I brought the kids to the Titanic exhibition in Cobh, Co Cork, recently and found it a thoroughly moving experience. Knowing the story before you go in doesn’t ruin the event even though you have a sense of the inevitability of the tragedy all the way through the telling of the story.
I feel a similar sense of looming calamity when I listen to life and pension experts continually recommending more people to shop around for annuities as a solution to the problem of reducing returns from annuities. While there can be some minor benefit in shopping around in order to find providers whose charges are lower, the general emphasis of commentators is always on improving pension outcomes by increasing the numbers taking out enhanced annuities.
This is depressing in its futility as a solution to the problem of reducing pensions, a classic example of moving deckchairs on the Titanic rather than changing the direction of the ship. It insults everyone’s intelligence by making it appear as if there is a magic way of giving some individuals more without giving others less. Of course, this isn’t true. Enhanced annuities pay out more to individuals with reduced life expectancy, based on the fact that they will be in receipt of the pension for less time.
Those who don’t qualify for enhanced annuities, due to their good luck in having retained their health, will have to receive correspondingly lower payments in order to ensure that their conventional annuities can pay out for a longer time. It is that simple. So increasing the numbers getting enhanced annuities is not solving the problem of low annuity payments from pension savings; it is just shifting the problem from one section of the pensioner population to another.
The amount that an annuitant can receive from a given pension pot is dependent upon two factors; the life expectancy of the pool of annuitants and the returns on investment that the annuity provider can get from the restricted range of investment options available to them.
No one has any control over the longevity of individual pensioners and the financial services sector cannot guarantee investment returns. Any attempt by the government to provide investment grade products that guarantee returns higher than the current market rates will only transfer the risk to the taxpayer – a move that always ends in tears.
What’s needed is a complete change of direction in how we think about pensions. We need to look at what people require from a pension and ways in which it could be provided, what is the proper role for government in such a structure and how we can provide the financial security that older people require in their old age.
Messing about with the existing rules and trying small incremental changes to the pension framework currently in place is not going to work. These false solutions just delay the thorough overhaul that is needed if we are to avoid the disaster of having a population with low private pension incomes and a government that cannot raise the amounts needed to plug the gap from a dramatically smaller workforce. In the meantime, the iceberg gets ever closer.
What do you think? Let us know in the comments below!