This article is about a group pension plan and a legally mandated way of calculating liabilities that isn't working in a particular case. It's a simple law change. It's not some crazy bureaucratic maze or malevolent government - it's actually a private pension administrator, and it is based on a strict way of calculating future liabilities for group plans being applied to individual members when they leave the group in a fairly dumb way.
The law in question came around for a good reason:
Section 75 came about as a result of a sweeping review of pension regulation in the wake of the Robert Maxwell scandal in the 1990s.
Following the media tycoon's death it emerged he had plundered millions from the Mirror Group pension scheme.
The Pensions Act 1995 introduced a series of reforms including a "minimum funding requirement" for pension funds. It also introduced something called "Section 75 pension debt", which meant if an employer "departed" a scheme, they could still be pursued for any shortfall.
It is just a poor match with this type of shared pension scheme (not British, so forgive problems matching this to other types of defined benefits plans I'm more familiar with). This seems to be a clear case to revise this Section 75 for these types of group plans/schemes.
There is no actual fiscal problem here, just a legal one. The biggest obstacle to amending the existing law, based on the article, is an inability to enact legislation because of distraction by Brexit.
> Section 75 came about as a result of a sweeping review of pension regulation in the wake of the Robert Maxwell scandal in the 1990s.
> It's not some crazy bureaucratic maze or malevolent government
hmm
Policy designed for big firms, and in reaction to a few bad billionaire's or hundred millionaire's actions, which then destroys or squeezing out the small companies is one of the most common complaints against regulations like this. It's how you end up with only mega-corps and no competition or upward mobility for the middle class, and everyone wondering why there's a wealth gap when your only option is to work at bigco.
This stuff always starts out with good intentions like "punishing the rich". And then some nobody middle-class plumber in Scotland is the one being forced to sell his house while Maxwell's family trust is still worth millions.
Meanwhile law changes are never a 'simple fix', these sorts of things stick around for decades.
Edit: note Robert Maxwell was the billionaire(?) father of Ghislaine Maxwell who was Epstein's second-in-command in the sex ring
Yes, financial regulation is hard. People are always trying to game it. Unfortunately there are really good reasons to avoid ex post facto laws. So you have the cat and mouse game where people find a loophole, exploit it, and it gets fixed. It gives the appearance of people "getting away with it". Overall the system works, and - almost by definition - you just hear about the exceptions. The solution isn't to give up.
I always feel like I'm missing something fundamental when I read these debates. unless the only alternative is "no retirement plan", why would you ever want a pension? wouldn't you be much better off having your employer dump the funds in your 401k?
Maybe. Pensions, like social security, are better understood as longevity insurance.
Pensions are complicated by lump sum payouts, survivor benefits for spouses, and a bunch of other things. But you collect them for life. If you live a short time, the 401k might be a better outcome and the beneficiaries of your will can inherit the wealth (or your spouse, if you outlive them, vs reduce survivor benefits). If you live a long time, it's overwhelmingly likely you have not saved up enough for it, and short of letting the elderly eat cat food and die on the street, the costs of that outcome are socialized to the rest of us.
A defined-benefit pension is a bet that your employer will remain both solvent and completely honest for the rest of your life. This is an enormous risk compared to just having your own personal retirement account.
If you as an individual still want proper longevity insurance and the predictability of a defined-benefit-plan without this risk, just use the personal retirement savings to buy an annuity.
In the UK at least, defined benefit pensions are almost always funded (unless you work for the government) meaning there is a pot of money big enough to meet actuarial estimates of the present value of the obligation.
No it isn't. PBGC, and it's various analogs. Yes, you get a haircut, but pensions are generally insured for that. 401 plans are administered by companies and are funds of funds, at any rate, and you're still just reliant on 1) a different set of companies 2) market values to line up with your liquidity needs.
Also, how are you just ignoring have to rely on the honesty/fiscal stability of the company backing your hypothetical annuity in the space of two paragraphs?
