Pension freedoms = bosses’ burdens


Much has been written about.the new UK pension freedoms; to treat pension pots like bank accounts. What has not been talked about is the vast burden these so called freedoms impose on both organisations and pension trustees. These burdens can be split into three categories.

What the freedoms do is to pass more of the burdens of an ageing workforce to employers and pension trustees and away from the state. Further, if employers and trustees pause for thought, let alone refuse to implement these measures, they are demonised by
Government ministers. In a stroke of genius, they even co-opted one of the most articulate and high profile commentators on pensions and ageing population issues, Roz Altman, by making her part of the Government.

The pension freedoms are a Government smoke and mirrors exercise that would make Darren Brown blush.

We are aware of the issues and costs of an ageing population. Successive governments have not only taken a “head in the sand” approach by ignoring the spiralling costs, but, have cynically protected state pensions and other age related benefits to attract the grey vote.

In an environment of out of control public spending, the Government has cynically and arguably with stealth, sought to transfer the burden of old age to pension schemes, employers and individuals, of future pension risks and costs.

There are many risks implicit in the pension freedoms. Some examples:
Bad or no advice
Under estimation of longevity
Administration issues, from complexity through legacy IT systems to poor administrative practices.
Loss of guaranteed benefits
Tax issues

Bad or no advice
Good advice is hard to find and expensive. You get what you pay for in life. There is a perception encouraged by the Government, that advice is either not necessary or should be free. Yet those exercising pension freedoms are taking risks and facing uncertainty, sometimes without even realising it. When the money runs out or the unexpected tax bill arrives,they will look for someone to blame, to claim compensation from or to sue. For DC and DB Occupational schemes that is likely to be the employer or the Trustees (which give trustee indemnity amounts to much the same thing). This also applies to the partners and families of those who exercise the freedoms. There will be much wailing and nashing of teeth when survivors find no death benefit and no cash left after the death of a loved one.

There has already beehn commentary about the unsuitable nature of ‘lifestyle” investment options under the new freedoms. If experience is anything to go by, this new pension class will be looking for the holy grail of rising returns and no risk. Good luck with that…

Then there are the sharks in the water, circling the unsophisticated. Coming up with expensive schemes that are doomed to failure in a few years: particularly when the economic black swan appears all too soon. Again, who will be to blame, the former employer or pension trustees.

The same “advisors” urging taking a lump sum to take a holiday or buy a new car. Pensioners cannot pay exorbitant utility bills with a holiday or eat their ageing, devalued car. Who will be to blame, who will meet the costs?

Under estimation of longevity
The killer (pardon the pun). The already puny pension pot (current average £120,000 at retirement) will have to last twenty years, with inflation, care and medical costs rapidly eating in to the capital. A rough calculation, without any lump sum, looks like the average amount will not last ten years.

It is unlikely, short of an unbelievable economic miracle, that the Government can maintain the so called triple lock on pension increases. We have already seen stealth reductions in the state old age pensions for those who followed advice and opted out of SERPS and its successors. The generational unfairness, as pointed out by David Willets in “The Pinch” Is getting worse. The costs of increasing longevity are falling on the young as more and more Government expenditure goes to the elderly, paid for by a shrinking workforce often still burdened with student debt before the rapidly rising cost of housing bites.

Administration issues
Few in the pension industry would argue, with a straight face, that pensions administration is agile or even efficient. To ask pensions IT systems to be upgraded quickly to administer the pension freedoms is to live in a fool’s paradise. To identify crystallised and uncrystallised funds over long periods, managing the tax issues (and reports of major HMRC errors and poorly thought out assumptions are already circulating) are major hurdles. The required IT changes will take many months, if not years.

In addition, recent history shows that changes to pension regulation occurs almost monthly. Attempts to correct both poorly thought out implementation as well as unintended consequences will result, quickly, in a perfect storm of regulatory, tax and structural changes: all to be absorbed by employers, trustees and providers at their own cost of course.

Lost benefits, seen and unseen
Many pension schemes, both private and company cover a mixture of risk benefits. These include life cover and, most critically, a small number have guaranteed annuity rates. These are often far in excess of market rates. Yet, some in the Government are saying no advice is needed (because good advice is expensive). Well, as the song said, you what, you what, you what! People may be giving up expensive non- replicable benefits for immediate cash.
Then there is the issue of long-term care costs. Pension freedoms will result in tomorrow’s care costs being spent today. Pensions from annuities at least provided some income stream against future care costs. The ever rising costs will have to be met by asset disposal (spending their children’s inheritance) or by the hard pressed tax payer. The benefits of a steady cash flow in elder years is washed away by immediate cash.

