The real problem with pensions

By The Economist online…

PAYING for pensions is like one of those never-ending historical wars; a confusing series of small battles and skirmishes that can obscure the long-term trend. The latest conflict is in Britain where university lecturers are indulging in strike action over changes to their future benefits.

Let us start by making the long-term trends clear.

1. People are living longer and retirement ages have not kept pace. This increases the cost of paying pensions

2 Interest rates and bond yields have fallen. This increases the cost of generating an income from a given pension pot

3. Private sector employers have reacted to this cost by closing their defined benefit (DB) schemes (which link pensions to salaries) and switching to defined contribution (DC) schemes (which simply generate a savings pot)

British universities have reacted in a similar way; they are proposing switching future benefits to a DC basis. To avoid confusion, this means that past benefits will be unaltered; if you are 50, and have worked for 25 years, you will still have 25 years of DB benefits. But since pensions are deferred pay, it does mean that the total benefits of academics are being cut so one can see why they are upset.

But there is still plenty of confusion, as this piece in the Independentillustrates all too well (to cite just one example, in a piece about workplace benefits, it quotes OECD numbers on state-pension replacement rates). There are three big areas where the debate gets muddled.

Read more here: The real problem with pensions…read more

Category: Business and finance, Buttonwood’s notebook

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