Pensions are disappearing anyway so I feel like we're arguing the nutritional value of eating yangtze river dolphins, but that is because 401 plans are cheaper for employers and there is a lucrative fee structure in administering them, not because of an intrinsic flaw of pensions.
There is no lucrative fee structure if the employer goes with a Vanguard and prob Schwann/Fidelity 401k. In fact, it’s far cheaper than the investment fees charged by pension fund managers and has greater performance. Absolutely no reason to pay all those actuaries and investors when an index funds with zero expenses do a better job over decades long timeframes.
And PBGC is woefully underfunded. It’s already needing a bailout with just a few failing multi employer funds. It’s mostly for show I presume, since this isn’t even the first time it’s getting bailed out.
Bittersweet, isn't it? Most of us don't want to see anybody else suffer, but it also sucks to see a previous generation get a better deal than the next one.
I guess the risk pooling is the part that I didn't fully appreciate. still AFAIK, most pensions are not inflation adjusted, so if you live for a long time, you risk "running out of money" anyway.
In the UK these pension schemes, known as 'defined benefit', legally have to be inflation adjusted.
There is still loads of risk to the employer as they are on the hook for any future shortfall. Shortfalls are common as there is huge correlation of risk, such as actuaries systematically under estimating gains in life expectancy. That's why most such schemes are in deficit.
One of the problems that caused the decline of DB pensions is the accounting industry decided on such a unlikely scenario that inflated the cost to the employer immensely.
One pension trustee commented that the scenario came true you'd be more concerned about your stockpile of tined goods and shotgun shells than a pension.
So who pays the accountants and who now has a nice excuse to shut down its scheme :-)
401k is specific to the US. It refers to a section of US tax code.
This article is about a British company. 401ks do not exist in the UK, and you get a lot of benefits and tax allowances from pensions that you get out of no other investment vehicle over here.
Theoretically there's a better expected value with the 401K, but that's not what almost anyone wants. People want a moderate upward trend in value with no chance of going under.
An interesting place to see this is in groups of US military members talking about the pension plan they just had the option to switch. The 401k version has a higher expected value than the pension version, yet many people who are themselves sticking things out to pension age prefer the pension age. Though it may be that people staying in the military trend risk averse.
> Though it may be that people staying in the military trend risk averse.
I'm sure this is more nuanced, and risk aversion may depend on the type of risk (ex. financial risk vs physical risk). But it still sounds really strange to me to characterize individuals who volunteered to join an organization that may (and probably will) put then in very dangerous situations as "risk averse".
Companies used to prefer having a pension for their retirement program because any excess returns on the pension fund would become profit. Many of the ill fated leveraged buyouts in the 1980s/1990s were PE firms raiding these "excessively" funded pensions. This, unfortunately, was around the time people generally stopped smoking and having heart attacks right after they stopped working. Also, people that have pensions live longer. This has led to underfunded legacy pensions.
As a general rule, the returns are better in 401k, yes. This assumes that it’s invested in something with good growth potential (U.S. stock index funds, etc) and not money market funds or something highly speculative, of course.
That's a great short term solution, but then what do you do with society's old people? We still haven't yet seen what's about to happen with the destruction of pensions in the US.
It will take two or three generations before they make (enough) money to pay for the "high pensions" of old Germans... And even we get a ton of new people. The old generations are still more.. M
Either? Dozen children is hyperbole, but 3 to 5 children, as well as an extended family for support. But it takes a lot of sacrifice to achieve, which no younger person I know of is interested in.
One can also plan to off themselves once they're unable to support themselves. I say plan, because I'm sure saying it is easy, but when it comes time to do it, it'll be much more difficult.
3 - 5 kids is not a solution to the problem, it's a pyramid scheme of ever expanding population that stops as soon as population growth stops, an I don't know if you noticed, but we've hit 8 billion, so it's no longer an option.
Also, what is this sacrifice you are talking about? Just another one "kids these days!"
