UKH

An interesting article that I'd missed  first time round. Three key 'take-aways' for me: just how greedy the firms have turned out to be (again); that retirement longevity estimates are being reduced quite a bit (with implications for a lot of the current public sector pension disputes, where longevity estimates are sometimes even more conservative); and that, following the very welcome recent reforms, now you have to chose to buy them, annuity rates have suddenly and significantly improved.

https://www.theguardian.com/money/2019/mar/16/annuities-a-4bn-pension-heist...

I believe it helps if you become a smoker on the day you apply for them. 

That's an interesting point. I've often wondered if you claim to be a smoker, how would they prove that you are not?

I thought the following paragraph was worth noting

"But here’s a thought: if you buy an annuity from Aviva, it will give you an income of about 5%-5.5% a year. But if you buy shares in Aviva on the stock market, they are currently yielding 7%. And if the analysts are right and the “releases” from the annuity reserves have only just begun, then those dividends might gush for years to come"

Such big companies have systems to deal with those who try to defraud them. If you are a longstanding regular smoker you typically won't live as long as average, so yes they offer better rates. At a recent pre-retirement event I was told these better rates are not as good a deal as the actual average reduction in predicted lifespan would indicate and then you have to live with the associated health problems.... best not to smoke.  The event I attended was amazingly informative....none of us knew that UK state pensions were anything like as complicated as they are.

Smoker, in the terms and conditions, means tobacco. So if I take up pot, or crack, smoking in retirement, I will get the lesser rate, which seems I'll thought out. 

But there is a risk that the stock will crash through an adverse event, such as miss-selling annuities. However, that has to be balanced against the fact that a bunch of stocks and bonds can be left to your kids. An annuity dies with you (or provides until your spouse dies.)

Swings and round things. One may be good for some people and not for others.

Exactly. An annuity is essentially a bet taken by the insurance company on how long you'll live. sometimes they'll win, sometimes you will. It's also guaranteed income whereas the stock market returns aren't.

The problem is if you have a life insurance policy that says you are not a smoker. I’ll maybe take up BASE jumping upon retirement.

Aviva’s dividend record is shaky with 4 dividend cuts in the last 10 years so not one to solely rely on for retirement income though maybe one to add to a diversified portfolio of high yielding shares to reduce risk to capital and income and has the advantage (compared to an annuity) of something to pass on in your will.

Annuites worked out very well for my Dad and Mum. My Dad put off taking one out the last year when he could ( think he ws 70). By that time he had had 2 heart attacks and a potential cancer thwarted. He chuckled at the excellent rates he got, as he knew full well his medical history was a plus!He often said it would have been better if he smoked as well.

He lived in good health until his last few years, and then when he passed away the annuity payments were transfered to my Mum.

He bought well ( he was shrewd) and annuities are good products as payment is guaranteed.That alone is a big plus.

As part of my pension plan, an annuity will figure, but like anything  I will mix it up with other options.

Eric Jones. 

Yeah. More dangerous sports, higher chance of something going wrong. Don't know if they ask that question. 

They could do much better predictions of longevity if they had access to medical records, dna etc. But that would open a whole new debate.  Of course either way there is no reward for being healthy. 

They should review risk in the opposite manner that they do with accident and life insurance.

There is one important thing to remember about betting. The house always wins. 

It's interesting how the industry conversation has changed just a few months down the line from that article, it's got to be said.

The problem is noone really knows. You lock in, and you get certainty, or you don't, and you either win or lose depending on what happens.Given the releases look at yesterday's reserves versus today's, the statement that "But we can assume that with reserve releases running to the billions, winners such as him have been the exception not the rule" is unfortunately factually incorrect - all we know is that expectations today are less than they were yesterday, not whether they're less than when the contract was originally sold. 

I saw some interesting modelling a while ago which tried to look at the whole stocks and bonds versus annuities versus blend approach to look at what the best option might be. I can't get the link to copy properly, but it was called Annuities Reinvented - Google should find it.

