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UK's £80 Billion Pension Blunder?
Ruth Sutherland and James Salmon of the London Mail report, £80bn wiped off value of pensions after inflation rate was underestimated for 12 years:
A
staggering £80billion has been wiped off the value of pensions because
the rate of inflation has been underestimated for 12 years, it emerged
last night.
Millions of pensioners
relying on occupational schemes have been left hundreds of pounds short
each year because their retirement benefits have not been increased to
reflect the full rise in inflation.
A 0.3 per cent a year underestimate of the effects of inflation over 12 years comes to 4 per cent.
John
Ralfe, one of the UK’s leading independent pensions consultants, said:
‘In simple terms, for every £100 of pension you are receiving, you
should be getting £104.’
Details of the
blunder come just days after the Bank of England admitted that
inflation this year is likely to rise from 4 to 5 per cent.
High
inflation can be devastating to pensioners because their incomes fail
to keep pace with rising costs and the real value of their savings
dwindles.
The Bank admitted to the
miscalculation in its quarterly Inflation Report, saying the Consumer
Price Inflation should have been 0.3 per cent a year higher between
1997 and 2009.
The figure was lower because the Office for
National Statistics failed to take into account changes in the prices
of clothing and shoes which were affected by hefty discounting in the
sales.
The ONS changed the way it records the prices of clothes and shoes in January last year.
The
impact on Retail Price Inflation would have been even greater but the
Bank did not disclose how much. Most pensions are linked to the RPI and
rise in line with that figure.
The Bank said the miscalculation
was the responsibility of the ONS. It means that for 12 years, the
increases to pensions for inflation have not reflected the true rise in
the cost of living.
More than 17million people were either pensioners or deferred pensioners in final salary schemes in 2009 and could be affected.
John
Broome Saunders, actuarial director at BDO Investment Management,
said: ‘If you went to every final salary pension scheme in the UK and
recalculated the benefits using the right inflation figure, you would
increase the total value of pensions by around £80billion.
‘This
is pretty shocking stuff at a time when people are worried about their
pensions. It is certainly very worrying that the government
statisticians didn’t get this right.
‘It is yet another thing reducing people’s confidence in the Government’s management of pensions.’
Mr
Saunders said the value of entitlements to final salary pensions from
employers, the public sector and local government was around
£2trillion. The 0.3 per cent underestimate over 12 years comes to 4 per
cent, or £80billon.
The true impact
on pensions may be even greater because most are increased either in
line with RPI or earnings, both of which are normally higher than the
CPI figure.
John Prior, a pension consultant with Punter
Southall, said: ‘This will affect anyone who has been in a final salary
scheme over that period.
‘It includes people who are already
retired and deferred members, or people who have left a company but not
yet drawn their pension.
‘It would indirectly affect current employees because their pay rises and pensions may have been less.’
The ONS said: ‘This is not a blunder. Our figures aren’t wrong – we have simply improved the way we calculate inflation.’
But
Laith Khalaf, from financial advisers Hargreaves Lansdown, said:
‘Pensioners have a tough time battling inflation as it is. They will be
up in arms that their income has been held back in this way.’
Simply
improved the way you calculate inflation? What a joke! Anyone who's
been paying higher gas prices, higher food prices and higher clothing
prices doesn't need some government statistician telling them that
inflation is running higher than the 'official' government figures.
According to the states the Bank of England's latest quarterly Inflation Report,
the ONS "picked up seasonal falls in prices during the winter and
summer sales, but did not fully capture the recovery in prices after
sales had finished". The study looked at clothing prices in Euro-area
countries and estimated the impact on the UK's consumer prices index
(CPI) if more accurate clothing prices had been included. The report
suggested that there would have been an even larger impact on the other
headline inflation index, the retail prices index (RPI).
Mark Reynolds of the Express reports, Millions Lose in Pensions Blunder:
Pensioners were cheated out of £80billion during 12 years of Labour rule, it was revealed yesterday.
