Monday, April 30, 2007

Another undesireable effect of HPI

UK workers 'face meagre old age'

Big mortgage multiples and money purchase pension unfortunately equals Old Age Poverty.

Posted by enuii @ 09:27 PM (589 views)
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3 thoughts on “Another undesireable effect of HPI

  • Yet another article saying Money Purchase Pensions are worse than Final Salary Pensions. Yet again I reply: if the employees pay in the same amount, the employer pays in the same amount, and the fund managers of the Money Purchase and the Trustees of the Final Salary have the same investment opportunities available to them, then they should do just as well as each other. With Money Purchase your pension is managed by a major financial institution, but your final salary pension is managed by your own employer which may be small and not finacially strong. And I would prefer a definite contribution from my employer to the promise of a hand out if markets turn down, when they may be least able to make good on their promise.

    Apologies for being somewhat off-topic, but the article is somewhat off-topic and if its there, it needs rebutal.

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  • Notaneconomicsguru says:

    Paolo, as far as I can see your simple investment/yield argument is essentially correct. There should indeed be no difference – all things being equal.

    However, the problem is Paolo that many employers see DC as a way to transfer the financial burden to the employee and they are not therefore contributing a large enough percentage. My employer stopped Defined Benefit (Final Salary) scheme at end of 2005 and started a DC scheme in Jan 2006.

    In my case in order to maintain the pension yield that I would have got under DB, I have to essentially double my own contribution and thus far I have only been able to afford to go halfway to that target. Each year I delay in making up the shortfall makes a significant difference and not only that, my employer only allows me to change my contribution level once a year in April. So although my car loan will soon be paid off, I cannot divert those funds to the pension pot until next April. I know there is AVC, but I am not sure how that works and whether I have to do lump sums or monthly amounts and even whether it will achieve the same yield as my main fund. Its extremely complicated. As far as I can see all of my pay rises for the next few years will be absorbed by increasing my contribution, so I am more than likely going to get poorer for a few more years yet. On top of that, the death benefits my dependents would enjoy under DC are now worse to the extent that I have had to increase my life insurance cover (that administered via the penison) to 5 times my gross salary to maintain parity in the death in service benefits. Although the cost of increasing my life cover via the DC pension scheme is much lower than I could get on the open market, this still takes funds from the retirement pot and helps to make the over all pension fund smaller. I may not be able to reduce this multiple in future, as my children are very young and it will be at least two decades before I can safely feel they are ‘off my hands’. Getting the wife back to work would certainly help.

    I am probably very fortunate because although I don”t feel comfortable with my pension, I am lucky enough to be well paid compared to the average and I expect that position to steadily improve, and also I will complete my mortgage in just over 8 years time. I can at least have some confidence that I can ultimately make up most of the shortfall even if I have too little time left now to achieve the pension I’d ideally like.

    I know there will be a great many who are not so lucky. Overall, I don’t think DC schemes are good for the employee and most people I’m sure either don’t understand this or simply aren’t able to make up the difference or are hoping that the problem will go away.

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