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Uk Private Pension Liability Poses 'unprecedented' Risk

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http://www.telegraph.co.uk/finance/personalfinance/pensions/7978412/UK-private-pension-liability-poses-unprecedented-risk.html

Aon, a leading consultancy that published the research, warned that the liability levels were “unprecedented” and posed a “significant financial risk.”

The advisers said that failing yields on Government bonds was the key factor behind the soaring liabilities.

Government securities are used to calculate how much the scheme must pay out to retiring workers at any particular time. Lower yields mean that payouts become higher in the calculation.

However, experts warned that the liabilities must be viewed in the long-term – they can be quickly just as quickly reversed in good market conditions.

Separately, another pensions consultancy said that sales of enhanced annuities have soared by over 41pc in just a year suggesting that Britain’s retirees are becoming more savvy about pension products.

Towers Watson said the total value of enhanced annuities topped £1.26bn in the first half of 2010 compared with £1.78bn during the whole of 2009.

The advisers said the growth shows a growing awareness among retired people of products beyond standard annuities.

Enhanced annuities, which pay out considerably more than a standard version, have been designed for people who are less healthy than average, for instance those who are ill, overweight or who smoke.

Enhanced annuities, also known as impaired life annuities, make up more than a third of annuities sold in Britain.

Is the falling yields the result of the BoE buying govt bonds?

Has Mystic Merv shafted the people once again?

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Is the falling yields the result of the BoE buying govt bonds?

Yes.

Has Mystic Merv shafted the people once again?

Yes.

Kicking the can down the road with more short-termism, distortion and misallocation of money - something he and his political chums have done since gaining control, long enough to be able to stay collecting the salary and pension before buggering off.

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Is the falling yields the result of the BoE buying govt bonds?

Yes.

Has Mystic Merv shafted the people once again?

Yes.

Kicking the can down the road with more short-termism, distortion and misallocation of money - something he and his political chums have done since gaining control, long enough to be able to stay collecting the salary and pension before buggering off.

This low rate hoopla is massively distorting, just a bung to the banks - you wouldn't believe what some of them are doing as a result.

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The actuarial profession assumes 8% a year return after inflation for the next 40 years.. actually forever.

And even with that hard to believe assumption of return used for the calcualtions of all pension funds.. many are still underfunded. So what happens if the after inflation return is 1% for the next 30 years?

I had got into a chat awhile back with my podaitrist about this. And he was saying throughout history every culture has had certain things they claimed to know about the future with certainty. For our society one thing was we 'know' with certainty about the future that anything invested today will grow at 8% after inflation forever.

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The actuarial profession assumes 8% a year return after inflation for the next 40 years.. actually forever.

And even with that hard to believe assumption of return used for the calcualtions of all pension funds.. many are still underfunded. So what happens if the after inflation return is 1% for the next 30 years?

I had got into a chat awhile back with my podaitrist about this. And he was saying throughout history every culture has had certain things they claimed to know about the future with certainty. For our society one thing was we 'know' with certainty about the future that anything invested today will grow at 8% after inflation forever.

Forecasting with certainty, I'm reminded of Taleb's Black Swan book a very good rebuttal on those that predict.

We know nothing of the future. :)

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What a mess it all is.

One of the things that makes me angry about private company defined pension schemes, is that if a fund is bust, and the company that supports it has gone bust too, then it is the retired people who get all the money. That means the young, those working and producing, lose nearly everything. Totally unfair, I cant see why a few older people cant take a modest cut in their pensions, in proportion to the cuts that those working have from their scheme.

And yes, that assumption of 8% per year is clearly wrong. The only way it can be made good, is for there to be a new technological revolution of some unknown origin, or for someone to generate a lot of inflation. Of course if you generate a lot of inflation, then the real value of the pensions all go down.

I would actually call for a bit of inflation here. After all, what we are talking about is dividing up the real resources of the nation, and at the moment, the boomers are hoarding it all. Add in a bit of inflation to uninflation proofed pensions, and the young uns will get some of the spoils too.

Shame that those public sector pensions are inflation proof. If the condems dont address this crime soon, then the bill to pay will be so large, the state will be brought down. Whatever happens, they wont get paid, but it would be better for those who think that they are going to get them to at least accept a managed reduction. Cos if they oppose it and strike, they might get diddly squat.

