Pots, Kettles, Black…

In the past, most of my blogs have been about the sorry state of the Defined Benefit pension scheme and its probable inevitable demise at the hands of poor regulation, economic circumstance and Government interference.

I thought this week then, it was time to look at the bright new future (which for these purposes is not the dreadful NEST) but the Defined Contribution or Money Purchase Scheme. This has for some time been the option of choice for employers who want to be seen to provide a decent workplace pension arrangement but without the downsides of costs and deficits which can grow to the size of the gross domestic product of a small country!!

A DC scheme provides benefits based directly on the contributions going in which are usually invested in the stock market or within various funds provided by an Insurance Company with varying degrees of risk depending upon the underlying asset classes. All risk however is firmly on the member of the scheme since the employer has no liability save in respect of the agreed employer contribution rate. If the member chooses to place the whole bundle into a fund invested solely in third world debt instruments then tough if the resulting pension is only just enough to buy a tankful of petrol every 2 months or so.

Extreme? Perhaps, but recent trends are suggesting that DC pots have fallen by nearly £20 billion in just 2 months.

There are probably several reasons for this but one of the most important I suspect is that most members of DC schemes do not actively manage the funds within which they are invested. Instead, they rely on the ‘default’ fund that will have been selected on their behalf which will usually be a pretty safe low risk kind of affair.
But the downside of such funds is their relative lack of performance. This may be fine if you are in your late 50’s with perhaps a working lifetime of DB savings to fall back on but pretty lousy for a 25 year old who can afford a riskier investment strategy due to the number of years available to put right any poor performance over a couple of years or so.

But financial education in the UK is failing whole generations of people who struggle to understand even the most basic differences between stocks and bonds. With a State Pension system creaking at the seams now, goodness only knows what will happen when these generations come to retire with little to show for a lifetime of working save a NEST egg and a pittance from the State.

We need to raise our game, in realising that if we are going to have to be responsible for our own financial futures, that we have the knowledge, and skills that will enable us to make informed choices. And that starts with the young – assuming that they are able to count beyond 20 by the time they leave school that is. I wish I could be confident of that one!!