A Liberation Into Poverty?

Jenna Towler of Professional Pensions reports, A liberation into poverty?:

Money worries often top the list of people’s biggest concerns. Surveys of older working people often specifically put lack of money in retirement as their biggest fear.

So, what would you do if you were offered the chance to access your pension savings before the age of 55? Would you be interested in that national newspaper advert or the website you discovered that offered: “A cash loan from your pension. Fast payments, with no upfront fees.”

The answer, if you are reading a journal such as this, is probably not.

Trustees and schemes managers are more than likely aware of the danger of such pension liberation or pension loan schemes, but many ordinary pension scheme members may not be.

Raising awareness

The Pensions Regulator, Financial Services Authority and HM Revenue & Customs say there has been a huge increase in people under the age of 55 going down this path, with terrible financial and personal consequences.

One member the regulator has been dealing with has been left suicidal after finding out he will have to repay his pension loan – which he has already spent repaying crippling personal debts. Another couple were “left in a state of shock at what has happened to their pension fund” after agreeing to liberation, it says.

Investigations by the agencies show cash released through pension liberation or loans increased from under £25m at the start of 2010 to nearly £200m at the end of 2011 – driven by opportunistic ‘businesses’ and the desperation of members in the economic downturn.

These liberation deals and pension loans offer members – who are often strapped for cash and targeted with cold calls – the chance to take out a substantial loan from their pension pot, giving them immediate access to tax-free cash.

The rest of the transfer value is then transferred into “highly risky or opaque investment structures” for periods of up to 20 years– with no guarantee the member will ever see it again. The structures are also usually subject to massive fees.

TPR case team leader Victoria Holmes says: “If the offer sounds too good to be true, it probably is. Transferring your pension to one of these questionable investment models could result in you losing your entire pension.”

She says the ex-pat community in Spain is being heavily targeted by these operations, as well as people who have recently been made bankrupt.

More worrisome, Reuters reports that less than half of Britons are saving into the pension pot (h/t, Diane):

Less than half of employees in Britain are now saving into a workplace pension scheme, the lowest proportion since records began in 1997 driven by a fall in membership of final salary schemes, official figures show.

The Office for National Statistics (ONS) said 48 percent of employees were saving into a scheme in 2011, the first time the figure has fallen below 50 percent.

There was a sharp difference between the public sector, where 83 percent of workers were enrolled in their employer's scheme, compared with 33 percent in the private sector.

"We've passed an important and worrying landmark," said Darren Philp, Policy Director at the National Association of Pension Funds (NAPF).

"Sadly, the fall in people saving into a final salary scheme has not been fully matched by interest in other types of pension."

Workers with final salary schemes, in which payouts are pre-determined using a formula based on salary and duration of employment, declined to 30 percent in 2011 from 46 percent in 1997. This contrasts with 79 percent of public sector workers.

Only 9 percent of private sector employers were contributing to new final salary schemes, down from 34 percent in 1997.

In January, oil company Shell become the last FTSE 100 company to close its final salary scheme to new members.

"Pension participation has been getting worse for some time, but we should now be approaching the nadir," John Ball, head of UK Pensions at consultant Towers Watson, said.

Auto-enrolment, under which employers will sign staff up to their corporate pension schemes unless they ask to be excluded, is due to be phased in this year.

Somewhat confusing then that The UK Pensions Regulator (TPR) is forecasting an increase in the number of multi-employer pension funds as employers opt for schemes they perceive to be "large, durable, low-cost" and strongly governed:

Automatic enrolment, which the Department for Work and Pensions believes will increase pensions contributions annually by £9bn (€10.6bn) from 2020, will begin later this year for 400 schemes sponsored by large employers with collective assets under management of £22.9bn.

But in a report published earlier this week, the regulator suggested the beneficiaries would likely be new entrants to a multi-employer market currently dominated by 30 industry-wide and 29 non-associated defined contribution pension funds with collective assets under management of £4.3bn.

Existing industry-wide schemes include the £33bn Universities Superannuation Scheme and £17bn Railpen railway industry scheme.

However, TPR's report distinguished between two further categories: Financial Services Authority (FSA)-regulated schemes run by insurers and "commercial arrangements that are not subject to the same prudential standards or prudential regulation as insurance providers".

It warned of low market barriers to entry to the latter, "given the potential growth in assets at risk" and significant variation in governance structures.

Moreover, despite potentially offering small and medium-sized employers economies of scale comparable with those in schemes run by large employers, few existing multi-employer schemes have so far achieved sufficient scale to do so.

"There is a possibility of market saturation and, in the event that economies of scale are not achieved, there may be an increase in consolidation activity," the report said, raising regulatory concerns over the schemes' durability.

But Logan Anderson, head of customer relations at the multi-employer Pensions Trust, defended the model.

"Setting up your own trustee is expensive and out of the reach of most employers," he said.

"Selecting your own administrator and investment manager is also time consuming and requires expertise. If you opt for a multi-employer scheme with a trustee acting on behalf of the members of all the employers, it saves employers governance time and money."

A survey published last month by the Association of Consulting Actuaries suggested an increase in the number of multi-employer products in the UK could cut into the market for the National Employment Savings Trust (NEST), with a significant majority of those polled favouring new or existing schemes over the default scheme.

Among entrants into the UK market created specifically to compete with NEST is ATP-backed multi-employer NOW Pensions.

The report published earlier this week appeared to acknowledge the finding from the introduction of auto-enrolment in other markets that most pension-holders are neither engaged nor financially literate.