Pension freedoms have been sold by the Government as a panache to the perceived evils of annuities. So the masses are swapping a guaranteed lifetime income, albeit small; for volatility, uncertainties and risk – and that is only the taxation regimes.

An expectation has been built up that these freedoms will magically change a lifetime of under provision of pension saving in to a happy retirement. Even before the freedoms: research showed a yawning (sic) chasm between pension expectations and the actual amount saved by the vast majority of the UK workforce.

Who will be blamed when these great expectations run into the buffers of economic reality? Could it be the pension trustees, the sponsoring organisations and the pensions industry by any chance? PPI anyone?

Here we have the nub of the issue. The cost subject can be split into four main issues:
Advice costs
Administration costs
Transaction costs
Professional and legal costs

Advice costs
Pension funds are often the biggest asset pool an older individual has.. (If not then insufficient has been saved), These savings have to provide cash flows for an unknown period. This at a time of unprecedented economic uncertainty. Yet there is a wilful refusal by Government and individuals to see the necessity to pay for expert, tailored advice. Yes, advice is expensive, but better than an old age of poverty. The issues that require expert advice include longevity risk (living longer or shorter than expected); investment risk (risk vs return and volatility) and taxation risk. (The frequent changes in tax regimes impacting savings).

Trying to develop investment strategies, hedging overlays and appropriate risk and reward approaches will tax the most learned financial advisors. We are already seeing some advisors turning away business, either because they fear being overwhelmed by demand or they are worried about giving best advice in the minefield of shifting regulation and tax treatment.

Getting any of these issues wrong will result in financial embarrassment at best and abject poverty at worse. When it goes wrong in the absence of advice who will be asked to “bail out” the individuals? The former employers, the trustees and the insurers. The state will, of course, wash their hands, not that they will have and funds anyway.

Transaction costs
Even in the short period since the “freedoms” started: we have seen billions of pounds of assets and cash moving around; all of which attract transaction costs, another deduction from the asset pot. For small funds transaction costs eat rapidly in to already inadequate savings. Again, employers and trustees will be expected to meet some if not all this cost.

Professional and legal costs
Trustees will pass large expenses for lawyers, actuaries and other advisors on to employers. Where there is no sponsoring employer the pension scheme will take the hit. Yet Trustees and their sponsoring organisations will have to take more and more advice as the regulations and practical exercise of the freedoms create greater complexity, risk and uncertainty.

The advisors will be very conservative in their advice and rightly so. The results will be frustrated pension scheme members, fearful trustees and exploded balance sheets of sponsoring organisation both expenses and provisions.

And there’s more. The announcement of consultation on major changes to tax treatment on pension saving and payments are both radical and involve a great and unlikely leap of faith in politicians keeping to their word over a lifetime of pension savings and income. Who, in their right mind, would base advice to trustees, sponsors and individuals on the fatal quicksands of government tax and pension policy?

Much has been made of the potential of the new pension freedoms. But, even putting aside the fact that these freedoms will only really help a small constituency of middle class, middling affluent, middle aged people (definition of the Conservative Party?). Who will carry the enormous costs and risks? These include, but are not limited to, financial, reputational and legal risks. They are also very long tailed risks. With life expectancy for those retiring today being somewhere around twenty years; who will to be blamed when the pension well becomes dry in ten years?

An adult discussion is needed between the Government, the insurance industry, the actuarial profession, sponsoring organisations and trustees on the allocation and mitigation of costs, risks and responsibilities before the pension freedoms turn in to a swamp of expense, recriminations and legal action stretching far in to the future. And, should I see any other flying pigs I will let you know.

The pessimistic person’s pension problems Pandora’s package


I had a letter recently from the Trustees of one of my defined contribution occupational schemes.  They told me they were going to change all of my carefully balanced investments in to funds of their choosing.  They said they were doing it in the best interests of all members; a reason that gives little room for argument.  It did set me thinking of the many pension risks we face; often not of our making.

Here is a list from the Pandora’s package of a pessimistic person’s pension problems.

Security risk

There is an assumption that our pensions are safe but what about:

  • The strength of the sponsor; as pensioners in Detroit have found – nothing is guaranteed
  • Investment manager – more on this later; but what happens if our investment manager fails?
  • Spouse risk; we assume that our spouse has made appropriate pension arrangements in the event of their death, but have they?  What about divorce?
  • State risk: some people rely on the state to provide a pension.  Research has shown that there are a lot of European countries who will not (and in some cases currently cannot) be able to afford the state pension burden.  If, it is going to be paid followed by when is it going to be paid followed by how much is going to be paid?

