Pensions planning has the longest time span of any financial decision that an individual has to make in his or her lifetime. From the day that someone starts work for the first time to the day that he or she dies (and beyond in the case where there are dependent beneficiaries), an individual is involved either with building up pension rights or in receiving a pension.
Few members of pension schemes appear to know much about the complex processes involved first in accumulating a fund of pension assets and then in drawing down a pension annuity from it. Even fewer appear to care, until, of course, they see the size of their pension and then it may be too late.
To illustrate the tremendous importance of pensions, we can consider a few facts about pension provision in the United Kingdom, a country with one of the world’s most well-developed private sector pension systems. There are nearly 100,000 occupational pension schemes in the UK, although most of them have only a few members each; and there are 6 million personal pension schemes. And collectively, UK pension funds are amongst the largest institutional investors, with assets in excess of 800 bn. pounds (or two-thirds of the UK’s GDP), owning a third of all shares in the UK and one-fifth of all government bonds.
The speed with which the pensions industry changes from one year to the next is also quite astonishing. In the case of the UK, almost every year, there is a new Social Security Act, Pensions Act or a Finance Act that affects pension schemes or pension funds. Roughly once a decade pension policy is radically changed as a result of a change in the political party in power or a major scandal in the pensions industry. Similarly, with increasing frequency, the European Commission or the European Court of Justice does something that has consequences for the UK pensions industry. In addition, innovations in the financial markets constantly provide new opportunities for fund managers to manage their pension funds. Also pension funds can have an important impact at the macroeconomic level; eg, the increasing maturity of pension funds in the UK will cause pension funds to switch out of equities into bonds, with major consequences for both corporate and public finance, and for the level of interest rates.