Interesting indeed for those whose minds work that way - 

http://uk.milliman.com/uploadedFiles/insight/2018/Annuities-reinvented.pdf

Thanks for the heads up

I'm always struck by the extremely conservative advice that is handed out to the UK consumer vs. the US consumer. Which is not to say that the US consumer is encouraged to be a cowboy, but the rate of asset drawdown is usually recomended to be at least a percentage point higher (i.e 4% vs 3%). Of course it wasn't too long ago (20 years) when 8-9% was considered fine. (in the US).  

No problem, and thank you for getting the link sorted properly.

Is this because the yanks are wanting to live it up in their retirement because they had naff-all holiday during their working lives?

Interesting paper, which I'll read in more depth later. 

Confirms my aim of mixing my options when I retire - hopefully in the near future.... 

When I look at annuity rates on offer currently, they are terrible - especially if you want RPI increases and transfer to spouse on your death.

You ar elike me. Like in any form of financial risk, you should always mix things up and never bet the house on one option. Of course if you are young and can take the risk and recover.

In the round - Increased life expectancy is a huge financial burden on all of us.

The rates  will be terrible, always have been if you want RPI and transfer to spouse ( who will almost certainly live longer).

I know you're half-joking, but this is only true overall, on average, across large numbers of bets - it certainly isn't true for every bet.

In the case of buying an insurance policy such as this, if you're party to inside knowledge that you're different from the norm in some relevant way, you may be able to skew the odds in your favour (for an annuity that would have to be knowledge that you're likely to live longer than expected).

For example, I've done very well out of accidental damage insurance for digital cameras - as the policies are sold as fairly standard packages and I'm clumsier than most, more likely be using my camera during physical activities than normal, and less likely to retire my camera just to buy the latest version than many.

Although the current situation has arisen because life expectancy has stalled - from the article:

"Just last week the actuaries clipped six months off projected life expectancy, with the projections now 13 months lower than in 2015."

You could say this should then mitigate the huge financial burden, but I'm not sure giving billions out to shareholders achieves this.

I disagree with such simplistic assumptions.

Firstly, even factoring for age, public sector pension costs on the state might drop medium term as all such pensions are a good bit less generous than they used to be, for more going in, and I think may end up paying back into the exchequer down the line as some argue that the current costing methodologies inappropriately multiply up negative assumptions. The USS pension is a current battle ground on such arguments and the facts don't look so good for the trustees. The USS in the dispute misrepresented the regulator, and made calculation errors that led to a trustee resigning and whistle blowing. The scheme, like most of its type, still includes a basic assumption of above inflation pay growth which has never been even close to reality.   We also have a good example of a closed scheme in the Coal Miner's pension, which faced dire predictions from the Telegraph, based on such valuations, when the government took it over in the 90s but now is so healthy it's giving annual surplus income to the government in the hundreds of milions annually (a major scandal in my view).

https://www.ft.com/content/3b6a2f18-8e94-11e9-a1c1-51bf8f989972

https://www.ft.com/content/fdf66d42-83ab-11e9-b592-5fe435b57a3b

https://www.pensionsage.com/pa/Govt-defends-position-on-Mineworkers-Pension...

Secondly, I'm not convinced increased life expectancy is a correct assumption medium term. The link below discusses recent decreases. The drops in that data don't factor in the recent worsening state of the NHS, our Social Care crisis, big rises in work related stress, let alone any black swan stuff (like hard brexit or a US style drug epidemic).

https://www.nhs.uk/news/medical-practice/uk-life-expectancy-drops-while-oth...

Then we have the right wing think tanks testing the water about further big increases in state pension age to 75 (that obviously would massively reduce state pension costs).

https://inews.co.uk/news/uk/retirement-75-state-pension-age-increase-iain-d...

I appreciate your ongoing discussion about the USS scene and it’s political battles.

But for those of us with our own pension pots and what we do with them it is not really helpful other than passing interest 

It is a totally different perspective, which I am sure you will understand. 