Political Risks

  • What tax regime are we going to face on our future savings and on pensions in payment?  In the US have we made use of the Roth rollover?  In Europe, what are marginal rates of tax going to look like in the future given the deficits are likely to last for another twenty years?
  • What limitations and regulations are going to be put in place now and in the future?  In the UK the limits on pension savings change every few months.  Are we going to face a savings limit; or like Australia a reduction in our state pension because we were prudent enough to save for our old age?  We know this is on the agenda of the UK and other European governments.
  • Are our pension’s savings going to be confiscated by the state at some stage, as we saw proposals to take savings from bank accounts in Greece recently? Do not think because it has not happened it will not happen in the future.
  • For those countries that allow income drawdown; will those rights be curtained or removed thus driving the proverbial coach and horses through our pension planning.
  • Regulatory risk; in order to protect pensions will regulators have to put such high hurdles in place that pension provision becomes impossibility expensive.

Economic risks

  • What happens to our savings when QE ends and the bond bubble bursts?
  • What happens if inflation takes off, as I consider very likely?  Are our savings and our pension payments protected against massive price rises?
  • Our country goes bankrupt!  Not at all impossible in these volatile times.
  • Annuity risks: are annuity risks going to crash even further (yes, probably).  Meaning we have to save vastly more for the same level of pension.

Sufficiency risk

  • Research by Fidelity and others have shown that very few people are saving enough to meet a basic standard of living let alone meet their retirement aspirations
  • Economic shocks for individuals such as unemployment, depression in the real level of wages, rising costs taking larger proportions of income are becoming the norm rather than the exception
  • Annuity rates are falling and there is little sign on the horizon of increases.  Forecasts based on old or historic annuity averages will underperform against the market reality
  • Life expectancy; this is the good news bad news story.  It is great that people are living longer.  But, that also pushes annuity rates down even further.  Someone (that is you) has to pay for all those extra years of pension

Investment risk

Where does one start?

  • Do we invest conservatively to reduce volatility; but with a greatly reduced investment return or do we invest more aggressively and risk losing it all?
  • Market timings – when do we buy and when do we sell; is our “lifestyle planning” going to mean our fund manager exists equities at exactly the wrong time?
  • Hidden costs eroding our pension savings.  De we actually know how much we are paying for all these advisors, fund managers, intermediaries, actuaries, professional trustees, pension lawyers, pension administrators and other assorted hangers on who seem to make a very good living out of our pension savings?
  • Investment advice; should we be in bonds or equities, infrastructure or emerging markets debt?  Even if we avoid the perils of active management do we know where we should be invested?
  • Diversification risk, everything seems to be correlated with everything else when we look at investments.  Are we over diversified or under diversified; should we be diversified?  Are our fund managers over or under diversified
  • Active vs. passive fund management?  Should we hope that “our” fund manager can do better than the market over the long term (statistically very unlikely) or should we invest in the market indexes and perhaps lose out on juicy “one-off” investment opportunities?
  • Vanilla or exotic investments.  Should we invest just in main index stocks, or should we use derivatives to help hedge our exposure?  Are Credit Default Swaps a good or a bad place to be; or both?

Operational risk

  • Have we got good fund administrators?
  • Are our pension records with our advisors correct and up to date?  Does someone still hold the record for the pension I took out in 1984?
  • Are our pension administrators undertaking the correct highly complex calculations correctly to ensure the correct final pension payment?  Some years are indexed against one figure (In the UK, for example, against RPI) and in other years against another index (again, for example in the UK, CPI).  Has inflation indexing, if we are that lucky, being calculated correctly.
  • Would we ever know if any of the above does contain errors?
  • Are the auditors of our pension scheme doing a good job for us?
  • Are the pension lawyers looking after our best interests
  • Have the pension trustees made the right investment and administrative decisions?
  • Have the regulators got sufficient resources and expertise to ensure that pension scheme members are being treated fairly?
  • Are the pension scheme communications easy enough to understand so we know the risks we are taking?

I could have gone on and on looking in my Pandora’s package but I have depressed myself enough already writing this.  I am going to have a little lay down and a cup of tea.

The seven ages of pay(ne)



As a reward specialist and commentator I have a particular interest in the financial characteristics of the journey of life.  Shakespeare wrote of the seven ages of man; I like to think of it as the seven ages of pay(ne). 