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This low rate hoopla is massively distorting, just a bung to the banks - you wouldn't believe what some of them are doing as a result.

final sal pension schemes will have to fess up and take advantage of the CPI inflation connection to reduce real final salary pensions.

younger generations, well at least those on later defined contribution schemes, will be better off than they think

seems the 40 to 50 somethings who had it ALL until a few years ago and didn't give a sh*t about the mess - well they seem a bit screwed now

(maybe they should have taken more rational and careful consideration of (1) their own investments (instead of get rich quick schemes like demutualisations and BTL) and (2) who they voted for; instead of wating until they are jobless at the age of 50 to start worrying about having made no pension contributions)

http://www.telegraph.co.uk/health/7978474/The-Baby-Gloomers.html

Edited by Si1

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final sal pension schemes will have to fess up and take advantage of the CPI inflation connection to reduce real final salary pensions.

The government change to CPI doesn't effect private schemes.

younger generations, well at least those on later defined contribution schemes, will be better off than they think

You might think that but since they are probably in the same fund, when the defined benefit scheme goes under all those in retirement still get to keep all the young peoples money.

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Aon, a leading consultancy that published the research, warned that the liability levels were “unprecedented” and posed a “significant financial risk.”

Sorry I don't get this.

"soaring liabilities" - "a significant financial risk" - for/to whom may one ask?

The way it's phrased you'd think we are all expected to join in!

Check again; yes this is private pensions

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Sorry I don't get this.

"soaring liabilities" - "a significant financial risk" - for/to whom may one ask?

The way it's phrased you'd think we are all expected to join in!

Check again; yes this is private pensions

Laura,

it means that a lot of money is owed to someone, and that there is a high risk that it wont be paid.

As an English teacher, I guess that you know words can be used to give hints and meanings in addition to the obvious message they convey. You are probably right, these words are hinting at the need to do something, or if not, the need for a bailout when the obligations are not met.

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Sorry I don't get this.

"soaring liabilities" - "a significant financial risk" - for/to whom may one ask?

The way it's phrased you'd think we are all expected to join in!

Check again; yes this is private pensions

To the company that has to put the money into the pension at the expense of using it to invest in productive endeavours that would create jobs.

All down to ultra low IRs.

The principle is simple although this is a grossly simplified and essentially incorrect calculation, merely to illustrate the point: If you promise your retirer an income of 10k per year and you get 10% safely on your investments, you need to spend 100k on the income. If you can only get 1%, then you need a million. If you only have the 100k in the scheme, then you need to put the other 900k into the pot in order to meet your liabilities.

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The actuarial profession assumes 8% a year return after inflation for the next 40 years.. actually forever.

Where on earth did you get this information? Maybe back in the 80s it was the norm for actuaries to assume 8% in perpetuity (and that was BEFORE inflation, not after) but a lot changed in the late 90s and early 2000s - it's all market rates now, hence the regular barrage of headlines about deficits moving up and down every month.

For the purposes of company accounts they discount liabilities using a measure of prevailing corporate bond yields and they project asset returns based on the asset class held (it could be around 8%pa for equities). Yields on gov't bonds are used for discounting liabilities in their formal every-three-years valuations (as opposed to annual company accounts) and this is what this article is about.

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One of the things that makes me angry about private company defined pension schemes, is that if a fund is bust, and the company that supports it has gone bust too, then it is the retired people who get all the money. That means the young, those working and producing, lose nearly everything. Totally unfair, I cant see why a few older people cant take a modest cut in their pensions, in proportion to the cuts that those working have from their scheme.

That is how it used to be until a few years ago, but with the introduction of the Pensions Protection Fund it's no longer the case. Retirees are still get a better deal when slicing up the pie (as it should be), but the younger ones don't by any stretch "lose nearly everything".

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That is how it used to be until a few years ago, but with the introduction of the Pensions Protection Fund it's no longer the case. Retirees are still get a better deal when slicing up the pie (as it should be), but the younger ones don't by any stretch "lose nearly everything".

I accept that the PPF has made things a bit better. But the PPF is not subsidised by the taxpayer. Private Pension funds have to insure themselves with the PPF, and that insurance money is used to bailout the insolvent. Again a big moral hazard problem here, with the prudent bailing out the idiots.

Anyway, the existence of the PPF encourages pension scheme managers to take bigger risks if a fund is in deficit. After all, if things go wrong, there is the PPF.

Trouble is, if the PPF doesnt have enough money either, then it cuts the payout to pensions under its control. I am unsure if the PPF also has to guarantee incomes of those who have already retired with respect to those that havent? Do you know this.

So if enough pension schemes go under, the PPF will only have a pittance to pay out anyway.

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Where on earth did you get this information? Maybe back in the 80s it was the norm for actuaries to assume 8% in perpetuity (and that was BEFORE inflation, not after) but a lot changed in the late 90s and early 2000s - it's all market rates now, hence the regular barrage of headlines about deficits moving up and down every month.

