Let's stop our pensions leaking away in 'charges The news on our collective financial future continues to be very gloomy. Last week, the IMF weighed in with the depressing, if not totally surprising, prediction that even a three-year increase in the average number of years we live will add £750 billion to the £1.13 trillion pension liabilities that the public sector and state pension systems are already committed to. The sums are so vast, the ocean of red ink so huge, that it starts to make you think that living longer is a curse, not a blessing. But not all the gloom is justified. There are things that can be done to make pensions cost significantly less - apart, that is, from everyone dying sooner, or working longer, or contributing more. One of them is to reduce the costs charged by the finance industry for "managing" pensions. These are already high, and can consume a third (sometimes as much as a half) of the value of your pension. One way to reduce those "management charges" is to amalgamate a large number of small pension funds into a single giant one. University teachers have already done that: instead of each institution having its own separate fund, the University Superannuation Scheme (USS) manages pensions for everyone working at a UK university. The charges that the giant USS pays (it is one of the five biggest pension funds in the UK) are lower than any that a single university could negotiate on its own. There is a plan to do the same for the 101 different pension funds that exist for local government officials. It's going to start with the 34 different pension schemes for London's 32 boroughs - and it could reduce substantially the charges that these individual schemes pay, which are currently more than £30 million a year. Less money for financial managers means more money for pensioners. It's that simple. Amalgamation of funds is a no-brainer, but of course it's opposed by a whole group of people who have an interest in perpetuating the inefficient system that exists now. This includes not only those who do so well out of managing the scattered individual funds, but also all those council officials whose jobs depend on each council having its own. They come up with figures to show that amalgamation doesn't save money. Michael Johnson, a research fellow at the Centre for Policy Studies, has demonstrated conclusively that those figures are wrong: amalgamation not only saves enormous sums of money - it is probably the only way to keep local government pension schemes solvent. Unfortunately, the process can't be extended from local government officials to the rest of the public sector, because pension schemes in the rest of the public sector aren't "funded." When a policeman (say) receives a pension, what's paid out isn't taken from a pot of money that that individual has built up through contributions over the course of his working life. Rather, the state takes the money from other taxpayers and uses it to cover the cost of that person's retirement income. Which is why public sector pensions are so much better - usually, about four or five times better - than pensions in the private sector. In the private sector, if you don't save enough, or if your investments don't do well, or those who manage them charge excessively for doing so, your pension shrinks. That doesn't happen when the state pays out by dipping into cash supplied by other taxpayers. It doesn't alter the fact that private pensions would be much less risky, and paltry, than they are if the charges levied on were them dramatically reduced. Amalgamation of individual pension schemes could work wonders, producing bigger pensions for smaller contributions. But the finance industry would fight any such move tooth and nail, for it makes billions out of overcharging pension investors. Will the Government take on the finance industry? Well: pigs may fly. Wait a hundred million years, and they will.