By my reckoning, the pensions ‘crisis’ has been with us for at least a decade. Whether that scores it as a terminal or chronic condition is uncertain. But its longevity is testament to its intractability. Pensions generally bore younger people, while terrifying and confusing those of us contemplating retirement. The industry tries hard but mostly fails to educate, fails to speak clearly with simple and consistent messages. That’s partly because saving and investing for retirement can be a complex matter; but there are too many incentives that act to keep things unnecessarily opaque.
Honest attempts to have a straightforward conversation often fall at the first hurdle. A pension adviser begins by asking “how much money will you need in retirement?” I haven’t met many people who have the faintest idea how to answer that question. The follow up question, “how long do you plan to live?”, is such an obvious turn-off that the adviser never asks it. He relies on advice, often expensively delivered, from people who purport to know about these things.
Things just get worse. Once we get into the world of investing, the sheer nonsense talked about the outlook for equities, bonds, property and the like is often breathtaking. But sometimes, occasionally, we get a glimpse of something sensible and simple.
Three professors at the London Business School have been producing studies of global long run investment returns for many years. Professors, Dimson, Marsh and Staunton’s most recent work is really worth listening to.
One message has been repeated time and again: don’t bother trying to forecast markets over the short term. Absolutely right. But the professors do give a steer for likely long run returns - what we can expect from equities and bonds over the next decade and more. The current message is clear: don’t expect too much. We will get next to nothing from bonds, perhaps even negative returns when we factor in inflation. Equities should be better than that but they offer nothing like the returns of the past three or four years.
What does this mean? Save more, much more, is the simple answer. Don’t try and be too precise, just salt away the absolute maximum you can. But it probably won’t be enough to finance 25 years, or more, of comfortable, anxiety free living. Not unless you do what few, if any, of us even want to do, let alone are able: save large proportions of our salary from a very young age. And make good investment choices.
Pension promises used to be made by employers. Some of those promises will not be kept; few new promises are going to be made. Neither the current pot of money nor the returns from investing it will be enough. The message that we are all on our own is loud and clear. Even some public sector pension promises won’t, ultimately, be kept. The arithmetic is as grim as it is relentless.
The “normal” retirement age is going to have to either disappear or rise. To their credit, the authorities here have made a tentative step in this direction. But the numbers are clear: more and bigger steps will be needed.
Pension systems only really work when a relatively small number of people avail of them for a short period of time. They don’t work for very large numbers of people who think can retire in their 60s - or even their 50s - and live comfortably for decades.
Essentially, I think a new behavioural rule-of-thumb should be encouraged. The idea of a ‘normal’ retirement age will have to be, well, retired. Work (but not necessarily full time) for as long as your health holds out. Something like that could be a large part of the solution to the pensions crisis. If that’s too radical, raise the retirement age - by a long way.
