the future for pensions and retirement · 11/30/2009 · the future for pensions and retirement ft...
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The future for pensionsThe future for pensionsand retirementand retirement
FT Intermediary ForumFT Intermediary Forum1010thth November 2009November 2009
LondonLondon
Dr. Ros AltmannDr. Ros Altmann
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OutlineOutline
�� The past: history of pensions and retirementThe past: history of pensions and retirement�� The present: demography and policy mistakesThe present: demography and policy mistakes�� The future: rethinking pensions and retirementThe future: rethinking pensions and retirement
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The past The past –– UK pensionsUK pensions
�� Up to 1990’s Up to 1990’s -- used to be a model for othersused to be a model for others�� Strong retirement saving cultureStrong retirement saving culture�� Very low state pensionVery low state pension�� Good private pension provisionGood private pension provision�� Employer final salary scheme or personal pensionEmployer final salary scheme or personal pension�� Ageing population all sorted!Ageing population all sorted!
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What is a pension?What is a pension?
�� Pensions are two different things:Pensions are two different things:1. Social welfare1. Social welfare2. Long2. Long--term savingsterm savings
�� ConfusionConfusion�� Employer final salary schemes offered bothEmployer final salary schemes offered both�� Heavy reliance on stock market returnsHeavy reliance on stock market returns
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The presentThe present
�� Falling social welfareFalling social welfare�� Falling private savingsFalling private savings�� Final salary giving way to money purchaseFinal salary giving way to money purchase
–– 21st Century employers won’t do social welfare21st Century employers won’t do social welfare�� Employer contributions fallingEmployer contributions falling�� Individuals on their own Individuals on their own –– facing povertyfacing poverty
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Whose responsibility?Whose responsibility?
Government
Employer
Individual
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This This isis a crisisa crisis
�� Government: no pension crisis now, maybe in futureGovernment: no pension crisis now, maybe in future�� Nonsense! pension crisis now, Nonsense! pension crisis now, pensionerpensioner crisis sooncrisis soon�� What will retired baby boomers live on?What will retired baby boomers live on?�� Didn’t build up enough savings in the good yearsDidn’t build up enough savings in the good years�� Demographic realitiesDemographic realities
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Demographic dangersDemographic dangers% change in UK population size each year% change in UK population size each year
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Policy mistakes undermined savingPolicy mistakes undermined saving
�� Initiatives supposed to help Initiatives supposed to help –– FSA; Simplicity, security & choice; decision trees; FSA; Simplicity, security & choice; decision trees;
stakeholder; Astakeholder; A--day; personal accountsday; personal accounts�� None of this is working None of this is working –– advisers know itadvisers know it�� Demand side vs. supply sideDemand side vs. supply side�� Asymmetrical regulation, easy to borrow, hard to saveAsymmetrical regulation, easy to borrow, hard to save�� Did Government really want people to save?!Did Government really want people to save?!
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Don’t politicians understand?Don’t politicians understand?
�� Pensions Ministers Pensions Ministers –– blink and you miss themblink and you miss them�� ShortShort--term spin is no longterm spin is no long--term solutionterm solution�� No incentives, major new disincentives No incentives, major new disincentives �� 2006 reforms already out of date 2006 reforms already out of date �� Turner admits this before they even start!Turner admits this before they even start!
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Current state pension reformsCurrent state pension reforms
�� Still inadequate, low, complexStill inadequate, low, complex–– BSP + S2P + Pension CreditBSP + S2P + Pension Credit
�� Link BSP to earnings, but S2P to pricesLink BSP to earnings, but S2P to prices�� Increase pension ageIncrease pension age�� Give with one hand, take back with the otherGive with one hand, take back with the other�� Still around half of pensioners on means testingStill around half of pensioners on means testing
–– State pension still undermining private provisionState pension still undermining private provision
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Personal accounts Personal accounts -- opportunitiesopportunities
�� Politicians:Politicians: claim success if more people contributeclaim success if more people contribute�� Treasury:Treasury: watch people save to replace meanswatch people save to replace means--testtest�� Financial industry:Financial industry: earn fees each year on assetsearn fees each year on assets�� Employers:Employers: cut contributions substantially cut contributions substantially
–– > 20% > 20% --> 7% > 7% --> 3% or 1%!!> 3% or 1%!!
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Personal accounts Personal accounts -- threatsthreats
�� Levelling down: make pension provision worseLevelling down: make pension provision worse�� Suitability: autoSuitability: auto--enrolled individuals could lose outenrolled individuals could lose out�� Inadequacy: investment or annuity forecasts wrongInadequacy: investment or annuity forecasts wrong�� Admin nightmaresAdmin nightmares�� Politicians only concerned people put money Politicians only concerned people put money inin�� But what matters is getting good pension But what matters is getting good pension outout
�� Today’s policymakers won’t be around byToday’s policymakers won’t be around by thenthen
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Generic advice hopelessGeneric advice hopeless
�� Individuals struggle with cost, risk and complexityIndividuals struggle with cost, risk and complexity�� Who will assess suitability?Who will assess suitability?�� Who will address investment risk?Who will address investment risk?�� Who will address decumulation?Who will address decumulation?
