to estimate their cost.. a sort of reverse engineering.
Going back to your question, you'll know that this is done using an accounting device called a discount rate. As the discount rate has the biggest single impact on the overall size of the liabilities, it is a very important number. Using a high discount rate makes the future liabilities appear to be smaller, and thus the case for painful reforms in the present day less urgent.
In calculating the figures mentioned, the Office of National Statistics (ONS) used a discount rate of 3% (as mandated by Eurostat, the European statistics body). However, a discount rate of 1% – potentially in line with our average rate of real economic growth over the next few years – would paint an far bleaker picture than that which is already bleak enough thank you very much!
It’s a little like the new Hinkley power station deal which we heard before xmas. We have forward fixed the price of energy, if we get that wrong we (the UK taxpayer) will be subsidising the French taxpayer for decades. And that's where it differs with other types of schemes. Even within the funded/unfunded arena, there are different regs.
Longevity assumptions are also important when projecting the future cost of pension liabilities, as the cost of pensions obviously goes up the longer you expect people to live. Longevity assumptions have persistently been underestimated in previous estimations of pension costs.
We must be honest (with ourselves) about using a realistic discount rate to account for our public sector pension obligations so we can see what the costs of these is likely to be in the future. Pension promises should be adjusted so that public sector workers are not given a significantly more generous deal than that available to private sector taxpayers, without whom the system could not function.
Public sector pensions, as contractual and legally binding obligations of the UK government, is debt just like gilts and should be properly included in public finance statistics.
But what is the option? We have failed to predict accurately and we can either continue to hide our heads in the sand or we can face up to the reality. What we have sow, we shall reap. And boy.. we are reaping it. We cannot undo the present or the past. We can just try to draw a line in the sand that many of us would wish to buty our heads in and we have to face up to addressing the future.
The Centre for Policy Studies (which I concede is a right leaning think-tank) claimed last year that the immediate cashflow shortfall in public sector pensions will be around £32 billion in 2017, meaning that each of Britain’s 26 million households will have to pay £1,230 to fill the gap. This compares with an annual bill of £850 per household in 2012 . However, that’s the good news. The cashflow shortfall is the difference between pension contributions by the UK’s public sector workers and the amount being paid out to people who have retired. This figure for the total public sector liability is almost £5 trillions.
Yes, our public sector pension liability is £5 trillions. That means we could make 5 million people into millionaires if we had no public sector pension debt liability. What is ‘just’ one trillion? A thousand billion, that’s what.. or a million million. Forget trying to relate that to images of coins stretching to the moon or pound coins being grains of sand on the beach – to put it into context, the government provided £37 billions of funding to bail out the two companies that comprise the former Northern Rock. Indeed, the UK’s £1.2 trillion public sector pension liabilities will not be paid in full, according to three quarters (75%) of economists polled by the Intergenerational Foundation.
Why? Because the £3.8 trillions that will have to be spent on state pensions only has a very weak relationship between the amount of money an individual has paid in through their National Insurance contributions and the benefits they are eligible to receive. In other words, it’s like the legalised Ponzi scheme I mentioned, with others.. it's the biggest there is. The money that we are paying in now goes towards paying the pensions of those who are retired.
The danger is, those currently aching to strike aren’t going to be able to have their pensions in payment funded by the next generation because there won’t be so many jobs and the taxation revenue won’t be as high (watch Despatches the other week on Channel 4?!). And there are more and more people too; the birth rate is rising again but there are fewer and fewer jobs.
This represents a huge burden which we are passing on to our children and grandchildren. And if our kids aren’t saving like mad for their retirement and wasting their money instead, they need their heads examining.
We only have to look to America to see the effects of unfunded public sector pension schemes. As The Economist pointed out in its recent coverage of Detroit bankruptcy, the problem of unfunded retirement benefits extends far and wide. Across America, authorities were guilty for years of trying to placate public sector unions by offering them pension and healthcare benefits which were much more generous then they could really afford, to be paid for by future generations of taxpayers who couldn’t have any say in these decisions.
And that’s what we’re doing, and that is why the Hutton Report was the catalyst for change.. especially as Gordon Brown and Tony Blair put as many people as possible on the public sector wage bill in the 1990s. And which is why David Cameron and George Osborne are trying to rebalance the public/private sector.
Unless we do something about it and take responsibility for ourselves, it’s going to hurt – even more. I am sure we agree on that, as we do most of this, if not all.
Ginge R said:
Because of a) the discount rate, and b) we do know what the tab is going to be and the regulation *is* consistent, and that's the trouble. But the calculations are different.
My whole point is that there is no valid economic reasons for the calculations to be different. The liability is exactly the same in both cases and should be treated as such.Ginge R said:
One of the tricks used to make the situation look rosier than it is has been using an unrealistical accounting device used for measuring the value of future liabilities in today’s money. It has enabled politicians for years to get away with allocating less money for pension funds and more for buying votes in marginal constituencies, appeasing single issue fanatics and overseas wars.
