ajva | either interesting or very very dull

A few months ago I was reading through a financial magazine, learning about lots of finance-based stuff, and came across an article on pensions. Now, I had never looked at all that boring stuff before and was startled to discover how they work, and there was one aspect in particular that angered me.

I wondered why I hadn't heard of the problem before; to me it was a blatant cut-and-dried example of sexism.

Basically, all that money you pay into a pension fund - what happens when you retire? Do you get your money back? Like hell you do.

You get 25% of it back as a tax-free lump sum, and then you have to buy an income called an "annuity". So if you're a 65-year-old bloke, and you have £100,000 saved up, you could expect to buy an income of about £6,500 a year for life.

Of course, women live longer on average, so a 65-year-old woman with the same amount saved up, buying the same annuity, WILL ONLY GET ABOUT £5,600 A YEAR FOR LIFE (because on average the company will have to pay women a larger number of payments).

Right. So presumably, since men in Barnet live on average 5.4 years longer than men in Lanarkshire, then those men applying for annuities from addresses with a north London postcode will 'enjoy' a proportionally smaller income than the Scots? What about average life expectancy differences by race? Or sexuality? I thought actuaries were supposed to be clever? Is it really beyond their capabilities to average this shit out between men and women?

Fuckers.

Still, the whole situation is under review - annuities and all. Also, today I am doing random surfing, and discovered this report on the matter. Apparently it is being fought against after all. Good. Now I won't have to write to the FT.

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- women retiring now are still doing so at 60 and therefore have less saved to start with. It's a right mess: people living longer and longer and no-one willing to pay for them. Apparently when the State pension was introduced the average age of death for men was 68 and 71 for women - now it's more like 78 and 81.

I recently had to decide which of my job's pensions I should choose: the 'classic' one or the new 'premium' one. With the old one, you have to be married for your partner to get a pension if you die after retiring. With the new one, you can nominate anybody.
About time pensions got with the 20th century, you might think.

Except in the small print (which somehow got approved by the Plain English Campaign, and no way did it deserve it), it specifies you have to be in an 'exclusive' relationship. And in the even smaller print on their website they say they really will check on this! Cohabiting with another adult will rule you out.

So I went for the old one, which has the advantage of costing 40% of the new one for the same size pension, and even refunding my contributions if I remain unmarried at the ripe old age of 60! This is of course the plan that was closed to new entrants a week after I started work here...

even refunding my contributions if I remain unmarried at the ripe old age of 60!

Gosh! Talk about major incentive to stay single. What a good time to start work.

AIUI the other other factor at the moment is that annuties are largely based on government bonds. Since there is less government debt, the government is issuing fewer bonds. And since people like the life insurance companies have to buy them, demand is still high so their price is now higher. So people's pensions are smaller.

By the time we retire, there will have been some big changes.

So presumably, since men in Barnet live on average 5.4 years longer than men in Lanarkshire, then those men applying for annuities from addresses with a north London postcode will 'enjoy' a proportionally smaller income than the Scots?

Yes, annuities are indeed starting to vary by locality as well as gender. You can turn the same argument around the other way - would it be right for the person in Scotland to get a lower pension just because the one in Barnet is skewing the figures? Couldn't that be construed as a double whammy - "oh, sorry, because you live in Scotland you're going to die earlier, and by the way, we'll pay you less in the meantime because the English are living longer than you?"

I don't know where the line should be drawn - all I'm saying is I don't think the answer is at all obvious.

Yes, annuities are indeed starting to vary by locality as well as gender.

Indeed? Then I rather feel we have to stop the rot before it starts...

You can turn the same argument around the other way - would it be right for the person in Scotland to get a lower pension just because the one in Barnet is skewing the figures?

But they would only get a lower income than they otherwise would get, not a lower one than the other person. At the moment men earn more at the expense of women. To give women equal income would mean men get less than they otherwise would get. Would it be right for men to get the same income as women, even though the women on average will get it for longer?

Um...yes. I think it's perfectly reasonable to expect that the income per year should be the same, and good luck to you with how long you live. This is the sort of thing where people in the industry plead mathematical inevitability, but there is no reason why an average cannot be taken.

Couldn't that be construed as a double whammy - "oh, sorry, because you live in Scotland you're going to die earlier, and by the way, we'll pay you less in the meantime because the English are living longer than you?"

No. It couldn't. Because that's not what we would be saying. We would be saying: "You're going to die earlier, which means you might not earn as much money in total as the people in England, but we promise to pay you exactly the same income in the meantime as your English cousins." I do not think that this is unfair. Bear in mind that the whole point of an annuity is that it is an *income* product rather than a *lump sum* product. Therefore its fairness or otherwise must be judged on the continuous element rather than the overall element. When we wring our hands about differences in pay between the genders generally, do we say that it is dreadful that women earn on average less during a lifetime? Would we then accept the argument that this is OK, because they work on average 5 years less? No, we focus on income, year by year. It is the *continuous* element of money earned we look at, because life is paid for continuously, and not as a single tab settlement on our deathbed. So should it be with pensions.

However, what with the way the market works, you would never get annuity providers bringing this in voluntarily. This is where government comes in handy - to sort out injustices caused by the market.

It was the continuous element I was looking at. My point was that it's not at all obvious to me that it's fair for Scottish people to get a lower income than they otherwise would because of English longevity, and that still looks to me like a double whammy.

But why is it fair that the same annuity, bought by two different people at the same time with the same amount of capital, should result in different incomes for the two individuals?

I don't think it is. I think both systems are unfair, and I find it difficult to decide which sort of unfairness is preferable. Mostly I wish we weren't starting from here in the first place.

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