The end of Pensions (as we know them)?

Sonnenblumen

I'm surprised with some of the 'pension selling' going on here and nobody mentioned that the only real certainty with any pension is AFC. As the tax relief on contributions narrows, this will certainly make the option much less attractive.

The returns over the last 10 years have been miserable, and despite all the fees etc, the pension companies and retained Fund Managers have many questions to answer.

I would prefer if the Gov provided incentive for more private pension, self managed/trust are an option but too heavily related to property.

Only 2 years ago, 000's switched all sorts of funds into secure savings which were barely above annual charges.

Overall a regressive step by Gov with/out capping.

Kennie1

thlint wrote: »

Thanks for the 30 year return. Pension/life companies are inclined to suggest that the returns are better during the life of the policy but when it matures - miraculously values fall. (personal experience of endowment policy where returns were exaggerated right up until when it was cashed in -- financial regulator thought it was all OK and completely above board as values go up and down) .
It will be interesting to see the actual return on the 20th Dec for that 10 year policy.
I have to disagree about availability of information - long term information is not available to consumers in a manner that can be digested easily. This is an indictment of the entire pension industry and the pension board in particular. When information is hidden there is usually a damn good reason -- Any body out there who has a defined contribution pension that has matured anytime in the last 5 years who has got good value ?? - Single premium policies are not really normal pension policies as most people understand them.
By the way the price of a pint of Guinness in 1979 was 0.70 and wages about 104 euros per week.

Most pensions invest in stockmarkets and the life/pension companies have no control over stockmarkets as for endowment policies those projections were over stated all right but were based on the returns over the eightys which seen huge stockmarket returns but the FR made the life companies go back and inform clients that they would need to pay extra and give them give them an option of a guranteed rate if they wanted this as an option.
I will gladly post the returns on the 20th (someone remind me if I forget) Yes information is hard to understand by Joe public, this is why these days it takes up to 4 years for someone to qualify to advise in this area, but any advisor worth his/her salt should be able to interpret, compare and contrast this info for you based on your want for risk and reward, you wouldn't try and self diagnosing an illness without medical training would you.
There is a problem with DC schemes with regard to having to buy an annuity but we can blame FF for this as the pensions industry has been telling the government this for years!!! There solution to this after the market crash in 08 was to defer the annuity for 2 years if the employee wanted to, this was still not a real solution though.
Wage inflation 700% Pension growth 1250% Not bad over 31 years! Regular premium growth over 25 year term is about 30% allowing for inflation.

thlint

There is no doubt that defined contribution schemes have many serious problems but it is not just confined to these. Defined benefit schemes have major funding problems and most people do not understand that private defined benefit schemes are not actually guaranteed and if the underlying fund fails to preform the defined benefit may not actually be paid. (see for example Waterford Wedgewood ).
The problem with a growth rate of 1250% is :that its on the earliest contributions which would be very small relative to todays money and later contributions will swamp their value.
Providing for ones latter years is important but getting back to the thread "The end of pensions as we know them" - Is it not time for the ethos of the current pension industry and regulation to be changed? The concept of growth rates of 11% per year (1985 pension schemes) and 5% as suggested today just misleads and confuses. Can pension schemes not operate like "with-profit" funds where the benefits are locked in at regular intervals ? The entire industry from regulator to broker needs to change and recognise the shambles (from the consumers point of view) that is todays pension industry. Maybe somebody has thoughts on what a real solution would be!

perch

I agree with quite a lot of what you write but you fail to consider the difference between money already invested, and new money not yet invested.

With new money not yet invested, it is perfectly ethical and unarguable legally that the government can offer different terms to what it offered in the past. This is not the same thing as the argument as to whether the policy is wise, or fair.

With money already invested, the individual punters have accepted the offer of the Government at the time of their investment. There was no provision that the terms of the offer were subject to change by the government in retrospect. For this reason, it is unethical and possibly illegal for the government to make caps now interfering with moneys already invested, and I believe that they carefully do not make any such changes in retrospect. It is equally unethical and possibly illegal for the government to create new taxes and new classes of taxes which would effect such already invested moneys but they do make such changes in retrospect.

Kennie1

thlint wrote: »

It will be interesting to see the actual return on the 20th Dec for that 10 year policy.

Cashed out just shy of €41,000

thlint

Kennie1 wrote: »

Cashed out just shy of €41,000

Well done -- ,
What was the actual return in %. It is interesting to get an actual real investment product as "the powers that be" try to keep real information to themselves.
How much was invested in 2000 -- did it make a real return on the investment. ( I mean when you compare say the price of a car or a pint in 2000 and today ). Since it was a pension fund product I am sure that with Tax allowance it must do OK -- but if it was a standard investment ( as pensions appear to be going ) without tax relief was the return good.