In a bitter blow to millions, the Bank of England’s February inflation
report showed the Consumer Prices Index between 1997 and 2009 was 0.3
per cent a year higher than official figures had previously stated.Experts say this miscalculation by the Office for National Statistics
cost the average final salary pension holder hundreds of pounds a year.Outraged pension groups said there was currently no way for any of the eight million people affected to claim compensation.
Dr Ros Altmann, director general of the over-50s group Saga, complained: “How much pain do pensioners have to endure?”
John Broome Saunders, actuarial director at BDO Investment Management,
said: “Had the inflation calculation been done correctly, many final
salary scheme members would now find themselves entitled to a pension
around four per cent higher.“This doesn’t just affect pensioners – deferred scheme members have also been denied a similar level of increase.”
Many pension schemes link payouts to the Retail Price Index, which is directly affected by the level of CPI.
Richard McIndoe, head of pensions at Strathclyde Pension Fund, said:
“Pensioners will feel aggrieved when they see this, and they think they
should have received four per cent more.“In reality, however, there is not much to be done about it. The
official inflation figure is still the official inflation figure.”
Joanne Segars, chief executive of the National Association of Pension
Funds, said: “It’s true that state and occupational pensions would have
been higher if this new measure had been applied. But all that pension
schemes can do is work with the figures they have been given.”The CPI error stemmed from the
misreporting of clothing prices. The inflation report said: “Previous
collection methods may have biased down estimates of CPI clothing
prices.”Last night a spokesman for the Office for National Statistics said: “ONS
has improved its methods for collecting clothing prices as part of its
development programme but this does not mean that there were measurement
errors or misreporting in the past. The Bank of England agrees with ONS
that the improved collection practices for clothing better reflect
current consumer behaviour.”But Saga’s Dr Altmann said much now needed to be done to protect pensioners.
She said: “The Bank of England needs to
get a grip and show its determination to combat the ravages of
inflation on savers and signal its intent to start raising interest
rates.
“At the moment savers and pensioners are being hit by low interest rates and high inflation, and Saga is deeply concerned.“We believe that a small rise in interest rates would send a positive
signal to increasingly desperate savers, without having an adverse
effect on the economy.“The sooner the Bank acts, the better.
“Pensioners have already been hit hard by the economic crisis. They are
suffering from extremely low interest rates and very high inflation,
which means that the value of their savings is being eroded.”Falls in stock markets and rising inflation have led to a typical
65-year-old now entering retirement with a private pension of just
£7,666 a year.This is almost half the officially recognised income needed to maintain an adequate standard of living.
We'll see if the Bank of England starts
raising rates anytime soon. Like most central banks, they're more
concerned about banks than pensioners. And remember, the name of the
game remains reflate risk assets and inflate your way out of this
financial mess.
Finally, the BBC reports that it is unlikely that members of the public could reclaim any lost money or ask for an increase in pension or benefit income:
The
National Association of Pension Funds pointed out that pension
increases are dependent on published inflation rates, which remain as
they were.
"It's a theoretical argument," explained Ros Altmann, Saga Group director general.
"You would have to prove that this is the only element of inflation that needed to be changed," she said.
The
policy of the Department for Work and Pensions is that it will only
change benefit rates if the official inflation figure is recalculated
and republished.A DWP spokesperson said: "Inflation
figures are determined by the ONS who regularly do work to improve
their methods of calculation.
"Any changes in methodology do not mean that previous inflation rates were incorrect."
But
changes in methodology which are in line with what the public has known
for years, namely, that inflation is grossly underestimated, only proves
that pensioners and workers are getting squeezed on all fronts. After
all, wages and pensions are linked to CPI. Welcome to the new normal,
which is pretty much the same as the old normal except dressed in
different clothing.
»
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Makes perfect sense to me. Intentionally under rate inflation on the paying end of pensions using something like a rediculously low (CPI) and make sure they pay $100 for a cheesburger at McDonald's. Brilliant!
