Since the beginning of the year I’ve cashed out of two small occupational pension schemes I accumulated earlier in my long career writing about money. Partly this was because of new UK legislation that allowed me to “retire” at 55, and also because I looked at the potential payouts and realised they were going to be very small after taxation, while the lump sum seemed useful now even after being taxed.
This was before I heard about the book written in 2002 called Rich Dad's Prophecy that warned of a major stock market crash this year and a sudden crisis for pensions. It offers another very good reason to be thinking about exiting retirement funds now, if you have the possibility, or at least whether you should be paying into them if you do.
The author Robert Kiyosaki spotted that 2016 was the year that the 75 million American baby boomers would be mandated to start drawing down their pensions by the plans to which they had subscribed maybe 40 years earlier. This exit of money from the stock market would mean it had more sellers than buyers and cause a crash.
Did the US presidential hopeful Donald Trump not warn of a “massive recession” and stock market crash about to happen this month? Many of the multibillionaire’s campaign statements are easy to dismiss as ridiculous, but this is the sincere pronouncement of a highly successful US businessman. After all, he simply described the so-called “topping formation” in the S&P 500 chart that anybody can see, with the rally from the previous drop insufficient to prevent a further fall, or a crash.
Retirees have already been victims of the post-financial crisis economy. Pension annuities – which are what you get monthly to live on from a pension fund – have more than halved in many cases, making retirement far less comfortable.
Read the small print in the pension fund annual reports and many reveal a serious shortfall between their pension liabilities – that is to say the pensions they have promised – and the funds now available, which are the future pension payments they will actually be able to make.
Kiyosaki identified this as a Ponzi scheme 14 years ago. Ponzi schemes are well-known financial scams that collect money by promising high returns and keep going by paying out big returns to early birds cashing out to attract more and more investors until the scheme crashes. Is this a lesson if you have a pension fund?
However, this is worse than a Ponzi scheme because it does not have one evil financier behind it. This is a structural problem created by governments honestly devising ways to force entire populations to save their money into stock markets for retirement, with the help of financial professionals out to make as much as possible from this process.
Ever wonder why equities are really so overvalued today? That’s the power of trillions of dollars of retirement savings.
Kiyosaki notes that stock markets are inherently unsafe places for retirement funds because they do have very long bear markets, and in these periods the value of savings will be greatly reduced and prove a particularly bad way of funding pensions.
In the UAE, expatriates are also big investors in mutual funds that behave like pension funds. But they are fortunately not so subject to lock-up provisions as pensions, such as the age the fund matures. If you see a coming storm in financial markets then it is possible to cash out.
For many long-term expatriates their money is also tied up, but in an end of service benefit scheme (EoSB) and not a company pension paid over to a third party to manage. This has positives and negatives.
You are vulnerable to the future financial fortunes of your own company, which bears this liability on its own balance sheet. And firms across the GCC will have total EoSB liabilities of US$75 billion by 2020, according to the financial consultant Willis Towers Watson. But EoSBs are less directly exposed to the immediate risks of global financial markets.
That said, a new report from Zurich Global Life, based on a round-table organised by the consultant Insight Discovery, estimated that the average EoSB payment had risen by 140 per cent over the past six years because of an increased typical length of service, while 83 per cent of companies do not fund these liabilities and rely on cash flow.
In the EoSB alternative to managed funds, all your eggs are in one basket with your current employer, although you have to wonder whether the benefits of asset diversification in pension funds have not been overstated, obscuring a far murkier bigger picture.
Peter Cooper has been a financial journalist in the Arabian Gulf for 20 years.