Pensions Inequalities

Jim, I’m going to sidestep your provocative remarks on Japan for a blog or two.

I’ll just add one thing – the most recent Merrill Lynch investor survey shows that investors are most hopeful of an economic recovery in China, while they’ve increased their underweight position in Japan.  So it’s China in my view that shows the greatest scope for investor disappointment, whereas very few own Japan in size.  If you’re a contrarian and like buying markets when they’re out of favour that’s just what you want to hear.

But I have a few thoughts today on pensions that I’d like to throw out for you and Matt to respond to.

The recent press coverage in the UK of the size of the recently-departed Royal Bank of Scotland Chief Executive’s pension got me thinking about the many disparities in the current British system.

Fred Goodwin’s pension may not seem that enormous, when compared to the size of payoffs given in the US to departing executives – Messrs. Rubin (Citigroup), Greenberg (AIG), Welch (GE) and Raines (Fannie Mae), to name a few – who have walked away with hundreds of millions while leaving failing companies behind.

But all the same the size of the pension “pot” that would be required to generate a payment of £693,000 a year – what Goodwin is due to receive – has been estimated by independent pensions expert John Ralfe at around £28 million.

Just compare that in size with the average pension pot earned by a UK worker in a private sector scheme, calculated at £25,000 last year, enough then to generate a pension of – wait for it – £1960 a year, using last year’s annuity rates.  That should just about cover the council tax bill (the property tax in the UK that everyone has to pay).  If anything, with stock markets having crashed and annuity rates falling with long-term interest rates, the calculation would probably produce a lower figure if redone today.

So the amount a worker would need to put aside to generate a Goodwin-sized pot by saving in a defined contribution scheme is, quite frankly, off the scale.  The Scottish Widows site calculated for me that if I were a 25-year-old saving for retirement at 65, I would need to save around £14,000 a month  for my whole working life to get Goodwin’s income in forty years’ time (calculated in today’s money).  I’m 45 and, starting from scratch, I’d need an even bigger monthly contribution – £42,171!  Jim, I need a pay rise…

I don’t know what return assumptions Scottish Widows use – but it’s unlikely that a change of a percentage point here or there would make much difference.  For what it’s worth, Tim Bond of BarCap gave a presentation of the annual Barclays gilt-equity study yesterday, and he argued that the decline in US and UK equity market valuations – measured by the p/e and Tobin’s “q” ratios – suggest that over the next ten years nominal returns from equities in the 10-12% range are quite feasible.  That would be much better than the last decade, during which returns have been negative, but pension savers still face a heavy burden if they wish to ensure anything like an adequate post-retirement income.

Then there’s the increasing inequality between private and public sector pensioners in the UK, with many state workers due to retire on final-salary-linked benefits, while private sector workers have their retirement income dependent on the vagaries of the stock market.  Not that public sector pensions are guaranteed either – as Bloomberg reported yesterday, state retirement liabilities are threatening to bankrupt many cities, states and public bodies in the US, and similar fiscal strains apply to the UK too.

All in all, the whole UK pension system seems a big mess, riven by complexity and inequalities.  After well-publicised excesses like the Goodwin pay-off, who could blame the average UK worker for cursing the whole idea of pension saving, and relying on the welfare state in the case of hard times? While at Index Universe we’re big fans of low-cost savings products like ETFs, which should be the savings vehicle of choice for many within their pension scheme, do we pay enough attention to the overall system in which they are supposed to operate?  Are SIPPS (self-invested pension schemes) really any good, or are they just another product dreamed up by a commission-hungry financial system?  These are increasingly pressing questions for all of us to answer.

  • Luke Handt

    Luke Handt is a seasoned cryptocurrency investor and advisor with over 7 years of experience in the blockchain and digital asset space. His passion for crypto began while studying computer science and economics at Stanford University in the early 2010s.

    Since 2016, Luke has been an active cryptocurrency trader, strategically investing in major coins as well as up-and-coming altcoins. He is knowledgeable about advanced crypto trading strategies, market analysis, and the nuances of blockchain protocols.

    In addition to managing his own crypto portfolio, Luke shares his expertise with others as a crypto writer and analyst for leading finance publications. He enjoys educating retail traders about digital assets and is a sought-after voice at fintech conferences worldwide.

    When he's not glued to price charts or researching promising new projects, Luke enjoys surfing, travel, and fine wine. He currently resides in Newport Beach, California where he continues to follow crypto markets closely and connect with other industry leaders.