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The Problem With Pensions – Two Fatal Flaws and How To Beat The System


About a year ago I left my job at an asset management company that managed a fair amount of pension funds, and hope to never go back into that industry (if I do this article will certainly do me no favours!)


Aside from not being able to deal with the stress and mind numbing day to day tediousness of a lot of what I did, I had also lost faith in the whole concept of "asset management".


There seemed to me to be at least two fatal flaws to the whole concept of pensions.


Fatal Flaw 1 - Most Pensions Are About Paying Someone Else To Gamble With Your Money.


We think of pensions as staid, boring.  I nearly fell off my chair with boredom when the guy who sold me my mortgage started trying to sell me one (I was just 22).  Thankfully I put him off – as the endowment for the endowment mortgage I'd just signed up to failed to live up to expectations on a monumental scale.   I would have been better off hiding the cash under my bed.


What went wrong?


Well the shares they invested in went down instead of up.


Every few years I'd make a profit… which would then be wiped out on the next change in the market.  And trust me, when you've done enough charts on the rise and fall of the stock market over 20, 30 years you'll see that this is not an isolated incident, it's the nature of the market.


My horse was in the lead, and then it got tired.  It wasn't my lucky day.  I should have worn my lucky socks.  Whatever the logic of investing in the stock market, the bond market, property – it's like studying the form of a race horse – you might be able to calculate the odds better, but you still can't be certain who will win the Grand National.


And this is the problem with pensions – which is why guaranteed pensions don't… cannot work, (in the same way that endowments can't work,) because you cannot guarantee the outcome of a gamble.  Unless it is the basic rule of gambling – the house always wins.


The only guaranteed winner of the pensions gamble is whatever bank, investment house, broker is taking your fees – they get paid for playing with your money whether they win or lose.


Fatal Flaw 2 - The Great Retirement Myth


You need a pension.  The government's told you this, the media's told you, the financial industry keeps telling you – probably with an elegant, very attractive older couple holding hands on the deck of a ship or on a beach.  Possibly playing with their many grandchildren.  Seriously?


Why do you need a pension?  How many years are you going to live?


Okay I'm going to let you in on a little secret – despite having a pension and working in pensions I'm a little foggy on what happens to my pension when I die.  Do you know?  Well, there's one thing for sure it probably won't do you much good at that point.


Let's take me as an example, I'm 40 years old now (almost), I might live to 90 say, wow that could be 25 years of retirement if I work until I'm 65, which most of us will do.


So 25 years of work, 25 years of retirement, say.  If we say there's a probability that I might die in any of those years, let's say for argument's sake I could well pass away right in the middle – just as I hit retirement.  Even without the skewed maths (because the probability, of course, is higher as I pass 65), there is a very high probability that a lot of people will either pass away or deteriorate rapidly after they retire.


There are a lot of theories for this – that people no longer feel worthwhile if they're not working, that without the need to get up and go to work people just… lose it physically and mentally.  In fact the best way to guarantee a long healthy old age is to be as active as possible mentally and physically.


So, rather than a healthy pension, the very best recipe for a long and happy old age is to do what you love.


Of course, if I do pop my clogs around 65 I hope very much that I've lived a life I love.


So… the most pragmatic, sensible approach to the whole concept of old age and retirement… find a career you love and keep doing it for as long as you can.


So once again… why do I need a pension?


Once upon a time people had one kind of will – then there was the living will – making a choice about how you wanted your life to end rather than just what would happen to your stuff when it did.


So it's time to start thinking about maturing benefits as something other than numbers on a page that someone else gets to gamble with.


What would you like to do with your life if you only had 6 months to live?


For many people it's a creative endeavour – highly risky – but potentially something that could earn you royalties for decades to come.


Or a business idea that might take years to establish itself.


Maybe it's a skill – translation, psychotherapy, yoga – that might take time to develop, but which could be the thing that keeps you motivated and active and impassioned for a long, long time.


It's the only way to win the pensions game, because if the house always wins, the only way to win is become your own investment house.


In short it's time to invest more sensibly, gamble for yourself, gamble on yourself.


And failing that at least invest in something wise or that you can enjoy – property, gold, diamonds, art – you may lose out but at least you'll enjoy the view in the process.


For after all, life is either too short or too long to live it badly.


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