I have covered this before, I think, but once again pension schemes are coming under scrutiny again about some of the assumptions they make.

The great thing about projections in to the future (where else could they go?) is that by making tiny adjustments to your expectations of, for example, investment returns and inflation, you can make problems appear huge or simply disappear, seemingly at will.  This has always formed part of the tension in the investment world and we have become used to dealing with it with vary degrees of success.

The problem for pension funds is that longevity seems to rise inexorably.  It is not like returns or inflation which may vary but can (rightly or wrongly) be assumed to predictable over the longer term.  Instead, every year it imposes an ever growing burden on the scheme’s resources or that of the sponsoring company or organisation. 

Employers have tackled it by nibbling away at the edges of the benefits the schemes provide, reducing their costs, or by simply closing the scheme.  The fact remains, however, that removing virtually all of the risk from the member and transferring it to the pension is a fearsomely expensive exercise.  I do wonder whether some employees would rather take on board a bit more of the risk themselves for the prospect of a higher pension in retirement.

One of the reasons defined contribution, or money purchase, schemes perform less well for their members is that the contributions made to them are usually considerably lower.  If the debate about pensions was a little more rational a little less politicised, many may do a good deal better.  The problem is that the government with its vast, unfunded pension obligations seems unwilling to tackle the problem on behalf of taxpayers.