The financial institutions earn more from pension funds than the old age pensioners!
When we are old, we need security, we need pensions. But how secure is the present pension system?
Millions of pension buyers in Britain are waiting for reimbursement and advice to compensate them for independent pensions they were "mis-sold" — or conned into buying — in the late eighties.
Hundreds of thousands who are topping up the pensions they have from their employers are just getting wind of a similar scandal emerging.
Many more who are buying into pensions are wondering if they are doing the right thing. And when their annual statements drop on the doormat, they look at them with incomprehension: how much will their pension really be worth? Are they really being wise putting their money into the hands of these financial institutions?
While individuals grapple with these issues, the British government is trying to address the pensions timebomb. As more people are living longer, the demand on the state social security system is ever increasing. So, the government’s solution is to compel people to buy private pensions. That is to say that people will be forced to hand over their money to the already bloated financial institutions in a wild hope that gambling on the stock-market will keep them in their old age.
Yet a rigorous examination of commercial pensions shows that they seriously fall down on three counts: on financial grounds, on grounds of sustainability, and on being possible to understand.
Firstly, the financial aspects. Investments are the only products we buy where we are not told the specifications of what we’re getting. There is no undertaking from the pension provider as to how much profit the pension will earn during the period before you retire, no undertaking as to what monthly pension that accrued sum will buy, and of course no way of predicting what that sum will be worth after inflation.
The financial regulators have tried to introduce some standards to the industry by stating that pension funds have to quote potential profits on a standard basis. So once you’ve told them how much you can contribute, all the funds quote what this will earn if the stock-market (where they have to put most of your money) rises by 6%, 9% or 12% each year until you retire.
They also quote what their charges might be and thus, if you shop around, all you can compare is their charges.
Here is where the first alarm bells ring. The charges can be a quarter or more of what you pay in. If you contract to contribute £100 per month for twenty years, you will have contributed £24,000 in total and some £6,000 will have been deducted by the various institutions involved. If the stock-market rises by 9% a year, your investment will grow to £50,000 which will "buy" you a pension of £4,000 per annum, worth £2,250 pa after inflation at 3% a year.
Or, to put it another way, just to get your money back, you need to live for ten years after retirement. The average life expectancy is now seventy-seven for men and eighty-two for women, so the average pensioner will only just recover what they put in, let alone any profits. As more people live longer, these pension sums are likely to go down as the institutions find they have to pay out pensions for longer.
In fact, the figures are only this attractive because at present in order to have £100 per month credited to your pension, you only need to pay £76, as the government will refund the income tax you paid when you earned the money. The tax advantages are about the only financial reason for buying a pension, resulting in advertisements which trumpet the tax benefits and underplay the disadvantages.
When you also take into account that nearly a third of people who buy pensions stop paying in for some reason and suffer penalties, it may be the case that the institutions will earn more from the pension than you will.THE SECOND ASPECT is the environmental sustainability one. We are using up resources and producing waste and pollution faster than the planet can replace and absorb them. If the planet forces changes, such as global warming, they are more likely to be sudden, painful and possibly disastrous.
So how will these changes affect share prices and therefore pensions? Despite environmental concerns spreading to most sectors of society, the evidence is that pension fund managers have barely taken the issues on board. Investments in companies dealing with chemicals (pollution), oil (climate change), coal (acid rain), transport (acid rain, asthma levels), agribusiness (nitrates and genetically modified organisms) and supermarkets (air freight and ozone, packaging) are all fundamental parts of pension fund portfolios.
All these sectors can be expected to undergo huge changes in the next twenty years because of the way they degrade the environment, and most of them will have to phase out parts of their businesses and meet legal claims for environmental damages.
