I’ve been mulling this over. It’s a staggering thought, but much of the UK’s current pension crisis is caused by a simple lexicographical issue; it’s all down to a missing word!
No pension has ever performed badly!
Ever heard someone say “don’t put a penny in a pension, my pension’s performed abysmally?” Of course you have, but they’re wrong, no private pensions have performed badly. You may be about to call me a madman and tell me I’m wrong, but hold fire for a moment. Your private pension hasn’t performed badly even if you think it has.
The reason for my contrary statement is simple – a private pension isn’t a product, it’s a tax wrapper; you put you pre-tax income in a pension, then pick an investment and hope it grows to provide for retirement. It’s exactly the same as ISAs in that they’re not a product they’re a wrapper too, you simply choose to put cash or shares type investments inside them.
Blame the investment, not the pension
The type of investment most people chose to put their pension savings in performed badly… very badly…. hideously badly. This was often the fault of an overly optimistic and commission hungry financial services community. Yet this is a crucial point, it was the investment that was at fault not the pension.
The missing word is ‘endowment’
The type of investment most people put their money in was called a ‘with-profits investment’ and these beasts promised to smooth out the returns in good and bad years. Yet in reality they were non-transparent investments no one could understand, which companies could easily massage the figures of to make them look better (look at Equitable Life).
In the mortgage world these with-profits investments were called ‘endowments’ and when ‘mortgage endowments’ underperformed, people were furious, however they didn’t blame the ‘mortgage’, they rightly blamed the ‘endowment’. These days, say the word endowment and rightly it’s mud in most people’s books (read Endowment Mis-selling Compensation article).
Yet with pensions, they were simply called ‘pensions’ not ‘pension endowments’. It’s quite possible if they had been called ‘pension endowments’ it would’ve protected the reputation of pensions but further nailed the reputation of the underlying investment, the endowment. However that wasn’t the case. Word spread about pensions and now the common perception of a relatively financially illiterate society is ‘pensions are bad’.
Who’s to blame?
No one. There’s no blame. It just happened. And of course it’s not the only pension problem, many final salary company pensions have also been a major problem, but that’s another story.
The tragedy of this is no-one has communicated the problem, explained what a pension is. All the kafuffle over stakeholder pensions didn’t address the basic confusion that ‘a pension is a tax wrapper; it’s the investment that decides the risk’. It is perfectly possible to get the pensions tax break and yet put the money in what is effectively a safe savings account – yet people still think a pension automatically means taking a risk, and a bad one at that. I wish the Government had or would put some budget into promoting that message!
I’m a fan of pensions you see. They’re not the only way to save for retirement – a good way is a mix of property, ISA investments, pension investments and other investments. Yet the public perception on the back of this missing word means a whole generation may have to grow up and eat cold baked beans in retirement. Scaremongering? Possibly, but it’s unlikely the state will pay out any more than the minimum when we retire, and if we don’t do it ourselves because ‘pensions are bad’, then who else will pay for things?