As (let’s use a topical example) firefighter pension liabilities will span decades, amounts of money which will be paid in the future need to be converted into present-day money in order to estimate their cost.. a sort of reverse engineering.
Going back to your question, you'll know that this is done using an accounting device called a discount rate. As the discount rate has the biggest single impact on the overall size of the liabilities, it is a very important number. Using a high discount rate makes the future liabilities appear to be smaller, and thus the case for painful reforms in the present day less urgent.
In calculating the figures mentioned, the Office of National Statistics (ONS) used a discount rate of 3% (as mandated by Eurostat, the European statistics body). However, a discount rate of 1% – potentially in line with our average rate of real economic growth over the next few years – would paint an far bleaker picture than that which is already bleak enough thank you very much!
It’s a little like the new Hinkley power station deal which we heard before xmas. We have forward fixed the price of energy, if we get that wrong we (the UK taxpayer) will be subsidising the French taxpayer for decades. And that's where it differs with other types of schemes. Even within the funded/unfunded arena, there are different regs.
Longevity assumptions are also important when projecting the future cost of pension liabilities, as the cost of pensions obviously goes up the longer you expect people to live. Longevity assumptions have persistently been underestimated in previous estimations of pension costs.
We must be honest (with ourselves) about using a realistic discount rate to account for our public sector pension obligations so we can see what the costs of these is likely to be in the future. Pension promises should be adjusted so that public sector workers are not given a significantly more generous deal than that available to private sector taxpayers, without whom the system could not function.
Public sector pensions, as contractual and legally binding obligations of the UK government, is debt just like gilts and should be properly included in public finance statistics.
But what is the option? We have failed to predict accurately and we can either continue to hide our heads in the sand or we can face up to the reality. What we have sow, we shall reap. And boy.. we are reaping it. We cannot undo the present or the past. We can just try to draw a line in the sand that many of us would wish to buty our heads in and we have to face up to addressing the future.
The Centre for Policy Studies (which I concede is a right leaning think-tank) claimed last year that the immediate cashflow shortfall in public sector pensions will be around £32 billion in 2017, meaning that each of Britain’s 26 million households will have to pay £1,230 to fill the gap. This compares with an annual bill of £850 per household in 2012 . However, that’s the good news. The cashflow shortfall is the difference between pension contributions by the UK’s public sector workers and the amount being paid out to people who have retired. This figure for the total public sector liability is almost £5 trillions.
Yes, our public sector pension liability is £5 trillions. That means we could make 5 million people into millionaires if we had no public sector pension debt liability. What is ‘just’ one trillion? A thousand billion, that’s what.. or a million million. Forget trying to relate that to images of coins stretching to the moon or pound coins being grains of sand on the beach – to put it into context, the government provided £37 billions of funding to bail out the two companies that comprise the former Northern Rock. Indeed, the UK’s £1.2 trillion public sector pension liabilities will not be paid in full, according to three quarters (75%) of economists polled by the Intergenerational Foundation.
Why? Because the £3.8 trillions that will have to be spent on state pensions only has a very weak relationship between the amount of money an individual has paid in through their National Insurance contributions and the benefits they are eligible to receive. In other words, it’s like the legalised Ponzi scheme I mentioned, with others.. it's the biggest there is. The money that we are paying in now goes towards paying the pensions of those who are retired.
The danger is, those currently aching to strike aren’t going to be able to have their pensions in payment funded by the next generation because there won’t be so many jobs and the taxation revenue won’t be as high (watch Despatches the other week on Channel 4?!). And there are more and more people too; the birth rate is rising again but there are fewer and fewer jobs.
This represents a huge burden which we are passing on to our children and grandchildren. And if our kids aren’t saving like mad for their retirement and wasting their money instead, they need their heads examining.
We only have to look to America to see the effects of unfunded public sector pension schemes. As The Economist pointed out in its recent coverage of Detroit bankruptcy, the problem of unfunded retirement benefits extends far and wide. Across America, authorities were guilty for years of trying to placate public sector unions by offering them pension and healthcare benefits which were much more generous then they could really afford, to be paid for by future generations of taxpayers who couldn’t have any say in these decisions.
And that’s what we’re doing, and that is why the Hutton Report was the catalyst for change.. especially as Gordon Brown and Tony Blair put as many people as possible on the public sector wage bill in the 1990s. And which is why David Cameron and George Osborne are trying to rebalance the public/private sector.
Unless we do something about it and take responsibility for ourselves, it’s going to hurt – even more. I am sure we agree on that, as we do most of this, if not all.