  • 16-18 – Making hay and sowing oats with the Bank of mum and dad
  • 18-21 – Sunrise over the start of the loan journey
  • 21-30 – The breaking dawn of early earnings and mortgaging future pay
  • 30 -40 – (Un)Happy families – climbing the debt mountain
  • 40-50 – Sunlit uplands of peak earnings and debt repayment
  • 50-60 – Watching the sunset as the storm clouds gather; dawning realisation of old age – being the Bank of mum and dad
  • 60+ – Old age? – an undiscovered country

Each of these ages of pay(ne) has characteristics and needs.  Segmentation of the employee population for reward and benefits needs to consider the differing stages of the financial journey.

We will view the journey both from the individual and the corporate perspectives.

There is a presentation supporting this blog at


16-18 Making hay and sowing oats

This is the start of the great journey.  Unless we have had the good fortune of a financial education we worry not about the financial future; we are immortal.  The Bank of mum and dad provide the wherewithal to pursue hedonistic desires; even if the need for a good education and a part time job obstructs the high road.

18-21 Sunrise over the start of the loan journey

This age marks the start of the higher education adventure, but, at a cost.  Student and educational loans are an overhang for a large part of the financial journey.  For the corporates – and, for example, the armed services; it can provide a cheap way to encourage engagement.  This is achieved by sponsorship through this part of the voyage or by the promise of help with the initial debt burden.  As was said in the past “give me a child until he is seven and I will give you the man” now the motto is “engage them at 18 and keep them for a while”.  Given the “war for talent” paying for engagement at ages 18-21 is cheaper than trying this later in life.

21-30 the breaking dawn of early earnings and mortgaging future pay

When mentoring undergraduates and graduate trainees I tell them that if they are not managers by age thirty they are unlikely to reach the top of their profession.   This is a time of rapidly increasing earnings. At the same time, they are mortgaging their future earnings to borrow to get their foot on the foot of the property ladder; or buy desirable consumer goods.  The financial decisions made here cast a shadow over the rest of the financial journey.  For organisations, the focus should be on a good base salary as the start of wealth creation, with the promise of future riches for good performance and engagement.  An issue is divining the motivations of this cohort.  We have seen generation X and Y come and go – what are the drivers of the new cohort?

30-40 (Un)happy families – climbing the debt mountain

For individuals this is the time of playing (un)happy families while also climbing the debt mountain of mortgages, school fees, loan repayments, divorce settlements, child maintenance and other claims on their wealth and income.  For the organisation; the provision of pension savings (even if not taken up), life cover, personal medical insurance and the like, all become part of the glue mix to hold on to high performers alongside the promise of wealth creation through equity LITPS (Long term incentive plans) and the like.  At one time having a final salary scheme was (at least in the UK) a good, albeit expensive way, to maintain loyalty – alas no more.  Working in investment banking I introduced a well-received concierge service for our cash rich but time poor traders.  Providing a benefit that is valued by employees is an important component of the glue recipe that supports corporate strategy and objectives.

  40-50 ~the sunlit uplands of peak earnings and (hopefully) debt repayment

In a professional or management career these are the peak earnings years. The children, if any, will have flown the nest.  Disposable income will  be available to repay the debt and, if one has been lucky, the wealth creation promises of LTIPs will start to provide a boost to lifestyle,  Perhaps, it is time to start some serious pension savings (far too late of course).  Organisations will seek to cocoon there employees of this age; both because of the investment in training and skills that would have taken place; also, because of the dawning demographic realisation that the talent train behind has left the station almost empty.  Employees have the potential to be looking for security and certainty or alternatively the chance to develop even further and perhaps in new directions.  Status is important now – job title or car, corner office or the key to the executive washroom.

50-60 watching the sunset as the storm clouds gather – the dawning realisation of old age and becoming the Bank of mum and dad.

This is the time when the ugly reality of the journey’s end comes into focus.  Only a few more years of earnings ahead; with little saved to live on in retirement.  Now, there is an increase in financial demands; grown up children looking for help to purchase a property. There may be financial demands from elderly relatives unable to afford decent care as they descend in to old age and destitution.    Dickens would have had a field day commenting on the plight of our elderly, inequality and unemployment.  For organisations, the provision of assistance with social care and financial education for retirement are of importance.  In the ideal world, providing the facility to wind-down before retirement by working part-time would be an option.  However, the realities of the demographics, economics and the current political malaise make this a difficult scenario.  Some argue that older workers are more productive and more reliable – one hopes so.  This is not the worst of times or the best of times to be in this group; but it is clearly no bed of roses no matter where you are in the world.