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Annuitisation needs revisitingAnnuitisation needs revisiting
�� Annuity rates worseningAnnuity rates worsening–– Final salary schemes buy out, Solvency IIFinal salary schemes buy out, Solvency II
�� 10,000 annuities each week 10,000 annuities each week –– rising fastrising fast�� 90% buy level annuities90% buy level annuities�� OMO not working OMO not working –– wrong product, bad ratewrong product, bad rate�� Mandatory annuitisation should endMandatory annuitisation should end
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Confused pension objectivesConfused pension objectives
1.1. To deliver security in retirement?To deliver security in retirement?2.2. To maximise potential investment returns?To maximise potential investment returns?
�� Need to separate the two Need to separate the two �� Employers finding social welfare unaffordableEmployers finding social welfare unaffordable�� Private pensions assumed equity risk premiumPrivate pensions assumed equity risk premium�� Gambling future retirement security on the stock Gambling future retirement security on the stock
market has failed millionsmarket has failed millions
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Investment risk misunderstoodInvestment risk misunderstood
�� No guarantee that equity risk will be rewardedNo guarantee that equity risk will be rewarded�� There’s no loyalty bonus!There’s no loyalty bonus!�� Private pension forecasts Private pension forecasts -- everyone a winner!everyone a winner!�� Theory just says ‘on average’ ‘over the longTheory just says ‘on average’ ‘over the long--term’term’�� What if below average and how long is longWhat if below average and how long is long--term?term?�� State pension cuts relied on equity returns to State pension cuts relied on equity returns to
deliver social welfaredeliver social welfare
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Do equities meet pension liabilitiesDo equities meet pension liabilities
�� Need to keep up with inflationNeed to keep up with inflation�� Need to keep up with longevityNeed to keep up with longevity�� Need to outperform interest ratesNeed to outperform interest rates�� Manager underperformanceManager underperformance�� ChargesCharges�� Employers can’t handle risks, how can individuals?Employers can’t handle risks, how can individuals?
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The future: reform social welfareThe future: reform social welfare
�� Start with state pension Start with state pension –– resident’s pensionresident’s pension�� State pays nonState pays non--meansmeans--tested social welfaretested social welfare�� What age?What age?�� State must provide basic minimum, not employerState must provide basic minimum, not employer�� Build private income safely on topBuild private income safely on top
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The future: reform longThe future: reform long--term savingsterm savings
�� Don’t use the word ‘pension’ for private savingsDon’t use the word ‘pension’ for private savings�� Lifetime Savings Accounts Lifetime Savings Accounts –– LifeSaver?LifeSaver?�� More flexibility, not just locked boxMore flexibility, not just locked box�� Accept uncertaintyAccept uncertainty�� Better investment optionsBetter investment options
–– Guaranteed capital and income? DiversificationGuaranteed capital and income? Diversification�� Encourage more savingsEncourage more savings
BUT…BUT…
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Pensions alone can’t solve pension crisisPensions alone can’t solve pension crisis
�� Must rethink retirementMust rethink retirement�� New phase of life New phase of life –– ‘bonus years’‘bonus years’�� Cut down gradually, partCut down gradually, part--time work, job sharing time work, job sharing
–– 22--3 days work, 43 days work, 4--5 days off, more money5 days off, more money�� Better for individuals, employers and economyBetter for individuals, employers and economy�� Advisers to help clients with lifestyle planningAdvisers to help clients with lifestyle planning
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Birth BirthBirth
15
15 years notworking
65
50 yearsworking
75
10 years notworking
33%
67%
18
18 years notworking
60
42 yearsworking
82
22 years notworking
20
20 years notworking
60
working
90
bonus years
24%
47%
29%
1950’s Now Future?
49%51%
retirement
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Advisers essentialAdvisers essential
�� Government undervalues advisersGovernment undervalues advisers�� UK system exceedingly complexUK system exceedingly complex�� Public sector doesn’t face these problemsPublic sector doesn’t face these problems�� People cannot manage well on their ownPeople cannot manage well on their own�� Huge opportunities as older population risesHuge opportunities as older population rises�� Honesty and realityHonesty and reality
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ConclusionsConclusions
�� Minimum security from state pensionMinimum security from state pension�� Encourage private lifetime savingsEncourage private lifetime savings�� More flexibility on way in and out More flexibility on way in and out –– not annuitiesnot annuities�� Later life working inevitableLater life working inevitable�� Advisers to help individuals plan realisticallyAdvisers to help individuals plan realistically
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Thank you for listeningThank you for listening
Website: Website: www.rosaltmann.comwww.rosaltmann.comEmail: [email protected]: [email protected]
Twitter: @rosaltmannTwitter: @rosaltmann