I’m also in the younger generation, but we are choosing to live in more expensive cities and being further educated and prioritizing high incomes as opposed to starting to have kids at a younger age. There is no value judgment here about the choices, but I would consider it a sacrifice to give up partying in one’s 20s to raise a family capable and willing to support you. Of course, it may also not be a good choice since earning power of those who have children in younger 20s might be greatly reduced.
One of the big reasons cities are more expensive is that a lot of Americans use their house as a savings plan, causing society to prioritize things that keep property values stable or increasing.
We can't simultaneously have ever-rising property values and affordable housing. Without affordable housing, many people are choosing to defer having kids (including, as you say, by pursuing more education to get higher-paying jobs), which reduces the worker/retiree ratio. That in turn makes it more expensive to be old, requiring more yet more savings.
To me a lot of this problem like a pathological response to the US's lack of good long-term pension coverage. Our every-man-for-himself, devil-take-the-hindmost approach causes a lot of scarcity thinking, which makes it hard to adopt sensible systemic solutions.
Maybe one reason. But I think the biggest reason is that technology and globalization have caused more and more jobs to move to big cities, and in particular to cities on the east and west coast (in the US), which results in housing scarcity due to demand exceeding supply. This is the case in the city where I live. Due to a booming tech industry, the influx of people moving to the city exceeds the amount of housing that can be built (along with other infrastructure, like roads).
And it isn't a problem in all cities either. From what I hear costs are going down in many industrial cities as residents leave to seek more abundent jobs elsewhere.
Sure, but the question is: why hasn't housing supply kept up? I'd say it's because there are strong political incentives to avoid doing anything that might cause prices to go down. So we end up with very restrictive zoning and a ton of inertia. This is very obvious in all the Silicon Valley suburbs, where everybody loves job growth but housing growth barely happens.
As to the latter point, I'd be interested to see your data. The Case-Shiller metro indexes are all up over the last 5 years. [1] The metro area with the least inflation is New York, which doesn't match.
Cities in the US are more expensive due to housing policy, as you mention, but also because cities as the engine of American business and growth are subsidizing the rest of the nation. A significant chunk of every city dweller's money ends up in taxes that are transferred to far less efficient and less wealthy non city areas.
Take away the wealth transfer from cities to non urban areas and the only people living in rural areas will be the wealthiest and end of the world preppers.
People are prioritizing expensive cities because that's how you get higher income. You get higher income by being educated. And you need higher income to raise kids because raising kids is incredibly expensive especially if you don't have a higher income job's provided healthcare.
This has absolutely nothing to do with partying. And if you're choosing to have kids for the purpose of having a support network when you're older, that's kind of a fucked up rationalization for it. At that point, society has failed you somewhere along the way. Even ancient societies had other methods of supporting the elderly in the community or through some form of welfare.
Who would take care of someone else like they would their own parents? And you can do things for multiple purposes. Children and family provide a valuable support network to get you through life, but it can also be because you want to raise kids to be good stewards of society and all that Jazz.
Hypothetically.. if one were an unattractive misanthrope with low sperm count.. what procreation strategy would you recommend to maximise my comfort in old age? Off the top of my head, I'm thinking I should adopt at least 7 Vietnamese orphans.. I won't be able to provide them more than a community college education, and I will undoubtedly imbue them with emotional problems as well.. so 7 sounds like a safe number to perhaps end up with 1 or 2 more resilient ones that will be able to manage my care...
It’s impossible for 99% of people to save enough money to buy the kind of care your children would provide you. Not even considering how well someone would tend to wiping your butt, but the emotional benefits of being surrounded by family are probably not able to be replicated.
1. Had the government or community take care of the elderly.
2. Criminalize poverty and force them to work or be imprisoned.
3. Let them die.
Even the Roman Empire had pension for people that served in the military. You can take your pick as to which system you'd prefer, but pensions have quite literally existed for thousands of years in some form.