Kennie1

thlint wrote: »

Well done -- ,
What was the actual return in %. It is interesting to get an actual real investment product as "the powers that be" try to keep real information to themselves.
How much was invested in 2000 -- did it make a real return on the investment. ( I mean when you compare say the price of a car or a pint in 2000 and today ). Since it was a pension fund product I am sure that with Tax allowance it must do OK -- but if it was a standard investment ( as pensions appear to be going ) without tax relief was the return good.

As previous post 01/12/10 the returns were about 36% with real returns at about 10% gross, take tax relief into account and you can add to this real return! Again this was a low risk fund where as if it were a med/high risk fund it would have lost money hence this is the risk that you take. I thought that I had the value posted rather that the % returns posted and I was just too lazy to look last night!!!

Would disagree with you that the info is not out there. See the point is that you have to be able to interperate the info and like any profession you have to study hard to become qualified in this area, just to take an example; to ask me about anything regarding family or criminal law etc I would not have a clue, that is why I would employ a solictor like wise if you need to know anything about penison you should employ a pensions expert with suitable qualifcations eg QFA with pensions diploma and so on. Most pensions have whats called "derisking" built into them these days (but certainly not all) where a % of the fund is switched into a secure fund each year, this would usually happen 10 years before retirement at least with 10% switched each year. So if you were 62 in '07 you would have 70% invested in assets such as cash or bonds and only 30% of your fund would have been exposed to the crash at the time. Hope this make sence!

Will be very interesting to see what happens to the employee/employer Bik/PRSI/USO relief for private pensions over the next couple of weeks in the finance act...industry is lobbying government because of the different and unfair treatment of Private/Occ pensions so there may be some head way hopefully!

thlint

Thanks Kennie,
I have to admit that I am coming from the belief that pensions are mis-sold and that really it is only the pension funds themselves that do well from pensions. ie Admin fees based on % of total value even when the funds are doing poorly. I accept that charges need to be made but the charges appear to be out of kilter with the work done. Investments are one end of the market but since Pensions are almost compulsory and taxpayers (on 20%) who do not contribute to pension are paying for other peoples (those on 40%) pensions there is a much higher requirement to protect the value of pension funds . There is an obligation to fully inform pensioners of exactly what they will get when they retire and I do not believe this is happening.
Your 10 year fund is good, but when an annuity is purchased the most you could expect is 20.00 per week (and tax will have to be paid on this possibly upto 50% leaving 10 per week)
There is another aspect of pensions which is tax avoidance (not evasion) which requires a whole different skill set but unfortunately the pension industry and government have got confused between genuine pensions, tax based systems and the holy grail of public service pensions.
About information -- nobody knows (really true they say they do not know pension board and actuary association ) how pension funds have preformed over the last 30 -40 years . Is that not an indictment of the pension industry. Thanks again Kennie for at least one good news story from investments

Jim2007

thlint wrote: »

Maybe somebody has thoughts on what a real solution would be!

Well I don't know if it's a real solution, but I can tell you what is done here in Switzerland:

The system is broken into three pillars as they call them:

The first pillar is the state contributory pension, which is very small - an entire years pension would only cover about 3 months living expenses for an average couple.

The second pillar is your work pension, which is mandatory and should account for the major portion of your final pension. These are almost all defined contribution pensions rather that defined benefits. These funds have a guaranteed minimum annual return, currently about 3.5%

The third pillar is personal savings - you can pay up to about €5,000pa into a special savings account which has a min. return of about 2%pa and comes of your gross salary, so tax free.

All 3 pillars are locked until retirement age, with the exception that you are allowed to use a percentage of the 2 pillar as a deposit on a house.

For an average Swiss professional this should result in a pension of around €50K pa from pillars 1 + 2, which is taxed as normal income and savings of around 100K in the third pillar, which is payable as a lump sum, currently taxed at 10%.

In addition to this, there is what I call the fourth pillar, there is no CGT on the gains from investment activities of private investors, which is usually defined as less than 10 trades per month. The result is that pretty much everyone has got a little stock portfolio on the go.

I would be interested in hearing how it is done in other countries.

Jim.

Kennie1

Only too happy to post the info. May i just say before i bow out of this post (Hopefully I hear everyone say) You may have a point to some extent when you point the fingure at the industry but may I just point it back for a moment; Look you are provided with the info at point of sale so you must "read and understand" if you dont read or understand dont come back 30 or 40 years time and say "I was not told that" It makes me smile sometimes when people are able to tell me everything that they were not told but when asked what they were told, there is utter silence ...and then a moment later... "Jasus I cant remember back that far"

A pension is not something that you take out some day you are passing the life company/bank/ brokers office and dicide to throw a few bob into, it sually the second largest investment you take out after your home. Like your home it need regular mantinance and care. What I am saying is you need to sit down with your advisor and review your risk attuite in relation to the fund you are in, take on board the advice they give you and then make the decision that you are most comfortable with. When you take out a pension your broker receives a renewal commission every year for this service but all clients are too busy to come in and take the time to review their second largest investment in life, mean while the broker is raking it in and having to do SFA for it. So make them work for you as they are getting paid for this!