On the question of life expectancy. You cannot ignore what you see around you in the Uk ... a growing ageing population. 

Perversely the billions given out to shareholders goes where?

Mostly- with the odd exception- back into the pension funds for the likes of everybody.

So you can argue its just recycled back to everybody anyway.

The USS dispute has implications for most final salary schemes. It's especially unfortunate for trustees and government that they now raised awereness of the likes of academic mathemeticians, accountants and economists, now much better informed of the real implications of overly conservative valuation methodologies alongside increasing regulatory conservativism. Sadly my union still gets a bit 'carried away with it all' at times (as they are mainly winning) but there are people involved who are just looking at the situation academically (Michael Otsuka being a particular star   https://medium.com/@mikeotsuka  )

As I said life expectancy has flattened in the UK and may be decreasing. Actuaries are currently saying they have overestimated longevity as much as the opposite.

https://www.actuaries.org.uk/news-and-insights/media-centre/media-releases-...

The population is undoubtedly ageing, but the issue is how fast?  The statistics bear out Offwidth's assertion that life expectancy in the UK has, in the last couple of years, stopped rising.

https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriage...

"The slowdown in life expectancy improvements in the UK has continued, as 2015 to 2017 saw the lowest improvements in life expectancy since the start of the series in 1980 to 1982."

"Life expectancy at age 65 years in the UK did not improve for males and females in 2015 to 2017 and remained at 18.6 years for males and 20.9 years for females."

One can argue why the continual falls in mortality that we got used to over the last few decades have halted, but stopped they certainly have.  I'm not personally delighted about this situation, but it certainly takes a bit of pressure off pension provision.

Let’s hear from an actuary on this.

Wishful thinking springs to mind about the impact. 

Fine for final salary schemes. But most of us are not in those. Even those left are mostly public sector.

That horse left the field a long time ago. 

Believe me, as a 58 year old my wishful thinking is definitely not in the direction of a shorter age 65 life expectancy!

Those facing lower expectations in retirement are generally in jobs with increasing responsibilities and workload but lowering autonomy. This includes the bulk of public sector workers but that won't statistically mean you surely? The civil service studies dismissed the legend of the overstressed public sector high fliers.

https://en.m.wikipedia.org/wiki/Whitehall_Study

I always reckon there is alot of wishful thinking in terms of pensions, mostly along the lines of burying ones head in the sand about trying to work out how you are going to fund it when  you or in your early to mid 80's onwards.

Its a hell of a financial risk, almost impossible to work out, unless you are in a public sector penion scheme or for the very few in the private sector left in a final salary scheme.

Most people outside that are taking a big gamble which ever route they select.Its a lottery.

And todays best way of doing it will almost inevtiably have changed in 10 years time. Annuities being a dead product for example, and now being in as part of the mix.

Pension planning is causing me a lot of headaches. 

Funding the gap between when I want to retire and when the state pension kicks in isn't too bad (especially if I take up a part-time role), but how do you work out what you're going to need as you get older? I guess our spending will decrease as we become less active?

We also plan to be living full time abroad, and there's the post-Brexit risk that our state pension may not track RPI (as it would if we lived in the UK). 

I've got so many "what-if" spreadsheets on the go to predict the various eventualities, but one stock market crash could knacker all of that.

I'd agree with all that. Still, state pension costs was one of your points and that's mainly still public sector pension liabilities and state pensions. Its also worth remembering little is completely risk free.. final salary pensions have been 'raided' and 2008 should have been a wake-up-call that the world economy isn't as stable as it sometimes seems.

My biggest concerns are still much less for our generation and more for those just starting in work. My generation have been treated unfairly at times in pensions terms, whereas I think the young have been 'sold out'.

Take a look at https://firecalc.com/  Ignore the slightly religious tone, - the calculator is very sophisticated  albeit with a clunky interface.  The last tab allows lots of sensitivity analysis.

In my view the sell out is people who were  given flexible pensions that allowed early retirement in old final salary schemes.I often wonder if anybody has been able to work out the cost of such give aways overall to pension funds.I look at my father-in-law retired at 55 in a private final salary scheme, very comfortably off, now closed to everybody because of the cost of that generations largesse.