Very strange - in your previous post you were talking about how the state pension was the best value there is. And now you basically follow up with loads of information explaining why the state pension is one massive "fraud" as the true cost has been repeatedly hidden using unrealistic assumptions. You are basically making my point for me.As (let’s use a topical example) firefighter pension liabilities will span decades, amounts of money which will be paid in the future need to be converted into present-day money in order to estimate their cost.. a sort of reverse engineering.
Going back to your question, you'll know that this is done using an accounting device called a discount rate. As the discount rate has the biggest single impact on the overall size of the liabilities, it is a very important number. Using a high discount rate makes the future liabilities appear to be smaller, and thus the case for painful reforms in the present day less urgent.
In calculating the figures mentioned, the Office of National Statistics (ONS) used a discount rate of 3% (as mandated by Eurostat, the European statistics body). However, a discount rate of 1% – potentially in line with our average rate of real economic growth over the next few years – would paint an far bleaker picture than that which is already bleak enough thank you very much!
It’s a little like the new Hinkley power station deal which we heard before xmas. We have forward fixed the price of energy, if we get that wrong we (the UK taxpayer) will be subsidising the French taxpayer for decades. And that's where it differs with other types of schemes. Even within the funded/unfunded arena, there are different regs.
Longevity assumptions are also important when projecting the future cost of pension liabilities, as the cost of pensions obviously goes up the longer you expect people to live. Longevity assumptions have persistently been underestimated in previous estimations of pension costs.
We must be honest (with ourselves) about using a realistic discount rate to account for our public sector pension obligations so we can see what the costs of these is likely to be in the future. Pension promises should be adjusted so that public sector workers are not given a significantly more generous deal than that available to private sector taxpayers, without whom the system could not function.
Public sector pensions, as contractual and legally binding obligations of the UK government, is debt just like gilts and should be properly included in public finance statistics.
But what is the option? We have failed to predict accurately and we can either continue to hide our heads in the sand or we can face up to the reality. What we have sow, we shall reap. And boy.. we are reaping it. We cannot undo the present or the past. We can just try to draw a line in the sand that many of us would wish to buty our heads in and we have to face up to addressing the future.
The Centre for Policy Studies (which I concede is a right leaning think-tank) claimed last year that the immediate cashflow shortfall in public sector pensions will be around £32 billion in 2017, meaning that each of Britain’s 26 million households will have to pay £1,230 to fill the gap. This compares with an annual bill of £850 per household in 2012 . However, that’s the good news. The cashflow shortfall is the difference between pension contributions by the UK’s public sector workers and the amount being paid out to people who have retired. This figure for the total public sector liability is almost £5 trillions.
Yes, our public sector pension liability is £5 trillions. That means we could make 5 million people into millionaires if we had no public sector pension debt liability. What is ‘just’ one trillion? A thousand billion, that’s what.. or a million million. Forget trying to relate that to images of coins stretching to the moon or pound coins being grains of sand on the beach – to put it into context, the government provided £37 billions of funding to bail out the two companies that comprise the former Northern Rock. Indeed, the UK’s £1.2 trillion public sector pension liabilities will not be paid in full, according to three quarters (75%) of economists polled by the Intergenerational Foundation.
Why? Because the £3.8 trillions that will have to be spent on state pensions only has a very weak relationship between the amount of money an individual has paid in through their National Insurance contributions and the benefits they are eligible to receive. In other words, it’s like the legalised Ponzi scheme I mentioned, with others.. it's the biggest there is. The money that we are paying in now goes towards paying the pensions of those who are retired.
The danger is, those currently aching to strike aren’t going to be able to have their pensions in payment funded by the next generation because there won’t be so many jobs and the taxation revenue won’t be as high (watch Despatches the other week on Channel 4?!). And there are more and more people too; the birth rate is rising again but there are fewer and fewer jobs.
This represents a huge burden which we are passing on to our children and grandchildren. And if our kids aren’t saving like mad for their retirement and wasting their money instead, they need their heads examining.
We only have to look to America to see the effects of unfunded public sector pension schemes. As The Economist pointed out in its recent coverage of Detroit bankruptcy, the problem of unfunded retirement benefits extends far and wide. Across America, authorities were guilty for years of trying to placate public sector unions by offering them pension and healthcare benefits which were much more generous then they could really afford, to be paid for by future generations of taxpayers who couldn’t have any say in these decisions.
And that’s what we’re doing, and that is why the Hutton Report was the catalyst for change.. especially as Gordon Brown and Tony Blair put as many people as possible on the public sector wage bill in the 1990s. And which is why David Cameron and George Osborne are trying to rebalance the public/private sector.
Unless we do something about it and take responsibility for ourselves, it’s going to hurt – even more. I am sure we agree on that, as we do most of this, if not all.
Thanks (Oh, by the way, I'm an Actuary with 20+ years experience)!
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