Agree with you with your comment about 20% tax payers. It was a social injustice that the people that could afford to do with out a pension got massive tax breaks for investing in pension while those that needed it most only got 20%.

Fund managers have no control over stock market movements, and with each fund there is a mandate for the level of stock, bond, property and cash to mantainrd the fund, the managers mandate is to try and to get the best return compared to the index it is tracking so when markets a falling the pressure is higher to beat the index so you could say that the fund managers actually work harder when there is a bear market! But here is a little secret that the managers would not like you to know...They rarely beat the index they are competing against over a 5 year period! so indexed are the way to go and they also offer lower AFC's than managed funds.

thlint

Unfortunately it is often the case that people do not remember - as it happens I do not have to remember, I wrote it down in 1985 (25 yrs ago) where I was told to expect a 13% growth and a projected fund of IR£213,000 with pension of IR£31,000 per year if saved IR£40 per month, this was 8% of my gross wages at the time. My notes say we discussed galloping inflation ( at the time around 10%) job changes and top ups - does not give the conclusions and I cannot remember what we said about them
Maybe the professionals thought it accurate at the time but even if it made the accumulated fund of 213000 the pension you could expect would be 6 to 7000 per year . Why do pension companies not be honest and give the actual values the policies achieved instead of projected values so that real returns over the longer period can be seen. Customers could compare the expectations of previous pensioners with to-days realities. I do not disagree with pensions or pension provision but the selling and regulation of pensions needs major reform and a serious dose of transparency. It is unfair to expect economically ignorant -(as in not knowing or having the ability to understand) - customers to be able to make any meaningful decisions about a complex issue. It is up to the professionals and the government to look after their interests. The professionals also have an obligation to look after themselves as best they can so this leaves the government who sadly appear to inept in terms of real customer protection. Maybe as you suggest and I believe managed funds with admin charges are not suitable for pension funds expect in exceptional circumstances with savy customers who understand properly the risks. The change needs to come from inside the industry and I as an engineer can do no more than point the problems as I see them and help people to see the situation from a different perspective. . Standard investment saving is not the same as pension fund provision and the government appears to have difficulty in distinguishing between them.

Kennie1

My previous post was not directed at you but was a general observation so I hope I did not offend. The 13% that you were quoted at the time was reflecting the returns achived historically at the time as is the 6% quoted in todays projections. These projected figures are approved and set dpwn by the financial regulators office and lets face it that department was asleep at the wheel for the last decade so there may be change to them in the future.

So what's changed in the 35 years since you took out your pension. Inflation continued to fall from 10% in the mid 80's to historically low levels in mid to late 90's whilst they did go back up to peak at about 6% or so in the early to mid nought's, interest rates fell about 80 to 90% which all of this has impacted on annuity rates so if interest rates and inflation stayed the same the real value of your annuity rate would have stayed at about the 30000 that was projected. Life expectency has increased for a retired person aged 65 by c.60% from the mid 80s so the life company has to pay out a pension for a extra 4 to 5 years with the same pot of money!

When you received your policy information pack it would have stated that the value of your investment may go down as well as up and the the figures are only a projection and are not guaranteed. May I ask did you continue to invest 8% of your salary each year, this would have protected your real value against wage inflation. Just ran a quote for your 213 k and this would generate a yearly pension increasing by 3%pa of 8900.

All that said the regulation was lax to say the least in the mid 80s and you would need a degree in law to understand some of the jargon that was wrote in the policies documents, but I do think that there has been a dramatic improvment over the years and for the most part the information provided is clear and easy to understand for those that take the time to read it. The charging structure is simple to understand now a days as well, Risk profiling is now mandatory for clients so they decide which funds is right for them, if they do not understand what they are investing in, the advisor is obliged to tell them that the fund is not suitable for them and will direct them to other funds. If the advisor does not comply with the regulations they run the risk of being struck off. But like everything in life there is always room for improvement:)

thlint

It became a paid up policy after about 10 years -- houses and kids just suck money. Started another policy when demands became a bit less -- but having analyzed my experience I regret starting a pension in my mid 20s when I should have been spending on other more important things at the time.

perch

That is exactly what is happening in my family. They can see my experience where the government feels free to move the goalposts to the disadvantage of my retirement arrangements.

So my next generation, aged 30-40, are making moves to get away from
locked up arrangements which seem to benefit mainly institutions, and are vulnerable to government manipulation at any time in the future. They are looking at direct investment in ETFs. They will pay the tax now and have the money free to take with them to a sunnier retirement elsewhere, or to opt out of Ireland Inc if things here deteriorate much further. Mobility is the key.