That was the sell out for future generations.

The costs and implications of this ( if that is the right word) killed the so called golden goose.

Annoys the hell out of me. The same for public sector schemes.

They should have strictly enforced a 65 pension age, no if's or buts or compromises.

That's brilliant! Thanks.

Early retirement results in a reduced pension, however, so in principle at least the cost is the same.

I don't know how many others there are on here (I'm an actuary in a life insurer).

Having lost large chunks of my life to Offwidths retirement/pensions/etc threads before I'm trying to skim the surface on this one rather than get stuck into details, but if there's anything short/specific then I can try to reply...

You have stopped paying in to the pension pot and that makes an impact to the whole scheme.

When will I die?

How?  If the payouts are in line with the contributions, surely everything is in balance?

Law of diminishing returns? All the easy wins have been won. There won't be change until a) things get worse (think drug-resistant MRSA or Ebola) b) things get better (cure for a common cancer).

Try funding the pension on your own. That way it shows the true cost. 

I agree - particularly in the 90's, when many schemes were in surplus due to booming stock markets there was much too much optimism that things would ever continue thus.  Also at the same time many employers took pension holidays, stopping paying in their contributions.  

(For Offwidth & anybody else interested in USS, worth noting that despite huge amounts of pressure from VCs at the time to do this, USS always maintained its employer contributions at a reasonable level through the fat years, thanks to the saintly Professor Graham Davies.  That's one of the big reasons why, despite the strains, it still survives).

I think there's something in this.  There've been very big gains in cardiovascular disease, thanks largely to less smoking, aspirin and statins.  Progress for diseases like cancers has been much slower.  And as you say, there are some scary new threats on the horizon.

I am.

However, I still don't really see the problem in principle.  If you are saying early-retirement was simply too generously funded and the actuarial calculations wrong, I can see that would destabilise schemes.  But can't see a fundamental problem with less money in leading to appropriately less moeny out, which I think is the intention.

The "we haven't found the next quick win" argument is one of those which is used to explain the recent slowdown, since a lot of the historic gains came from CV diseases and there's only so much benefit to be had from their treatment.

Straight in with a tricky one!

It’s different when it’s your own pension pots s it’s your responsibility / cost all the way through. You can make a more rational decision.

Thats your opinion but it's not mine. I don't think defined benefit (DB)  schemes were ever that more expensive than Dedined Contribution (DC). They only looked that way as DB valuations have become more conservative and the liability has formally moved to the organisational balance sheet in an unfair manner (exaggerating the valuation faults) and due to Gordon Brown's tax changes that looked worse on DB. In cash terms they have just moved a proportion of outgoings; from lower charged (ie more fee efficient) DB pensions, to a less efficient (annual higher individual fee) outcome in DC schemes. Hence, a big lump of the money just moved from the retiree with a DB pension to financial organisation fee based profits with a DC pension (and a huge boost thanks to Gordon either way for HMRC). The double whammy in moving from defined benefit to the much more expensive fee wise defined contribution schemes is the volatility, which is stressful and unfair, especially so for the half who lose out on average.

A good pension is deffered pay and an incentive to work in organisations that have such schemes. Deffered pay is also taxed.

This is what the Telegraph said in 2008 about the Coal Miners scheme which is still hugely in profit for the government; a view based on self appointed pension ideologues like John Ralfe playing Cassandra on DB schemes.

https://www.telegraph.co.uk/finance/comment/2794289/Taxpayers-may-have-to-d...

Despite all these warnings, the government income on the scheme remains and as it turns out, a decade on, that the assumptions look more conservative than needed rather than less as Ralfe claimed. 

Mike questioned the level of sainthood.

https://medium.com/@mikeotsuka/uss-deficit-traced-to-employer-contribution-...

