No, there is not a typo in the title. It is meant to confuse.

You see, we’re told by the government to save for retirement. We’re also encouraged to do so, as pensions and other qualifying forms of saving are tax-advantaged in some way.

Yet while the rhetoric and tax breaks would make one think that the government has our best retirement interests at heart, this is not necessarily the case. Indeed, chronic deficit spending by the public sector has resulted in a huge, accumulated national debt that needs to be serviced with tax revenues.

Naturally, the government would prefer to keep debt servicing costs low. Following the financial crisis of 2008, the Bank of England obliged. Interest rates were held lower for longer than at any time in history, no less.

More recently, the Bank has been raising interest rates. But they remain low in a historical comparison. In inflation-adjusted terms, they are in fact lower today than they were in the immediate aftermath of the crisis.

Thus whoever has been holding UK government debt or other interest-bearing securities has been receiving a lower return for longer than at any time in history. Among other institutional investors, this includes UK pensions.

As I wrote last week, certain institutional investors, including pension funds, are required to match assets to liabilities. And so a lower-for-longer Bank of England interest rate policy, combined with UK government regulations on pensions, has entrapped future retirees into over a decade of historically low returns.

That said, pension funds do have some leeway. They can invest in shares, for example. Shares have fared much better over the past 15 years. And so a balanced portfolio hasn’t been such a disaster. Until last year, that is, when both bonds and shares plummeted in value.

This is especially the case when viewed in inflation-adjusted terms. And while the Bank of England expects inflation rates to decline sharply from here, much damage to pension pots has already been done.

What a difference 15 years makes

Fifteen years of historically low returns is a long time, about 1/3 of a typical working life. What this means is that your average worker’s pension pot has failed to grow in real, inflation-adjusted terms to the extent that many would have assumed.

An entire working generation has been doing what the government has asked, encouraged and to an extent even forced them to do. They probably feel as if they’ve been somewhat prudent and done their part. But they haven’t been getting the returns they were implicitly promised over the years due to a combination of low rates and high inflation.

Those who supplement their savings with Self-Invested Personal Pensions (SIPPs) may have fared somewhat better. It depends on their choice of investments. Most IFAs recommend a mainstream SIPP investment approach. Depending on client age, they might recommend a 60/40 or 50/50 stocks/bonds portfolio. And so a substantial portion of SIPP holders might also be disappointed when they see how well or not their investments have done over the years when inflation is properly taken into account.

The upshot of the above is that a meaningful portion of UK households are probably not on track to have their retirement sorted by whatever retirement age they were aiming for. Thus they will have a choice to make: work a few years longer, or find a way to give their pension pot returns a boost.

There is no return without risk, however small. But a purely passive approach to investing is not necessarily any less risky. It depends on a range of factors. For those looking for a boost, a more active investment approach could be taken – one of which we will be presenting to you tomorrow. Look out for more information on how you can join.

No matter what, an “ostrich” retirement strategy is not an option, if indeed it ever was.

Until next time,

John Butler
Investment Director, Fortune & Freedom