Ultimately everybody has to give a little. Inflation adjusted pensions are a luxury we can no longer afford. The baby boomers will crush us all.
"Actuarial considerations." Reminds me of the terms like "problems with internal controls" and "geo-political risk resulting in some latin term for war caused this." In other words save the PR schemes for the PR department. Money schemes have always been around--and the all involve the same thing--NO MONEY. Making it a "government priority" only adds the stench of legality to the crime.
Canucklehead wins !!!
Market fundamentals (laws of physics and thermodynamics) will eventually force the world to adopt an entirely new "economic model" per se. For the most part, humanity is nothing more than 8 billion ignorant baby-makers living in a closed system with finite resources, what could possible go wrong with an "easy-money" policy for the entire "civilized" world?
There is a real cost for creating capital out of thin air, especially when all that capital does nothing to create real value and simply circulates between bankers. Revaluation will occur whether they like it or not, so don't sweat it. Just be properly hedged. Soon enough, canned beans will be the best hedge for the masses.
No doubt BP did not help pension situation in UK and now BP is gambling again in Russia. No matter if public or private pension fund, investments mostly wind up in private sector in attempt to meet assumed returns ,especially in low interest rate envioronment. Afterall, even Leo advocates relying on Hedge Funds ,the epitomy of private sector manipulation, which seems like a contradiction to his argument---me thinks.
But I still respect and love reading Leo--he has a lot of insight
@ geno,
Correction, I know most hedge funds are full of shit, charging 2 & 20 for leveraged beta! Having said this, there are many excellent hedge funds that deliver real alpha across all strategies, and unlike mutual funds, these managers have the bulk of their net worth in the funds they're managing so their interests are aligned with their investors. I also think most hedge fund strategies can be replicated internally at pension funds at a fraction of the cost. Of course, to do this you need to attract and retain competent portfolio managers and analysts (ie. compensate them properly). The media here in Canada makes a big stink about bonuses given to pension fund managers, ignoring the hundreds of millions in fee savings.
How about alzheimer sponsored Nascar? Would that raise the visibility of medicare for the aged? Sponsor what you'll forget next day, so that you can sponsor it every day...can't lose!
Mark Martin drove the "Viagra" Ford a few years back...
time for a Logans Run
the military and the sponsorship of nascar.
http://nakedempire.wordpress.com/
Public schemes require minimal obligation to benefit from safety net precisely for that latter day. What's the problem with that? I grant you we all prefer 'no taxes', no minimal obligations, but that's a pipe dream as explained above. Other optional choices still exist. You can't 'opt out' of civilisation and still benefit from collective infrastructure.
I assume you are regarding those who do not prepare for the future as those who are opting out of civilization but still want to benefit from collective infrastructure.
Life expectation increase is a problem as its costly. It'll have to be dealt separately outside basic package scope. Financed as an option; I'm referring to Alzheimer type age related expenses. No doubt about that. But let's not throw the baby with the bath water.
Common sense says you allow "choice". Look at the old fables. In every culture there is a story about the propriety of putting resources away for a later day.
Bernard Dussault, former Chief Actuary of Canada, sent me these comments:
Isn't it funny how governments always seem to make these mistakes in measuring inflation toward the side of paying less to retirees and making their currency look better than it actually is?
What were the odds?
Like I said, the farming analogy is that "the rains didn't come at the right time".
What is your solution, tax the younger generation more? Make them work harder? Make them work smarter? Make them retire at a later age?
Let's talk about the "inflation benchmark". Does CPI actually measure what is important to a retired lifestyle? Is the basket of goods appropriate? Is it simply a "number" that can be used to lever additional wealth from the younger generation?
You can't have democracy and shared values in society; like infrastructure, education, justice, medicare, police security; if you don't pay a collective minimal contribution to civilisation. That's the price the top 10% have to pay to be part of a bigger thing with the other 90% called national community, letting each generation's star performers make it to the 10% echelon, inspite of their modest, humble origins. The escalator works both ways, not one way.
