How do you cope with the risks of saving for a pension?by Andy Davis / June 22, 2011 / Leave a comment
For better, for worse. For richer, for poorer. In sickness and in health, till death us do part. Was there ever a more succinct expression of the risks inherent in making very long-term commitments? And given our inability to forecast even relatively short periods into the future—a failing shared by investment analysts, actuaries, central bankers and Harold Camping, the doomsday predictor—the only courses left open are to accept the risks or avoid all long-term commitment.
Anyone who is putting money into a pension has chosen the first of these options and if they’ve been reading the newspapers over the past few decades, they’ll have some idea of the risks they’re accepting. Take former policyholders of Equitable Life: a decade ago they could only stand helplessly by while an institution that had been investing the savings of the professional classes since 1762 was blown apart. Equitable’s promise to pay retirement incomes at a certain rate come what may, along with its policy of paying out its entire surplus to policyholders, proved its undoing when it turned out that customers were living longer and therefore consuming more cash than Equitable’s forecasts said they should.
Or how about staff of a certain national newspaper company, who paid into its pension fund only to discover that their money had fallen under the control of Robert Maxwell, one of the most egregious criminals in British corporate history? How many of them saw that coming?
On a more prosaic level, even the changes in tax rules for pension funds, introduced by Gordon Brown as chancellor in 1997, hastened an enormous shift in the landscape over the following decade: the virtual disappearance of final salary pensions from the private sector.
What makes these episodes particularly troubling is that in each case, the individuals affected found out the hard way that they were exposed to far more financial risk than they had realised, and that the safety nets were dreadfully inadequate. Three things stand out: first, the pensions business, by its nature, is plagued by big and often very unpredictable risks. Second, the burden of those risks is shifting relentlessly from state and private sector institutions on to individuals (measures to prevent a repeat of the Maxwell debacle notwithstanding). Third, repeated government tinkering is piling a worrying degree of regulatory risk on top of the standard investment risks we must all now shoulder.
All of the above is…