Proposals are being made to control the extravagant claims made on investment returns to attract new business, with more realistic growth levels. The danger of course is that these lower levels will be taken as the norm with business as usual in speculative investment and the Industry pocketing the difference.
Anyone who has taken out a pension plan will have experienced the diminishing returns scenario, where what starts as an adequate saving for a given outcome, steadily reduces in projected value to become completely inadequate when it is too late to correct.
Complaint to the FSA gets the response that they have no control over Fund performance and a recent DWP report on private defined contribution schemes showed that they lost money in real terms, defeating the whole object of saving for retirement.
What is needed is for the Government, the Bank of England and the Financial Industry to get together and define realistic and affordable returns on the basic investment, separated entirely from speculative investment, to give benchmark levels that can be applied and enforced.
The aim should be to reduce the personal risk out of DC schemes to bring them closer to Defined Benefit ones, which is essential for any form of long term saving. One needs to know the firm outcome in forty years time, not an ill-defined meaningless promise.
There is also confusion over actual and real growth; performance is usually worked out and given in actual terms, whilst aims and requirements deal in real terms. This is quite reasonable as one wants to compare the value when one retires with your living conditions today. In rough terms one can just subtract the values.
There is need of a basic rethink on long term savings, the Industry is besotted with speculative investment with the fast buck mentality and unrealistic financial rewards. This combined with indiscriminate lending resulted in the property boom and collapse and the present banking and economic crisis.
Pensions Funds need a stable long term investment area with guaranteed results and offer great opportunities to create growth, employment and recovery in the present UK economy, with the potential for considerable fund expansion. Where else can you obtain a steady and regular source of investment funds guaranteed over a forty year period, which need not be repaid but only serviced at a modest rate.
One just needs to match the money to the investment, and there has never been a greater need in the UK economy for internal investment, the money is generated here and should be spent here, not in boosting Industry and jobs in the Far East or anywhere else overseas.
The opportunity and need exists in housing, schools, hospitals, Industry, transport and energy, which all require assessing on what is a reasonable and affordable return on investment; the PFI fiasco is a good example of what to avoid with its high operational costs.
At present contribution levels in a funded system, modest returns of 4 or 6% actual, some 1.5 and 3.5% real, can give acceptable pension levels with yield factors of 3.6 and 5.7 over 40 years in real terms.
There is a large contrast in returns from DC schemes, that fail to keep up with inflation and which all are being forced into, from the returns shown by the larger DB schemes, which even over the past five difficult years are showing growth of 5 to 6%. Investment returns over a 10 to 20 year period average 8% to 10% and 8% has also been achieved by some large pension schemes over 25 years.
There is also the need for urgent change in the poor and ever decreasing returns on annuities, which are destabilising pensions, some are now half of what they could afford to be even with the increasing life expectancy forecast.
Pensions and pensioners are an opportunity and not a burden, they need to be treated seriously and realistically, outside the present failed commercial system, as personal and long term savings giving stable and guaranteed returns during working life and retirement.
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