The problem for the pension funds is that even if they wanted to, they can’t as a group just sell their investments in the environmentally damaging companies. This is because the funds are so huge that news of just one selling shares in one type of business could of itself cause a crash in that sector. Indeed, one large fund is quietly — very quietly — selling shares in one area because they fear the future liabilities, but they are doing so very discreetly indeed. If they do sell en masse, the next problem is what to do with the money: they have to place most of their cash with stock-market investments and there simply aren’t enough environmentally sustainable companies to mop up their money.
The small clutch of ethical funds are taking environmental issues into account, but much of their money is still to be found in companies which are inherently unsustainable. Most, for instance, invest in supermarkets, businesses which rely on oil and chemicals to produce and move their food in a manner which will need to change drastically as the environmental crisis begins to bite.
THE THIRD ISSUE around pensions is that lay people find them all but impossible to understand. Even pension advisers themselves need to reach for their manuals on the rare occasions that a customer asks some incisive questions. Hence, in my view, it is all but impossible to make an informed decision on whether to buy a pension, and if so which type. You are solely in the hands of the financial advisers. The standard way of quoting a pension allows you to make some comparison between charges but little more. If the advisers suggest one particular plan, you more or less have to go with that and hope for the best.
So where does that leave all of us who wonder how we will keep ourselves in times to come?
This is the point at which many people throw up their hands in resignation and conclude there is no alternative, and sign on the pension company’s dotted line.
But it is the point at which we should step right back from the financial institutions and look at our old age in a different light. After all, it’s only in Western industrialized countries that people believe that all they have to do to ensure their future is pay some money into a pension fund.
There are other ways to security than the conventional pension. What of friends and family? What of the possibility of sharing facilities? What of reducing your fuel bills? What of putting your money in a local, environmentally sustainable small business? What of living to stay healthy so you can live independently for longer? And what of living with others such as in co-housing so you don’t need to spend so much money on day-to-day living?
Here is the chance to grasp. A far bigger overhaul of the welfare state is needed. Our society is richer in material terms than most other civilizations that have ever existed; surely it is possible for our collective wealth to keep us during these non-earning periods.
One way to achieve such collective security would be to establish "the citizens income". It means that we all receive a basic income plus housing allowance no matter what our circumstances. This would replace all other benefits and be far cheaper to administer, and would become an income tax credit for those in full-time paid work. In addition to ensuring that we all have sufficient income, it would also mean that a lot of work which at present isn’t profitable would become economic to do, because the basic income could subsidize the wages bill. (More information on the Citizens Income is available from the Citizens Income Study Centre, St. Philips Building, Sheffield St., London WC2A 2EX, tel 0171 955 7453).
While waiting for this, it behoves all of us to start putting money towards our future in more practical ways. So buying solar panels to heat our water or investing in insulation will reduce our bills before retirement, and afterwards.
Setting up co-housing schemes so we share facilities with like-minded people will address the isolation that many elderly people experience, and reduce their living costs.
Setting up pension schemes which are invested in the things people will always need can be wiser than putting it into the financial institutions.
Let not the financial institutions delude us into thinking that since their pensions give us access to income tax rebates this is the only way to realize these tax benefits. The income tax rebates are also available through the Self Invested pension schemes which can be set up directly with the Inland Revenue, thus saving the huge charges going to the pension funds. Ask your Inland Revenue office for more details.
Such schemes are often set up for company directors, but there is no reason why less exalted beings shouldn’t set them up for themselves. The advantage is more freedom about where to invest (although the smaller businesses which are not listed on the stock-markets are still out of bounds), and freedom from some of the contract terms the institutions insist on.
But if you are going to buy a pension, ask the adviser every question you can think of, demand they explain every piece of gobbledegook in the brochure, and only then make your decision.Peter Lang is the author of Ethical Investment — A Saver’s Guide (Jon Carpenter Publishing, Oxford); and Lets Work — Regenerating the Local Economy (Worldly Goods, Bristol).
Peter Lang is the author of Ethical
Investment — A Saver’s Guide (Jon Carpenter Publishing, Oxford); and Lets
Work — Regenerating the Local Economy (Worldly Goods, Bristol).