60+ old age? The undiscovered country

The average income for those over 65 in the USA is just under $30,000.  In the UK it is approximately $28,000. (The two data sets are not completely comparable).  Hardly a fortune and almost certainly giving a lower standard of living than the recipients had hoped.  Longevity is increasing at a tremendous rate in the developed world so more people are living longer but with less income.  A good news, bad news story; you will live longer but be poorer.  Now with the debt overhang of the individual, their children and potentially elderly relatives “The good life” is but a dream.

For organisations the changing demographics as well as the alleged lack of skills of the younger generation means that they should start to prepare to employ those over sixty in increasing numbers.  That will cause new challenges.


Segmentation of our employees is a useful tool in reward.  Reflecting on the different cohort’s needs and aspirations when aligned with our business and reward strategy is a powerful approach.   For individuals, financial planning and awareness of the bumpy weather on the journey ahead will help prepare us to make the best of the domain of our old age.

This article is tongue in cheek; but it reflects underlying truths for both organisations and individuals.  I hope you enjoy and have a profitable journey and good weather.  Now where is my map to the sunlit uplands?




Perfect storms and social revolution – the pension’s story

The biggest issue in reward is surprisingly, pensions. We are faced with a perfect storm that includes changing demographics with the ratio of workers to pensioners heading to an unsustainable low. Long term and historic low rates of investment returns linked with rapidly falling annuity rates meaning fewer bangs for your pension bucks. The level of state pension provision in many European countries such as Italy, France and Greece is unsustainable in good times let alone the current economic meltdown. This is leading to a relatively rapid increase in state retirement age (and some would argue nothing like fast enough to match the demographic and economic environment) and attempts by some countries, such as the UK, to move pension provision for anything over the safety net limit, to employers and employees.
Labour market demographics relating to pensions are moving to the equivalent of the horror movie. Fewer, younger workers with high levels of debt (caused by a mixture of higher university fees in the UK to mass youth unemployment in Greece and Italy) are supporting higher levels of the non-working elderly population. Job tenure appears to be getting shorter with longer periods of UN or underemployment, as recent UK graduate employment statistics have indicated. The ability for younger employees to build a retirement pot over a working lifetime has been heavily eroded at the same time as state support is steadily being removed either by real reductions in pension value, means testing of anything over the most basic pension and increases in state retirement ages. If this is linked to the increasing cynicism and downright hostility to the entire world of financial services, pensions and investment included, of younger people, that makes retirement savings bottom of any list of financial priorities and thus unlikely to happen until far too late from a cohort of workers who will struggle to support the aging populations across the world.
We also have the unedifying spectacle of late middle aged workers having to support, on one hand their adult children who cannot find well-paid jobs or the ability to purchase or rent their own accommodation alongside financially supporting their elderly parents and other relatives who have too much wealth to be eligible for the rapidly shrinking state care home provisions but insufficient wealth to provide for themselves. An issue which incidentally will impact on the wealth inheritance of the middle classes further eroding their ability to have a nest egg for retirement.
In general people are living for longer, perhaps much longer as a mixture of improved living standards and innovative medical interventions (soon to be further enhanced by individualised bio-medical approaches around DNA mapping) means that life expectancy is moving in to the eighties and beyond. The downside of this is the rapidly increasing medical and care costs of an ageing population being funded by a smaller and smaller number of poorer and poorer, indebted younger workforce facing competition for jobs and income from the Asian tigers and BRIC economies.
All these economic factors sit alongside a greater social expectation of a “good” retirement. Fidelity Investments has produced some excellent research highlighting the gap between what people save for retirement and their expected income at that time against their retirement aspirations. The gap is vast and growing. The issue of social revolution arises that when todays older workers see the retirement goalposts being moved further and further away and when they reach retirement their living standards plummet not only way below their expectations but arguably below a subsistence level with the state unwilling or more likely unable to pick up the slack. How will this massive demographic cohort react? Who will they blame (because of course there must always be someone to blame) and more worryingly what are they going to do about it? What about those in work seeing their taxes being used to fund income and the rapidly increasing social care bill for the elderly while they themselves see the pot for their old age reducing to nothing and their own living standards being not only less than their parents (well-paid jobs, accommodation, a secure old age??) and perhaps even less than their grandparents…..
We are indeed, like the Titanic, blindly heading towards the iceberg of demographics. In some ways we are worse off as those who run governments are well aware of what is happening but turn a Nelson like blind eye towards the iceberg both due to the short term nature of politics and because any of the solutions are so painful no one wants to even think about them let along propose apocopate policy responses.
Even those of us who work in reward can do little against the headwinds of the current economic, social and political environment – we are already in the perfect storm and things can only get worse.