For the purposes of company accounts they discount liabilities using a measure of prevailing corporate bond yields and they project asset returns based on the asset class held (it could be around 8%pa for equities). Yields on gov't bonds are used for discounting liabilities in their formal every-three-years valuations (as opposed to annual company accounts) and this is what this article is about.

http://globaleconomicanalysis.blogspot.com/2010/06/ny-state-shell-game-municipalities.html

Another oddity of the plan is that the pension fund, which assumes its assets will earn 8 percent a year, would accept interest payments from the state that would probably be 4.5 percent to 5.5 percent.

This week, Mr. Paterson called borrowing “a last resort,” but added, “I have never said I wouldn’t borrow.”

Oddities Galore

The idea is so absurd that I struggle to believe anyone would propose it, let alone actually vote for it. Yet it passed, and the governor signed it.

Paterson and other state officials hope the stock market will bail them out. I have the odds of that at something like 15%.

Plan assumptions of 8% annualized are highly unlikely to happen. Amazingly, even IF 8% returns came home, Seven State Pension Plans will be Out of Money by 2020.

It would appear that a few US state pensions are working on the 8% return figure.

Mish has made quite a few posts on this subject where the 8% figure keeps cropping up.

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Final salary pensions may be based on a final salary....but the percentage of that final salary is/will get smaller...most will require a part time job to get by while they wait in expectation (and if lucky enough) for the government pension payout to be calculated payable a few months before average life expectancy. ;)

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I cashed in all my company pensions because I couldn't see them paying out as promised. Big haircuts but at least I have something in my grasp to do something with (SIPP).

1. Financial crisis - would they still be standing?

2. Potential for inflation above capped rate (big risk over the long term).

3. If yields tended to zero would they have enough in the pot?

So whatever happened I couldn't see them performing as promised on the tin.

Of course the other side to low yields is the effect on profits in the ftse as companies have to set aside more and more for staff pensions. And the feedback loop there could make pension liabilities even higher.

EDIT: BTW DYOR. I'm just a bloke off the internet. I could be mad for all I know.

One of my previous e'ers recently stumped up a sizeable lump sum to plug part of the deficit. This next bit is verbatim from the Trustee report:-

"The Scheme has received a cash contribution of £x,xxx million. This has been used to purchase a portfolio of debt securities owned by the Principal Employer"

:lol: So, they're covering their deficit by selling sh1t they own to their own pension scheme. I can only assume the Trustees were offered coke and hookers to sweeten the deal.

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I accept that the PPF has made things a bit better. But the PPF is not subsidised by the taxpayer. Private Pension funds have to insure themselves with the PPF, and that insurance money is used to bailout the insolvent. Again a big moral hazard problem here, with the prudent bailing out the idiots.

Anyway, the existence of the PPF encourages pension scheme managers to take bigger risks if a fund is in deficit. After all, if things go wrong, there is the PPF.

Trouble is, if the PPF doesnt have enough money either, then it cuts the payout to pensions under its control. I am unsure if the PPF also has to guarantee incomes of those who have already retired with respect to those that havent? Do you know this.

So if enough pension schemes go under, the PPF will only have a pittance to pay out anyway.

As long as the PPF maintains a decent level of funding (!!), it has made things much much better for younger members, not "a bit" better. Previously, as you say, younger members could in reality lose 100% of their benefits if their employer went bust while the scheme was very underfunded. Now I believe they lose just 10% (and some inflation protection) if their deferred pension is of the order of 25k pa (don't know the actual number) or lower - this is what it's capped at so the higher the pension the more they lose, but it's a far far better (ie fairer) arrangement than what existed before.

Totally agree about the moral hazard aspect but I don't know how else you'd design the system unless there was some explicit gov't g'tee. The riskier schemes don 't get off scott free though (the levy does adjust according to many factors) - they pay more than "healthier" schemes, as is the case with any insurance arrangement.

Not too sure about the level of g'tee for retirees vs non-retirees. That is, if things got bad enough that the PPF would need to cut some pensions, I don't know how they would determine who gets cut and by how much. I'm sure the information is out there though, I'm just too lazy to look it up.

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I would actually call for a bit of inflation here. After all, what we are talking about is dividing up the real resources of the nation, and at the moment, the boomers are hoarding it all. Add in a bit of inflation to uninflation proofed pensions, and the young uns will get some of the spoils too.

Shame that those public sector pensions are inflation proof. If the condems dont address this crime soon, then the bill to pay will be so large, the state will be brought down. Whatever happens, they wont get paid, but it would be better for those who think that they are going to get them to at least accept a managed reduction. Cos if they oppose it and strike, they might get diddly squat.