Jeremy Cooper, who chaired the Australian Super System Review that led to auto-enrolment in that market, has advised would-be emulators to factor in pension-holder lethargy as a defining factor.

In the absence of engagement and capability, according to TPR's report, it would be up to the regulator to make certain that providers properly managed downside risks and generated sufficient scale to ensure efficiency and value for money.

In Canada, the Financial Post reports, Pension Worries On the Rise for Both Defined Benefit and Defined Contribution Plan Sponsors, Towers Watson Survey Finds:

A new survey of 115 Canadian Defined Benefit (DB) and Defined Contribution (DC) pension / Capital Accumulation (CAP) plan sponsors from global professional services firm Towers Watson suggests that a growing sense of pessimism is settling over the Canadian pension landscape

The study reveals that 65% of DB respondents (compared to just 56% in 2011) believe that Canada is experiencing a pension crisis that will be long-lasting and likely to worsen in the next 12 months. DB and DC/CAP survey respondents alike are also concerned about ensuring adequate retirement income for their plan members when a pension plan re-design is underway, with more than 70% of DC/CAP survey respondents anticipating that CAP-related litigation will increase in the coming years, citing inadequate retiree income as a key factor.

In response to the on-going funding crisis, more than half (54%) of DB respondents indicate they are currently planning or considering investment strategy changes, typically to de-risk their portfolios. In contrast to prior years when plan sponsors were more focused on seeking higher returns, 53% of 2012 respondents (compared to only 36% in last year’s survey) appear willing to accept lower returns in favour of reduced risk.

David Service, Director of Towers Watson Investment Services, confirms the shift in attitude. He notes that “until a few years ago, plan sponsors remained caught in the mindset that de-risking meant giving up more return than they felt was worthwhile.” He adds, “many plan sponsors did not take advantage of the de-risking opportunity that existed in 2006 and 2007 when their DB plans were close to fully funded. After another volatile year of market performance and declining funded status, sponsors now seem more inclined to focus on de-risking their DB plan – even if at the price of lower returns.”

As the funded status of DB plans continues to decline, pension funding reform is increasingly important to survey participants. When asked to identify their main concerns in regard to pension legislation, funding issues top the list, with a majority of respondents citing permanent extension of amortization periods (59%) and extensions to temporary funding relief (57%) as being within their top three priorities, followed by calls for greater harmonization of pension legislation across Canada (49%).

Plan design changes appear to be a somewhat less viable de-risking tactic for employers, with only 2% of current private sector DB plan sponsors expecting to switch to a DC/CAP arrangement for new hires in the next 12 months. A further 8% of respondents are considering this move in the future. As Ian Markham, Canadian Retirement Innovation Leader at Towers Watson observes, “while the trend to move from DB to DC/CAP is continuing, many of these plan changes, especially in the private sector, have already occurred. Just 36% of private sector survey participants are still keeping their DB plans open to current members and future hires – a far cry from the levels we saw in the past.”

Regardless of plan type or sector, the majority of survey participants (72%) agree that their employees are more concerned about pensions now than they were 24 months ago. Mirroring this anxiety, the pension risk survey confirms that many plan sponsors feel the same.

About the Study

These findings are part of Towers Watson’s 2012 Pension Risk Survey of Canadian pension plan sponsors. With insight from senior executives at 115 organizations, the Pension Risk Survey is the most current and comprehensive study of DB pension plan management available. This year’s survey also included questions on DC/CAPs. The data collected from this survey provides organizations and governments with actionable insights on the current and future state of pension plans in Canada.

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers solutions in the areas of employee benefits, talent management, rewards, and risk and capital management. Towers Watson has 14,000 associates around the world and is located on the web at towerswatson.com.

Employees should be concerned about their pensions and retirement. Just like in Britain, the Globe and mail reports that more than half of Canadians did not make a RRSP contribution this year and the main reason was, not surprisingly, a lack of funds:

The RRSP participation rate of 38 per cent was essentially unchanged from the previous two years, despite the current market volatility.

Among those who did not make a contribution, 61 per cent cited a lack of funds as the reason, 14 per cent said they already had enough money for their retirement, 9 per cent pointed to a lack of confidence in the economy and 4 per cent did not think it was important to make a contribution.

Canadian households are struggling with record debt loads, leaving them with little money to invest in things like retirement.

“Many Canadians are financially stretched and saving for retirement often gets pushed down on the list of financial priorities,” said Tina Di Vito, the head of BMO’s Retirement Institute.

Still, she urged people to make regular contributions to their RRSPs, regardless of the amount. “You’ll be surprised how quickly your nest egg will grow over time,” she added.

Mutual funds were the investment of choice this RRSP season with 59 per cent of Canadians investing in them. A quarter, 25 per cent, invested in GICs, 22 per cent invested in equities, 12 per cent in bonds and 6 per cent in ETFs.

Welcome to the bleak future of pension poverty where most people are unable to save for retirement and those that can are getting hosed on fees, receiving mediocre gains on some crappy mutual fund investment. A liberation into poverty? That is a theme you'll be hearing a lot about over the next decade. When it comes to the pension crisis, brace yourself, the worst is yet to come.

Below, Federal Reserve Chairman Ben S. Bernanke speaks about monetary policy and the U.S. economy. Bernanke, testifying before the House Financial Services Committee in Washington, affirmed that interest rates are likely to stay low at least through late 2014 without any indication that further monetary easing is under consideration.

My take: the U.S. economy is recovering and will surprise everyone to the upside. This may force the Fed into raising rates sooner than 2014, a welcome relief for savers but a disaster for those struggling with debt.