Falak, commenting on your democracy and shared values in society comment, we will see the rich move to the "society" that bests shares their values and supports them in supporting their family. Granted there are crooks but there are good rich people too.
You can only skim so much cream before all you have left is skimmed milk, and that won't sustain you during a hard day's work.
Nobody has the answers. That's why "choice" is so important. Those grasping for the brass ring will lead the rest of us out of this quagmire.
A committee won't resolve the issue. They will simply table the agenda item and wait for deliverance.
The basic french scheme operates on each working generation paying for the past generation's pension by direct contribution. It is "mutualised", indexed on a low interest rate scheme based on government savings fund rate. It takes into account inflation indices as well as comparative benchmarks for annual readjustment. It's not indexed on risky security assets. It's government guaranteed and totally transparent as its operating costs are controlled by independent legislative and bureaucratic panels on a continuous basis. The retiree knows how many points he's accumulated every year end of subscription and what the retiree point value is at each year end. In addition, more higher income people can subscribe to corporate or individual pension funds based on risk assets depending on their risk profiles. Some of them have govt. tax incentives tied in. The basic govt. retiree scheme is the safety net that allows most low income people to pick up a fixed income of 1300 euros/month at age sixty (or after forty years of subscription). People can live off that. It's worked for Sixty years; Remember the salaried retiree has free medical cover as well in France. The UK pension scheme is all security asset index based. You're at the mercy of the market. The scandinavian countries are more in line with the french system.
Basically what you have is the Japanese model with better demographic trends.
If France doesn't increase immigration and/or grow their economy, France will acquire the dreaded "Japanese Industrial Disease" (que "Dire Straits").
@Canucklehead : Why is the french pension scheme more efficient, more modest, more risk hedged. There is food for thought. Their only problem is the demographic crunch as the baby-boomers go to retirement and number of contributors diminish. I find it difficult to accept economic dogma like "don't touch free market capitalism...when the reality teaches us these very pension instruments are created by huge financial TBTF conglomerates...whose only aim is to dodge the market transparency through crony lobbying...are you buying into this dogma blindly, inspite of the evidence? I would vote for mixed systems which avoided both bureaucratic monopolies and private scheme oligarchies, with transparency to check for accountability.
Falak, you can't regulate common sense. If you socialize/nationalize/collectivize all pensions, how do you know you are getting a good return? What are your benchmarks?
Society prospers if individuals go for the brass ring. Society flounders when you strive to provide the lowest common denominator. That is human nature.
Why do you say that the french pension system is more efficient, more modest, more risk hedged? Do you have any benchmarks that you would like to share that support your statement? I suspect the French are "cooking" their benchmarks in much the same manner as the "British" or the "Americans" or the "Canadians" et al. What about the Japanese?
If your idea is better than mine, let's hear it. Otherwise, I'm sticking to my idea.
In the end, Western society is built on the foundations of pioneer values. If you want to succeed at life, study the success stories of the pioneers. If you want to wallow in their failures, it's your choice. You do learn both from successes and mistakes.
The secret is to apply what you have learned. You need to do something.
Go for the brass ring.
Read my comment above. Here is another thing for you to ponder, when we take the private sector solution, society as a whole will end up paying more in terms of healthcare and welfare costs down the road. This bullshit of the private sector solution is the only solution to bolster pensions is based on ideology (religion), not facts. The fact is that public defined-benefit plans have outperformed private defined-contribution plans because they are able to reduce fees, invest in private markets, and invest with the best managers around the world as well as develop in-house strategies (again lowering fees). Keep peddling the private sector solution and I will keep attacking this nonsense. It's great if you're high net worth individual but for social policy, it's an utter disaster.
You can spend infinite amount of money extending life from 95+years to 125+ years. During those times, the quality of life is "suspect" as you need a strong drug regime, joint replacement, organ replacement, etc. Is life that precious to you? What about those generations that follow? Load them up with debt and say "thanks suckers"?
