The Pension Problem

In this episode of Equitile Conversations, Gerald Ashley and George Cooper discuss the mechanics and challenges of pension systems, focusing on their reliance on current workers and demographic trends. They explain that state pensions, like the UK's, are "pay-as-you-go," funded by taxing current workers rather than a saved pot of money, dispelling the myth of a personal pension fund.Pre-funded pension schemes, where individuals save into assets like equities and bonds, also depend on future generations to buy those assets when retirees sell, creating a demographic dependency. The conversation highlights a looming crisis due to aging populations and declining fertility rates. In the UK, pensioners have risen from 13% of the population in 1975 to nearly 19% in 2024, with projections suggesting a quarter of the population will be over 65 within a decade. Low fertility rates exacerbate the issue, as fewer workers support more retirees.The UK's "triple lock" policy, which ensures pensions rise with the highest of inflation, wage growth, or a fixed rate, further strains younger generations, who face higher taxes, student debt, and asset price challenges, reducing their ability to have children or buy assets.Also the heavy reliance on long-dated government bonds in pension funds, driven by asset-liability matching, can be flawed due to central banks' manipulation of bond yields through quantitative easing, which distorts inflation forecasts.Finally a look at equities being better suited for pensions as they align with inflation-driven corporate revenues. Rising bond yields and government borrowing signal future inflation, potentially eroding pension values, acting as a hidden tax.This Episodes Book RecommendationsGerald suggests:Odds n Sods -  My Life in The Betting Businessby Ron PollardGeorge suggests:Riches Among the Ruins: Adventures in the Dark Corners of the Global Economyby Robert P Smith

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