Based on projections I got when I started my pension I was thinking I could retire at 55-60. Now it looks like close to 70! It's too late for me to do anything about this now, unless I win something large!
Since when has a usenet thread stayed on topic? ;-)
The vested interests of government ministers?
M.
"Derek Geldard" wrote
... of course ...
"Derek Geldard" wrote
Exactly! They certainly did *not* say that DC schemes were in trouble, due to longevity, as you said they did (top of this post).
"Derek Geldard" wrote
Of course you can comment. But don't read something into it that isn't there, and then complain about it!
"Derek Geldard" wrote
Yep. Have you not considered that the only real "pension fund problems" might relate to defined-benefit schemes, and *not* defined-contribution schemes?
"Mark" wrote
Were those early projections based on a *level* pension?
If investment returns and inflation stayed higher, more in line with the assumptions behind those old projections, and you took a level pension from age 55-60, then you'd soon find that the real value of that pension was eroded by inflation.
[In order to get the same "buying power" from your pension throughout retirement, you'd need to take an *increasing* pension (escalates each year into retirement).]So, if you just look at the *initial* level of the pension, then it would always seem possible to retire earlier under the "high returns/inflation, level pension" scenario. But that ignores the fact that, in real terms, your pension will be reducing year-on-year.
If you'd be happy with a much lower (real-value) pension after a few years, based on the "high return/inflation" projection, then why would you think you needed to wait longer to retire under the "low return/inflation" scenario?
Defined contribution schemes would have been directly affected by poor stock market returns and by lower annuity rates ( caused by lower interest rates and by people living longer). This means that when you go to buy a pension with your pension pot the annuity providers ( insurance companies) offer lower pensions. The following web sites give interesting information but the paragraph I have put in below summarises the problem.
"Smith" wrote
The *pensions* payable from DC schemes would have been directly affected, yes. But that is *not* a problem for the *scheme*...
"Smith" wrote
That's not a problem for the *scheme* ; it maybe a problem for the
*pensioner*."Smith" wrote
... which would have quickly been eroded by inflation, leaving the *real* value of the pension much lower.
What are the comparisons for RPI-linked pensions?
And £1,700 in 1979 was worth considerably more than £1,700 would be today. In 1979, it would probably have been enough to live on without too much hardship.
It is difficult to find figures for RPI linked pensions going back nearly 30 years.
However, RPI annuities are partly based on actual inflation figures at the time as well as expected inflation, and would always mean that the pension would keep its real value.
"Graham Murray" wrote
Umm - and the 10,000 in 1979 was considerably more costly than 10,000 would be today...
There's no point in comparing the 1,700 in 1979 to the 1,700 today, unless you also compare the *cost* of that 1,700 -- which is 10,000 in both cases!
"Smith" wrote
But the rapid reduction in the real value of the "17% pension", due to high inflation, would eventually make it worth **even less** than the "7% pension" in a more stable environment!
"Smith" wrote
Yep, and they were much less readily available back then, so the market in them was less competitive.
"Smith" wrote
That's the point. If they had been more readily available in the 1970's, they would have provided real-value pensions of much more similar (real) values to those payable today.
You cannot say that a level pension of 17% from 1979, which would soon not buy anywhere near as much as it did originally (due to high inflation), *must* be much better than a level pension of 7% today (which will keep it's buying-power much better than the 1979 equivalent).
BTW - do you still think that there are any (major) problems for DC schemes?
I agree that the value of a level pension today would probably decline at a slower rate than one in 1979.
So your argument might imply that defined contribution schemes today may not be necessarily be in a worse position than in 1979.
However, to see the full picture, one would need to look at the amount of the pension built up ( obviously much higher than 1979 figures), annuity levels as just discussed, and also compare prices now with 1979.
Whether there really is a pensions crisis ( a much overused word) is a point of much debate as the problem is much more complex than the media would have it ( see original start of this thread ).
So maybe it needs a more objective look. Perhaps to take an artificial example of someone starting work at 16 and retiring at 65 having put, say, 5% of their gross income into a pension scheme for the whole of their working life and having a pay rise each year in line with inflation. Then compare the percentage of final salary taken in pension by the theoretical man working from 1930 and retiring in 1979 and one starting work in 1959 and retiring now. I know that it is an artificial scenario, but it would serve to compare like with like.
I'd have to look back to be sure, but I doubt I would make that mistake. My recent projections certainly include both a level and a rising pension.
I would not be happy with a low real value pension. However I believe that "real" inflation is much underestimated at the present and IMHO we now have a low return but not a low inflation situation. This is not a good scenario.
M.
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