What are society's "benchmarks" that you use when comparing private pensions to a "living pension"? Are trips to tropcial climates included in your "living pension"?
Why can't people work harder, smarter, longer?
Id' like to see the benchmarks that back up your comment about public defined-benefit plans. How do you account for the trillions in pension liabilities these plans carry?
"How do you account for the trillions in pension liabilities these plans carry?"
Easy, in the US, state governments did not top up pension plans and pension liabilities were discounted using rosy investment projections. It's a total joke to discount them at the magical 8% when interest rates are at historic lows. Even in Canada, where most pensions use CPI+4% as their actuarial rate of return, some argue that this is not realistic.
As for DB plans outperforming DC plans, it's a fact. DC plans have been an abysmal failure. DB plans can at least pool assets and use their leverage to lower fees. They can invest in the best public and private managers around the world. Do you think Joe & Jane Retail can invest in with the best managers? No, they end up investing in some shitty mutual fund that rapes them on fees while underperforming markets. Amazingly, most people still don't use exhange-traded funds (ETFs)!!!!
Can we cut to the chase. You want the younger generation to work harder and pay more tax... Work smarter and pay more tax... Work longer and pay more tax.
Is that the "gist" of your plan? That, and investing in ETFs?
Bingo! Good luck getting Leo to admit that that is the gist of his public pension schemes.
Let me ask you guys a question, which generation does inflation hit hardest? And stop thinking better pension plans means higher taxes. You can increase contribution rates and use realistic investment projections to stay close to fully funded levels. If you have to, you cut benefits or remove COLAs (cost of living adjustments) from pensions. It's not just tax your way out of pension problem. This is just fear-mongering at its worst.
Leo, I enjoy your religious zeal on the pension subject. The short answer to your question is "...that dog don't hunt...".
In a nutshell, you are not doing "God's Work". The Pension Management Fraternity (Pension MF) need to be taken to task about the state of the pension system. Their defense is simply to attempt to change the benchmarks, move the goal posts.
Where are the public hearings hosted by the Pension MF that is intended to focus light on their industry, and it's shortcomings. Mandating that everyone "must" contribute to their largess is not the answer.
Instead of initiating a redirection and saying "...it is for the children or old women..." present something concrete. Don't play to emotion. Present something of substance.
If your idea is not better than mine, I'm sticking with my idea...
Leo,
Yes, you can cut the benefits and remove the COLAs, but will you promise to not complain about those solutions? I doubt it. As for the higher contribution rates, well, that just makes it harder for the workers to save anything for themselves and leaves them even more dependent on the public pension plans for their retirements.
You were partially correct in a statement above (or below, not sure where right now) when you wrote it is wrong to sell easy solutions to retirement, but you public pension ideas seem to be promising an easier way to save, and in contradiction to all the problems that are becoming apparent in the public pension programs of today. I am still wondering why you believe these problems are an aberration rather than the norm for such programs.
I want people to grow up and stop thinking that there are easy "market" solutions to everything, including the pension problem. We can have fully funded pay-as-you-go plans that do not take away from one generation to pay for the next. Policymakers should look at pension models around the world to get ideas on how they can bolster their own pension plans. As for ETFs, they're better than most mutual funds, but certainly not my first choice for dealing with the retirement crisis.
Leo, I retract my question above. You really are stupid.
And what exactly are you proposing, genius?
i want the government to stop giving to that moron over there and start giving to that moron known as me.
Leo,
Grow up is right on. Take responsibility for your actions. If you think for one minute government has or can perform better how come no one gets fired, demoted or run out of town for screwing up? My answer to that is most govt. employees at the upper end suffer little or no consequences for their fuck ups. If you want your money misdirected or want to pay the absolute highest price for something just have our Gov. do it for you.
Your suggestion that "Policymakers should" do something is quite different than policymakers actually do something wasteful far more than they do something efficiently.
GIVE ME A BREAK
... and a farming analogy to this article is "we didn't get the rains at the right time"...
