Pensions have become so complex that even the Bank of England’s chief economist, Andy Haldane, is confused by them. “I consider myself moderately financially literate,” Haldane told attendees at the New City Agenda annual dinner in London. “Yet I confess to not being able to make the remotest sense of pensions.”
This is a “desperately poor basis for sound financial planning”. The root of the confusion is the shift away from company defined benefit (DB) schemes – which pay a pension based on criteria such as final salary and years of service – towards defined contribution (DC) schemes over the past 20 years, says Haldane. This has placed investment risk “squarely on the shoulders of the individual, rather than companies”, since what you get with DC pensions depends on how well your investments perform.
His statement inspired a wave of support, with The Daily Telegraph subsequently launching a new campaign to simplify the pensions system. But perhaps the real problem with pensions today lies elsewhere, as MoneyWeek’s editor-in-chief Merryn Somerset Webb writes on MoneyWeek.com.
The pension system today – whether DB or DC – is actually remarkably simple. The problem is that the loose monetary system of the last decade has distorted the market so much that savers are finding returns increasingly hard to come by. Who is to blame for that? Well, we should start by looking at the Bank of England.