When wealth is a mirage and plans go bust

In case you missed the news over the last few days, the US city of Detroit went bankrupt.

Once the fourth largest in the US by population and a former industrial powerhouse thanks to the automotive industry, it is a city that serves as a powerful example of what could go wrong even in places where all seems right.

Retirement planning debtate requires a new approach
Retirement planning debtate requires a new approach

Putting a human face on the problems in Detroit is not hard. City workers in receipt of fixed income, defined benefit pensions are the most striking. Many face the growing prospect of their monthly pension entitlements falling by 50% or more. Some retirees are openly questioning whether or not they will be forced to go back to work to make ends meet.

It may be easy for those in seemingly prosperous parts of the world to dismiss the problems in Detroit as a result of some local factors, but to do so would be foolhardy.

Defined benefit pension schemes all over the world are facing a crisis of a magnitude never realised before. Think housing bust writ large. Retirees can no longer assume that what they feel is rightfully theirs will remain so. In the case of Detroit, a falling city population has served to destroy the necessary tax base to support pension payments. However, other more fundamental factors are also coming home to roost, not least the gross miscalculation of future pension values by actuaries.

Governments are finally beginning to wake up to the magnitude of the problem. Across the EU and US, high levels of unemployment, population shifts as well as population decline and extraordinary levels of household debt combine to undermine pension schemes in many sectors, especially existing and former state and semi-state organisations. But realising there is a problem and fixing it are two different things, the latter may never happen and if it does, likely to be on the back of a lot of pain.

Too many representative bodies in the field of pensions advice have also been in denial, continuing to operate in a fashion akin to those makers of horse-drawn carriages who refused to change their ways despite a growing use of motorised vehicles. Their synapses wed to the formulae of yesteryear.

For many, especially those nearing retirement that may feel their retirement needs and fully funded by a defined benefit scheme, the days of absolute certainty are nearing an end. Lack of fund growth, inaccurate assumptions by actuaries and other uncontrollable factors are beginning to shake the foundations of the pensions industry, soon to be joined by the public that still believe in and rely on them.

The wealth that was supposed to be may never really have been!

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