And what happens when the economy goes bust when you're running down your investment in your retirement years? Or if you can't invest or save due to the many rent-seeking behaviors we see nowadays? Do we just let them die because they had the misfortune of bad timing or being take advantage of?
For 5: Even in those non-American societies they have recognized that leaning 100% on your family is generally a bad thing for working professionals. Or at least those companies are not willing to pay for their employees to take care of their elderly or disabled family members.
A pension is a personal savings. Back when pensions were actually offered by companies, you'd often choose your company by not just your paycheck, but by the retirement plan they offer. You would literally turn down jobs that might pay better but offer no pension. If that's not saving your money, then what is?
Because pensions aren’t portable. They lock you into a particular organization. 401k, stocks, savings accounts, etc, do not. Pensions (in the private sector, public ones are another ball of wax entirely) do not protect you against inflation. You have no control over what they’re invested in (which in some cases, is the pension manager’s retirement). There are much better options available.
I think the USA going to soon learn the ugly truth about your item 4: that massive swaths of the population have not saved adequately. I mean, I make pretty ok money and save the max every year, but there is no way on earth my pathetic 401k is going to last even 10 years after I stop working. Now consider the average American who has fuck-all in their retirement account. Despite their disadvantages, pensions at least let people who didn’t save retire in (perhaps difficult) dignity. When my account says $1 and I have no other living breadwinners in my family, my only remaining retirement option is to spend that last dollar on a bullet.
I'm pretty sure that and our 2-3x inflation annual increases in our already-insanely-high healthcare spending are going to lead to civil unrest in the next 30-40 years. On the shorter side for the healthcare spending (no way we can keep up the current rate of increases even 20 more years without an actual, honest-to-god revolt) and somewhat later for the failing retirement system (such as it is). I'm a lot more worried about those than climate change, which we are for-sure not going to address anyway if those aren't dealt with.
If long term's just another 20 years, at the outside, that'll be enough. Short of lots more people getting sick and dying or living with chronic illness, untreated (so, not generating medical bills, and see also: civil unrest), I don't see what's going to slow it down in that time frame. I think effective legislation, which could theoretically do it, isn't likely for at least another 10 years or so if we're lucky. If it takes longer than that, well, I just hope the rioters blame the correct things/people for their problems. And hopefully the retirement crisis hasn't reached first-page-story status by that time yet, either, or it'll really be a mess. I suspect that one will hold off a bit longer, though. Pretty sure mid- to late-Gen-X folks will be the ones who make that one pick up the pace, especially if inheritance amounts have been trending significantly down for those same folks due to EOL healthcare bills for their parents.
So yeah, I agree it won't maintain a steady growth rate in the long term. I just don't think it'll stop before it causes some pretty big problems.
[EDIT] incidentally I'm not aware of high-profile projections of this stuff that have HC costs doing anything but continuing up way faster than inflation through at least 2030, provided the regulatory environment remains fairly similar. Even Warren's plan isn't projected to do much about that—need price controls in one form or another (like AFAIK every other OECD state uses) and a fix for our doctor supply problem, at least, probably, to do much about the rising costs.
Look at healthcare as a percentage of gdp over the last 50 years. Costs have been rising at a much slower rate over the last 10 years, and have dropped over the last 3. There's no reason to think the rate will stay constant over 20 years.
If anything naive extrapolating shows falling costs as a percentage of GDP, and sustainable rising real costs.
The only way we get crazy numbers is extrapolating using the average from 2000-2020, but there's no reason to do that.
I understand that, but if you are going to criticise him (?), you should suggest whatever it is you deem appropriate. Then it's going to be constructive.
If you are not going to make the effort, why should he take your criticism seriously?
There's nothing appropriate to suggest. Predicting the rate at which health insurance costs are going to rise over the next 20 years is impossible.
I can however tell you that naive extrapolation is definitely the wrong way to do it.
Look at the 2nd derivative it's all over the place, so assuming that it will magically stay constant is wrong. The 2nd derivative of healthcare as a percentage of GDP is actually negative over the last few years.
