Busting pension fund myths - Stop the scare-mongering & pay up!

This opinion piece was published today in "Inside Housing".

"There is a lot of old nonsense being put out about defined benefit pension schemes and the Social Housing Pension (SHP) fund in particular.

Let us kill some pension myths.

Yes, many pension schemes have a deficit, but these ‘deficits’ are calculated in the main by using the return of government bonds called ‘gilts’. Due to recession these gilts are at a near 200-year low. Therefore, these so-called ‘deficits’ are pretty meaningless.

You do not get rid of any deficit by closing your pension scheme or raising contributions so high that members cannot afford to remain.

In fact, you could make it worse.

A closed pension scheme will not have new money coming in and will soon find that it will not be able to invest in long-term equity investments that produce superior returns. So employers could end up paying even more to close this gap.

It is the cost of future membership that is key. Ignore the scare stories. The cost of a modern defined benefit pension is affordable and sustainable. Why is it that they are opening brand new defined benefit pensions in South Korea, which has among the highest life expectancy in the world?

Unless an employer wants its workers to retire and die in poverty then they have to pay up. There is no alternative. At my first ever Trades Union Congress  pension course we were told there is a old-fashioned but valid rule of thumb that, if you want to retire at half pay and with a lump sum, you need to save 20% of your income into a pension fund for 40 years.

Whenever I tell people this they are shocked. But this is the reality. Pensions are expensive. Employers need to be putting in at least 14% of the wage bill into pensions.

Poverty in all its ugly forms is obscene, but in front-line housing management I find poverty in older people to be perhaps the most depressing, since there is little they can do about it at that stage.

At a time that many housing associations are making massive record surpluses, giving above inflation pay rises to executives and after years of pay cuts (most staff are at least 20% worse off in real terms because they received no or below inflation pay rises) they meddle with their staff pension schemes at their peril.

Unison has arranged for early talks with the SHPS and is more than willing to meet up with any employer to discuss their concerns. But enough is enough.

John Gray is housing association branch secretary at Unison 

(I'm actually the Secretary of the Greater London Housing Association Branch of UNISON but never mind)

Pension Myths

This post has nothing to do with moanie Ultra left pension miserablists. Instead I was checking out what the Pension Regulator has on its website about auto enrolling and came across this:-
　

"Pension myths
Automatic enrolment into a workplace pension will make it easier for people to start saving for their retirement. All employers will be required to enrol their eligible workers into a workplace pension scheme if they are not already in one.

We know there is a lot of confusion surrounding pensions and saving. These pension myths can make people feel confused about what they need to do to fund their retirement. We’ve explained some common pension myths below.

It’s not worth saving into a pension.
FALSE! Most people can expect to get back more in retirement than they put in their pension. Most people saving in a workplace pension also benefit from contributions from their employer and the government in the form of tax relief*.

My house will be my pension pot.
BE CAREFUL! Property doesn't allow you to spread your money across a range of different investments like a pension does, and doesn't have the same tax advantages.

My partner will be my pension pot / I’ll inherit money from my parents.
BE CAREFUL! Inheritances can be uncertain, so it is important to make individual pension provision. Increasing numbers of people are surviving into their 90s and longer, so your parents may still be alive when you retire. You might also find yourself in a difficult situation in the case of divorce. Inheritances can be uncertain, so it is important to make individual pension provision. Increasing numbers of people are surviving into their 90s and longer, so your parents may still be alive when you retire. You might also find yourself in a difficult situation in the case of divorce.

I can only pay in a small amount so it isn't worth it.
FALSE! Your contribution to your workplace pension will be a percentage of your salary. You’re also likely to benefit from a contribution from your employer and tax relief* from the government too. Even if you end up with a small overall pension pot, you might be able to take your pension as a cash lump sum as long as your pension savings are no more than a certain amount (currently £18,000).

I’ll save when I get old / I'm too old to start saving.
FALSE! It is better to start early – usually, the younger you start to save, the bigger your pension will be, as your money has more time to grow. And unless your retirement is a few months away, there’s still time for you to build up some money.

If my company shuts down I lose everything.
FALSE! There was a problem with people losing their pensions when their company shut down in the past. But this is no longer the case. With most schemes your pension is looked after by the pension provider, so if your employer goes bust you won’t lose your pension pot.

If your pension scheme is run by your employer and they go bust, your pension pot might be smaller than it would have been. This is because, if your employer has been paying the pension scheme administration costs, they will no longer be doing so. These costs would now come from the scheme member’s pots.

My grandma only lived to be 70 so surely I won’t live much longer, why bother saving?
BE CAREFUL! People tend to underestimate how long they’re likely to live and life expectancy across the generations is changing fast. On average, you’re likely to spend 20 years in retirement, so you will need to plan for that.

The State Pension will be enough.
BE CAREFUL! The State Pension is a foundation, but for many people, relying on this alone could mean a fall in income at retirement. Saving into a workplace pension means people will have more money to help continue enjoying the things they like when they retire.

(*Tax relief means some of your money that would have gone to the government as income tax, goes into your workplace pension instead.)"

This is good stuff (not sure about the rest of the communcation material) but I think it might be a bit misleading about what would happen to your DB pension if your employer goes bust and the pension protection fund (PPF) takes over. Also there is still an ongoing debate on whether the low paid will benefit from auto-enrolling.

UNISON has a new guide to auto enrolling here