The State Pension scheme based on NI contributions has been the backbone which the population in work relied on. Companies had Private schemes for Directors and Management to enhance this.
As the State scheme progressively failed, these Company schemes expanded and Public Sector schemes grew up. These were all on a Defined Benefit basis in which a guaranteed pension based on number of year’s service was given and were treated as part of the employment contract or voluntary.
Private schemes also started in which individuals made their own contributions in what were Defined Contribution schemes, where funds built up but with no guarantee of final outcome.
The State and Public Sector schemes were run on an unfunded “pay as you go basis”, which means that contributions are spent on existing pensions as they arise and Funds never build up.
Funds that build up in Pension schemes can be large amounting to trillions of pounds, that is twelve noughts and their size is therefore difficult to appreciate.
They are also big business, these large amounts attract predators, particularly the State, and are therefore vulnerable, with funds being eroded, even disappearing and generally giving poor value for money.
The main problem is that Pension funds lack ownership and protection. Contributions are deducted from wages and disappear into a black hole to re-appear, if lucky, forty years later in an unknown state or value.
Funds are individual personal savings taken from wages or as part of the employment contract and should be treated, protected and accounted for as such. Any misuse, abuse or speculative loss should be treated as a criminal offence, which would insure that funds would be treated with the care they deserve.
Some private individuals have invested in property, with a rapid growth in buy to let; bought wisely at the right price, these can form the basis of a sound pension scheme without, of course, the tax relief advantages. However most of the recent major losses, including the Banks, have been in property.
Equity release is becoming more popular, basically you are mortgaging your property with no repayments, which steadily erodes its value. The cost outweighs the gain and it is a last resort (more later).
In general funds are invested in the Stock market and the number of UK investment funds runs into thousands (see http://www.trustnet.com/ ) , they are therefore subject to market fluctuations and rely on market growth to progress. Major Companies use their own Investment Managers, but in the UK other Funds tend to be run by the Insurance Companies, who also run Annuities, effectively a closed shop.
Well managed funds should be transferred to more stable investments as they approach maturity from Age 50 on, into Government Stocks and Bonds, but recently these investment have been subject to speculative investment and have therefore become less stable and reliable.
Pensions are in turmoil. Funded Defined Benefit Schemes are the only reasonable scheme but are in decline due to a variety of reasons, the main reason being the large deficits they have and the Company investment required to reduce these. Why these deficits appeared is not apparent as schemes are shrouded in secrecy.
The impression is that these are associated with regulations on projected liabilities and population increases. The pension industry overall is still suffering from over generosity in the 1990’s, when payment and annuity rates were an unsustainable 16%. This would have exhausted available funds in seven years, leading to substantial commitment losses running into 2025 plus the loss of investment income.
Pensions appear not fit for purpose and drastic changes are needed.
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