Not arguing about the US being about to learn this the hard way. But when we get to that point, neither a pension nor a 401k will be able to save anyone.
> This stuff always starts out with good intentions like "punishing the rich"
No. This stuff starts out with good intentions like - "not leaving people who have retired, suddenly with no pension and having to live in poverty or rely on the state, rather than on the employer pension that they had promised would be there for them". It''s not there to punish the rich.
In this case, however, the formula being used to determine whether a pension scheme is in trouble seems the problem and it needs to be reviewed urgently.
I'm a big fan of contextual laws with expiring timelines. One size fits all laws that are used like hammers for every industry and every company size are very destructive (the positive data supporting things like minimum wage laws are almost always limited to a few industries like mega-chain fast food restaurants, while there is plenty of evidence of harm for young and temporary workers). The conditions of marketplaces also constantly change where expiring/renewal should be a function of the policy.
I don't know, we don't have these sunset laws, they seem like an inefficient, because they lead to too much change without change in the environment. And become big rallying points to either keep them afloat or finally get rid of them. This of course could drive compromise, or just lead to a lot more tit-for-tat destruction. (You let expire that, now we'll let this one expire!)
I'd argue that it is a crazy bureaucratic maze, but we agree on the specifics of the change.
Shared liability was a fairly simple way for small employers to keep their workers taken care of even if specific businesses failed. Its existence, along with the existence of unincorporated business owners, was missed or ignored when Section 75 was put into place. And the oversight wasn't corrected in 2005 when the rules were revised.
More damningly, the rules were revised seemingly without consideration for the difficulty of back-filling forty years of contributions to an entirely new threshold. Section 75 came about because of outright theft, and was revised in response to employers promising pensions out of line with what they were actually investing, but it wasn't targeted towards those cases. Instead, it created a liability for employers who'd been adequately funding pension schemes for decades, based on a calculation they'd never planned to support. And if the pension funds don't play along, they incur fines which could actually make healthy funds insolvent!
So a change aimed at addressing theft from pensions has created a situation where either employers are bankrupted for offering pensions to employees, or healthy, honest pension funds become unable to pay full benefits. I won't allege malice, but it's fairly spectacular incompetence to write a law supporting pensions which actually endangers people's pensions.
I agree! Closing loopholes to prevent theft was good. Implementation was lacking. They should fix this and stop good people like the subject of this article from suffering.
> . It's not some crazy bureaucratic maze or malevolent government
It is. Because as one 71-year old individual, former plumber, one day the regulators come knocking on your door telling you you're 1.2m short. In this kind of situation, an individual with no political or instiutional connections is (perceivedly) powerless and overwhelmed:
- I can't pay my responsibilities.
- I can't change the law.
You can't really use that term to describe a situation that is well understood and is widely recognized to be a problem (not exactly a Kafka staple). It's simply awful law, which is bad enough.
You'd expect lawmakers to just fix it, although they tend to be preoccupied with other things in the UK right now.
- Every 4 weeks, men in grey, face-concealing masks sedate me and graft what is possibly the upper half of a deformed baby onto my back. They cry constantly. I am not allowed to have mirrors. It has been 18 months, and I can barely lift the weight of them any more.
It seems like the governments officials overseeing the scheme don't see anything wrong with Section 75:
> The Department for Work and Pensions spokesman said the rules were in place to ensure schemes were adequately funded.
> He said: "We have a duty to protect members in their retirement, ensure schemes are properly funded and work with those employers who remain in a multi-employer scheme.
It seems like a giant clusterf*ck was introduced in 2005.
1. It wasn't properly communicated to anyone
2. There was a loophole that allowed a company to exit the pension for £1
3. The remaining businesses to cover the share of the deficit for everyone who had exited the scheme.
4. Most of these businesses didn't learn of the deficit until 2016, a decade after the the new math went into effect.
If the pension didn't do their duty to warn businesses of the deficit in 2005, it should be on their heads to fund the deficit, and they should not be allowed to pull from the pension fund, they have to pull from their own money.