Inflation hurts those who holds real value least (or none at all). Guess who owns all the 'real things' like property, factories, shares. Younger or older ?

Who owns a lot of paper assets (including pension which is a 'promise' to pay) and small amount of bank savings ?

What is the most profitable industry during inflation after perhaps the food industry / farms? Answer - the banks.

The liabilities tend to be discounted to present using the long term index linked gilts (ILG). Think this is 1%ish at the moment and so the liability is enormous.

If this drops to 0 then the liability becomes infinite.

It was supposed to be a short term thing, but when you hear Ben talking about 'rates to stay low for an extended period', you wonder what 'short term' really means,

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Swings and roundabouts.

The old and infirm get to screw the young with absurd house prices, and the young screw them back with ZIRP annuities. Guess if youre in your 40s and bought in the mid 90s youre laughing, or if you took an annuity a couple of years back or have a public sector pension youre also laughing.

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http://globaleconomicanalysis.blogspot.com/2010/06/ny-state-shell-game-municipalities.html

It would appear that a few US state pensions are working on the 8% return figure.

Mish has made quite a few posts on this subject where the 8% figure keeps cropping up.

OK but that 8% isn't relevant to the article linked to in the OP. That's about US valuation rules which are quite different from UK valuation rules. This just proves how misleading and unnecessarily complicated the whole pensions system is anyway - the benefits are what they are and the money in the fund is what it is, but you get vastly different results and headlines based on what valuation rules you have to follow, what assumptions you're allowed to make and what country you're operating in.

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http://globaleconomicanalysis.blogspot.com/2010/06/ny-state-shell-game-municipalities.html

It would appear that a few US state pensions are working on the 8% return figure.

Mish has made quite a few posts on this subject where the 8% figure keeps cropping up.

My guess is that is what some hypothetical portfolio containing say 60% equities and 40% bonds produced from 1926 to whenever but no later than 2000.

For all the fancy math that actuaries have to know they seem not to understand that even equities have a fairly predictable return over long periods say two decades. The simplest but still effective calculation is, I think, called the Gordon equation and is just the dividend yield plus the growth rate of dividends. When the dividend yield on the S&P 500 fell to 1% in 1999 the actuaries and many others were still predicting the magic 8% returns.

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What a mess it all is.

One of the things that makes me angry about private company defined pension schemes, is that if a fund is bust, and the company that supports it has gone bust too, then it is the retired people who get all the money. That means the young, those working and producing, lose nearly everything. Totally unfair, I cant see why a few older people cant take a modest cut in their pensions, in proportion to the cuts that those working have from their scheme.

Well noticed. It's now ten years since the Equitable decision established the principle, pensioners get 100%, workers get the dregs.

Corollary: the big losers are those who have put most in, and have least time left in their working lives to recover. That is to say, today's fiftysomethings (and up).

In a word, boomers.

(did you hear this week's headline? Annuity rates down 50% in 15 years? That's for money-purchase, not final salary where the scheme bears that 50% loss. The big pension collapse is happening).

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My guess is that is what some hypothetical portfolio containing say 60% equities and 40% bonds produced from 1926 to whenever but no later than 2000.

For all the fancy math that actuaries have to know they seem not to understand that even equities have a fairly predictable return over long periods say two decades. The simplest but still effective calculation is, I think, called the Gordon equation and is just the dividend yield plus the growth rate of dividends. When the dividend yield on the S&P 500 fell to 1% in 1999 the actuaries and many others were still predicting the magic 8% returns.

Dividend yield + dividend growth rate is exactly how actuaries used to do their calculations back in the day. They would look at the actual dividends received by the investments in the fund's portfolio and impute an "actuarial value" of the fund's assets using long term assumptions of the dividend yield and the growth rate, pretty much ignoring the actual market value of the fund's assets. Back then the dividends were seen as more important, in assessing long term value, than what the traders thought the share price should be on any given day (thus ignoring the effect of any "irrational exuberance" in the stock matket).

Around the mid 90s, I believe, financial economists and the accounting profession started to push actuaries to use market values instead ("actuaries don't know better than the markets what a pension fund's assets are worth!") and they eventually won the debate. So your 1999 example is quite interesting - if the "old fashioned" actuaries had their way, they would have been able to ignore the late 90s bubble and pension funds wouldn't have disclosed all of those false surpluses which then allowed Gordon to conclude that pension funds had too much money, so lets raid them!

Maybe the old fashioned actuaries were right all along.

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  • 142 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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