Saturday, March 08, 2008
You will recall Anna Nicole Smith. She was Playboy's Playmate of the Year in 1993. But her real claim to fame was marrying a man 63 years her senior, who by some lucky coincidence, turned out to be a Texan oil billionaire destined to die just 13 months later (we never did find out about that huge smile on his face).
Now if he'd been a member of a company pension scheme here in the UK- or better still a public sector scheme- even though she was only married to him for 13 months, Anna could have looked forward to a widow's pension for her entire remaining life. And given that she was only 28, that widow's pension could easily have continued for another 60 or 70 years.
OK, the tragic Anna actually died at 39, but actuarially she's still alive. Pension funds which provide spouse's pensions after the member's death are opening themselves to a substantial and long lasting additional liability.
This is discussed in an interesting Policy Exchange paper Quelling the Pensions Storm by Nicholas Hillman. He reports the following astounding fact about the pensions paid to former soldiers of the American Civil War, which ended, note, in 1865 :
"Because the pensions included widows’ pensions, there was a financial incentive for younger women to marry veterans. In 1927, Alberta Stewart, a 21-year-old woman, married an 81-year-old ex soldier. Although he died soon afterwards, Alberta lived until 2004. She was receiving a pension linked to her deceased husband’s war record at the time of her death."
Think about that- 2004 was one-and-half centuries after the end of the Civil War. Widows it seems might well live on for ever.
Hillman is illustrating the enormous burdens pension funds have either taken on themselves, or had thrust upon them by government regulation. They are simply not sustainable, and as things stand, defined benefit pensions are heading for the shredder of history.
Hillman argues we need to be more inventive and flexible in finding ways to preserve them. Fund members should share some of the risks with their employers, and should even accept a watering down of existing promises, such as widow's pension entitlements.
At a more fundamental level he points out that we baby boomers have had a fantastic deal with our pensions, a deal that is no longer on offer to our children. And since they're the ones who are left with the bill (ie they will be forced to work on pensionless until they drop to support us), shouldn't we accept some cut in what we've been promised, to help them out?
We'll need to think about that. We'll think about it on our next cruise (paid for as usual out of our excellent final salary company pension).