Had these businesses known 10 years ago, they could have been paying all along an increased pension rate for their employees.
>If the pension didn't do their duty to warn businesses of the deficit in 2005, it should be on their heads to fund the deficit
The irony is the Pension claimed they couldn't notice the employers at the time (which would have given the opportunity to buy out for 1 Euro) because they would have had to research the contact info for thousands of employers...yet the Pension seems to have no problem doing the research now and noticing these employers of their Million+ Euro liabilities.
The real irony is that the UK government has just killed the pensions of an entire generation of older women by raising the retirement age without notice.
So going after small businesses to enforce an onerous rule change is entirely hypocritical.
> and they should not be allowed to pull from the pension fund, they have to pull from their own money.
What's the pension's own money here? Everything they manage should nominally be part of the fund owed to their retirees. Where do you propose they actually draw money from?
Their management fees. They aren't running a charity, they collect from the $1000 pension fund a 1-2% management fee (if similar to US 401k administrators).
And if they don't have enough cash to add back into the fund, they need to take on debt to fund THEIR shortfall.
The businesses were not told to increase their funding obligation from the start, so they should be off the hook.
You are right, in a way. If they can't service the debts themselves, and they can't take out a loan to cover it, they have to go bankrupt.
In reality, the pension provider probably should declare bankrupcy. In theory, FSCS / PPF should kick in and most people should still get some kind of pension out of it - albeit a lot less than they expected.
However... I don't know much about the bankrupcy procedure. Would administrators have to be called in? Would they then chase these customers anyway?
I don't see any way out of this cock-up of a law without the law itself being changed. It's bonkers.
[UPDATE]
Actually, it turns out that's almost exactly what they've done
... and they aren't willing to do anything about it, for fear that people might use any fallout mitigation to walk away from being responsible employers.
Look at the PBGC in the US and the rampant abuse (socialization of the cost of "mild" white collar crime - shortfalls that hit well after the fact due to purposefully but mildly underestimating future liability and overestimating future returns) for the other side to the outcome described in the article. Financial regulations are hard. It is like infosec, where you have well funded adversaries who are sometimes criminals.
The description makes it sound like they're not /actually/ underfunded just underfunded assuming they have to pay for someone else to take over fund and wrap up their fund right?
The pension are presumably insured to cover their negligence and liabilities...including failure to properly notice employers/members of the fund in breach of their duty to do so, which resulted in damages. Otherwise it comes directly from the pension (which isn't just a fund made up of employer contributions, it is a business entity that takes fees from the fund itself)
Sort of off-topic but for context, the “Department of Work and Pensions” (DWP, previously the “Department of Social Security” but renamed for ideological reasons) has been repeatedly caught making blatant lies in publicly released material in recent years, and are widely despised by anti-poverty and disability-rights activists. So do not take their statements at face value.
> The Plumbing and Mechanical Services (UK) Industry Pension Scheme was set up in 1975 with the aim of providing pension benefits for all employees of firms engaged in the Industry in the United Kingdom. The Scheme offered deferred benefits based on career average earnings.
The law in question came around for a good reason:
Section 75 came about as a result of a sweeping review of pension regulation in the wake of the Robert Maxwell scandal in the 1990s.
Following the media tycoon's death it emerged he had plundered millions from the Mirror Group pension scheme.
The Pensions Act 1995 introduced a series of reforms including a "minimum funding requirement" for pension funds. It also introduced something called "Section 75 pension debt", which meant if an employer "departed" a scheme, they could still be pursued for any shortfall.
It is just a poor match with this type of shared pension scheme (not British, so forgive problems matching this to other types of defined benefits plans I'm more familiar with). This seems to be a clear case to revise this Section 75 for these types of group plans/schemes.
There is no actual fiscal problem here, just a legal one. The biggest obstacle to amending the existing law, based on the article, is an inability to enact legislation because of distraction by Brexit.