There is little doubt that funded schemes are the best form of pension provision for the individual, particularly when supported by the Employer, who matches your own contribution and uses reliable providers to manage the overall scheme well.
The heady days of the property boom, when you could build up your own “buy to let” portfolio to secure a good income for retirement are past; ISA savings now offer abysmal interest returns and the Stock Market requires a lot of time and energy and the knack of seeing a good deal.
There are Investment Funds offering good returns over 10 year periods, but the 5% bid/offer price makes it expensive to change schemes to reduce risk and the tendency is to leave them alone, possibly to stagnate. If you run your own business, your commercial property is worth buying and putting into your pension scheme, but again can be uncertain when you retire and need the money.
Large group schemes have many advantages, particularly if they run continuously through work and retirement, once established with large fund build up, investment income equals or exceeds contribution income and can meet 75% of pension payments. Existing assets can therefore be bought and transferred without charge within the group using the new income from contributions, giving a stable continuity to assets.
The other major advantage is the shared mortality risk in retirement, which allows a given fund to pay out at a higher rate, meet the needs of dependent relatives and also allow for increased life expectancy. Contributions levels are therefore lower, outcomes more reliable and benefits higher.
Any funded scheme, also allows flexibility in retirement, if you want to work longer or retire earlier, you have complete freedom of choice, providing your accumulated fund is adequate to support you, however DB schemes outperform DC ones and give a more secure outcome..
The problem with DC schemes is that they are run at members risk, the managers, usually Insurance Companies, therefore have little interest in making the money work hard and even if they do, without any incentive to pass the money on. As a result charges and costs are high and returns poor.
The end results are also dependent on the out-dated annuity market, also run by Insurance Companies, with their uncertain outcome and in general schemes tend to lose money in real terms.
The only best buy is therefore a well managed defined benefit scheme and this needs to be made available to all. It is unlikely that the State will offer this chance; the current new workers pension scheme is based on DC and ill defined. Of course a good State DB scheme could make a vote winning manifesto.
There is a great opportunity for a major body, Institution, Building Society, TUC or Mutual Pension Society to take up this challenge. They could guarantee outcomes much better, more flexible and secure than the new State workers scheme, existing DC schemes and even Public Sector schemes, attracting opt out and transfer, particularly for those under 45, who are faced with ever increasing contributions and reducing benefits.
The present performance of existing schemes, the current levels of contributions and the poor annuity returns virtually eliminate the risk element and quite modest guaranteed outcomes would exceed those currently on offer and even extend to elderly care provision.
Housing Associations started in a similar manner and are now very successful, building up substantial housing stocks with modest rents on a mutually run basis. Pension Associations would present lower risks and create large investment funds, without borrowing needs and if entry was limited to the age 25 to 44 would have 20 years to build up adequate Fund levels.
There are successful DB schemes in existence, run on this basis, with low running costs and good guaranteed returns, in the USA the local Government and Public Sector schemes are run this way, showing high consistent growth and investment levels over 25 year periods.
It just needs the initiative, commitment and vision to proceed.
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