The fact that these schemes swing from large surplus to large defecit as the economic cycle shifts is further evidence that the valuation mechanisms are wrong.  DB smooths against such cycles in its pension payments  but overlooks doing so in its valuation.

Sure, if the employers' contribution hadn't been reduced from 18.55% to 14% in 1997, the scheme would be in better financial shape.  But the pressure from VCs at the time was, not for 14% employers contributions, but for 0%.  In many local pension schemes (including my own institution), as in many private sector schemes, the employers took pension holidays, leaving those schemes in much worse shape for the 2000's.  Graham Davies fought hard to stop the universities taking a contribution holiday and he deserves credit for that.

The general point (for individuals as well as institutions) is that it's never a good plan to assume the good times will last for ever. 

As you say, its an opinion.

Anyway ..what do think about all these NHS consultants and their overtime payments /tax bills/ pension limits.That is one hell of a mess to sort out.

Indeed . The NHS issues were predicted, reminded and yet ignored until it was too late and now the government have to deal with the consequencies. A sadly all too common story these days.

As I said, a lesser degree of saintliness (about a quarter less !

Not so much - there's very little safety net in the US. However the "state pension" is about 2.5 x the UK one, which provides a bit of a cushion for the minority of the population that have other assets (or, disappearing at speed, company pensions). 

I think the US is a bit comfier with risk in general - there's more of a "you can recover from bankruptcy" attitude than the UK "well it's off to debtors prison for you" approach

[slightly tongue in cheek]

It is surprising how mixing things up a bit adds to higher probability of a long-term good outcome without dinging returns too much. Although right now, everything looks a bit heated and cash seems the better option. But it is always thus (or has been for the 30-odd years I've been paying attention) and I think the most important thing for getting a good night's sleep in retirement is having enough to survive for a year or two.

Easier said than done, of course. 

Spot on. The change in accounting rules had a massive effect, as did the fact that the risk was on the employer. Moving to DC mean the risk was transferred to the employees.  When my workplace DB scheme £9million in deficit was frozen and loads of people transferred out it went to £2million in surplus.

Yes. When you stop paying in to a scheme you stop accruing benefits and thus the value of payout is reduced correspondingly (DB scheme - less years contributions means less '80ths out').  Pensions drawn early are also 'actuarily reduced' to compensate for the fact that there's likely to be more years of paying out.  However, problems occur when lots of people want to do the same thing at once.  Scheme investments are normally timed by the investment manager / trustee to mature just in time to provide liquidity to pay pensions when they come due.  If the payout profile changes due to people wanting to start pulling from the pot earlier than anticipated that screws up the investment mechanisms.

The detail mechanics of defined benefit pension scheme funding profiles are beyond my subject expertise, but I have to confess I thought there was a degree of cross-subsidy over time within a DB scheme.

You contribute based on a percent of salary, but you accumulate at salary * length of service, which means if you get pay rises a few years in then the accumulation rises faster than the contribution.

You also have a flat contribution rate by age/gender - 1/80th of a £20k salary is funded by the same contribution rate at all ages despite the fact that if you're 50 investment growth has a lot less time to work than if you're 20. 

Generally where you cross-subsidise, you're vulnerable to changes in the mix within the group, which can be skewed by leavers etc. 

I should caveat here that this is what I *think* is the case rather than what I know to be the case.

Interesting, thanks.

It used to be the case, in the glory days of DB pensions, that people who had served a company well over a period of time would be promoted a year or two before retirement so that their pension would be a percentage of a higher salary than they had earned while contributing. This was the case for my father, and also for a far more disreputable skiing chum of mine.

It's that "immediately pre retirement" example where the accumulation vs contribution mismatch is most stark - the entire accumulated benefit jumps by 10% or whatever it is just like that, and the cumulative contribution made barely changes. 

I *think*, again, that it is this sort of cross subsidy that the move to "career average" type benefits were designed to help reduce, in that it tempers the amount of jump that can be created in the accumulation.

This is why our Civil Service DB scheme is changing to a 'career average' one - it stops that 'twilight promotion' scam.

There are many more reasons than that.