Leo, you are stating the obvious. Collectivizing/socializing all pension contributions is a sure recipe to disaster for all as your benchmarks will be wiped out.
... Private pensions are the way to go. Some will win and some will lose. So is life. At least those losing will know that and can take their "pension masters" to task. It likely will not help but they may get some emotional benefit out of "fighting for their reichts".
Judging by the tone of this article, do "emotions" trump due diligence?
"Private pensions are the way to go."
Canucklehead, do you work for a bank, mutual fund company or insurance company? Please do not insult my intelligence with these idiotic statements. Private pensions only ensure pension poverty and exacerbate income inequality. Public defined-benefit pensions are no panacea, especially the way they're set up in the US with governance gaps, but they're infinitely better than the moronic private pension solution which is every man and woman left fending for themselves in these wolf markets dominated by big banks, big hedge funds, and high frequency trading platforms. Get real, pensions are a serious public policy issue, not something to be left to the whims of the market!
Why do you need "income equality"? Did everyone contribute to society in the same amount?
Where have you been living? No, you do not need income equality. I'm not a socialist or communist, but I don't want to end up living in some Banana Republic where the rich are getting away with tax evasion, the middle class is disappearing, and the poor are growing in numbers. We're already there. That's the grim reality and yet nobody wants to admit that we have an income distribution problem.
That is not a pension problem. That is a societal problem. That is the problem related to the breakdown of the family unit.
Leo, your "Banana Republic" comment was made in jest, was it not? You are proud of your greek heritage, are you not?
What does my Greek heritage have to do with this topic?!? Income inequality is not due to the breakdown of the family unit, although right-wing, Christian conservatives will have you believe that nonsense (it's mostly due to a corrupt tax system which always corporations to effectively pay no taxes). And yes, effective pensions plans can address some of the problems associated with income inequality because most of the poor are elderly -- elderly women to be more precise.
I guess I'm a right-wing, Christian conservative because I think that Canucklehead has it right and you have it wrong. The breakdown of the family unit is the leading cause of poverty in our society. Divorce is a leading contributor to reduced living conditions. Single-parent families produce kids that get into more trouble. All of this is well documented.
Elderly women are more prone to poverty because of our Social Security system. The money that they and their husbands could have been investing for themselves for their own retirement has been sucked away in payroll taxes over a lifetime. And when their husband dies, do they continue collecting the same amount as when they both were alive? NO, their benefit gets cut in half! Is this defined benefit, which you seem to prefer Leo, fair? What would you think if your bank said, "Well, since one of you died, we will only pay you half the interest your joint account was getting. After all, it's only fair." If an individual invests the same amount taken in SS taxes every year, EVEN IF THEY MAKE ONLY THE MINIMUM WAGE FOR THEIR ENTIRE CAREER, they would have well over $1 million if they get the long-term market return of 8%. Do the math.
Leo, are you stupid?
And for your information, corporations don't pay taxes. THEY COLLECT THEM. And pass along the cost in the final product to me and you.
"Elderly women are more prone to poverty because of our Social Security system. The money that they and their husbands could have been investing for themselves for their own retirement has been sucked away in payroll taxes over a lifetime."
Wow, and you're calling me stupid? Unfrigginbelievable....
... corrupt tax system... Aren't all tax systems corrupt? The thresholds are always set by politics. The concept is to bleed as much as possible without seriously impacting job growth.
priceless!
priceless!
Maybe the moslem sons will be more intelligent than the brit fathers or mothers. They may learn something from the Egyptians...as five thousand years ago!
the uk is now an experiment.
its is an example of how an empire can destroy itself within 100 years. USA observe.
From the minute they tossed out 'war-monger' Churchill after WW2 and brought in communist sympathetic, well off socialists it began to fall apart.
Now they have no manufacturing base and social cohesion is a fond memory.
Family breakdown is the norm and one in four births are to foreign parents, mostly Muslim.
They will have civil war and they have earned it with their corruption and stupidity.
Money waste, illustrated by this story is the norm and has been for decades.