Can someone explain why pensions aren't Ponzi schemes?

[digger_R]

simple question really, I'm no financial expert but how is a system that promises to pay you in x years time from other people paying into it, anything other than a Ponzi scheme.

I thought that was pretty much the definition, obviously it's all based on the pension provider making some money out of it and not just burying the cash in a field for a few years.

[ringram]

Unfunded govt ones are a ponzi for sure. Hence the recent changes.
DC schemes are fine, they rely on investment growth over time and income draw down or annuities to fund on retirement.

DB schemes suck, which I think is why the govt wants to kill them all. They are Ponzi schemes and will kill the pension protection fund which is already cleaned out and everything else that touches them. So the people complaining about the loss of DB really have no right to do so. They are involved in a scam and wanting others to pay for the fraud is morally wrong. Time to get real.

http://www.guardian.co.uk/money/2010/jan/12/conser...

"A Conservative government would not bail out the Pension Protection Fund (PPF) if it ran into difficulty compensating members of collapsed defined benefit pension schemes, it emerged last night.

Nigel Waterson, the party's shadow pensions minister, confirmed that if the Conservatives won the next election they would not financially underpin the compensation scheme, which was established in 2005, if it ever ran short of money.

At an event hosted by website headlinemoney, Waterson said that if the government guaranteed to support the PPF it might "produce unintended consequences and enable people to feel they could be more lax in running their pension schemes".

[Eric Mc]

The difference is intent.

A pension INTENDS to grow your investment so that it gives you a genuine return. Obviously, whether the return ends up being as good as was hoped will be down to the behaviour of the markets over the course of the life of the investment.

A Ponzi scheme is illegal from the start on the basis that the investor is promised (usually) a ridiculous return on the investment - one that the scheme could NEVER have returned and the operators of the scheme KNEW was unachievable. From the start they intended to dupe the investor and manipulated the funds to pretend that a higher rate of return was being obtained.

[digger_R]

So for my non-finance savvy self, what is the main difference between a DB and DC scheme?

Intent is an interesting concept, as it raises the question of what is deemed a reasonable return on investment.

[Eric Mc]

digger_R said:

So for my non-finance savvy self, what is the main difference between a DB and DC scheme?

Intent is an interesting concept, as it raises the question of what is deemed a reasonable return on investment.

The establishment of intent is often crucial when ascertaining whether a fraud is being perpetrated - and often why many fraud cases collapse once they get to court.

[Tiggsy]

digger_R said:

So for my non-finance savvy self, what is the main difference between a DB and DC scheme?

Intent is an interesting concept, as it raises the question of what is deemed a reasonable return on investment.

DB - the outcome is set, hence the pension needs to do a certain amount of growth to satisfy that outcome...or it's fked.

DC - the payments in are set, what you get back depends on fund growth....so it can be good....or bad....but cant "fail"

[ringram]

Eric Mc said:

The difference is intent.

A Ponzi scheme is illegal from the start on the basis that the investor is promised (usually) a ridiculous return on the investment - one that the scheme could NEVER have returned and the operators of the scheme KNEW was unachievable. From the start they intended to dupe the investor and manipulated the funds to pretend that a higher rate of return was being obtained.

Hehe, so DB is in fact Ponzi, though maybe not originally have been the Intent.
I would argue that this has been highlighted years ago so any new contributions and members that have been added were with the Intent of massive fraud.
Ignorance is no excuse under law. In which case all politicians are guilty.

Now just to prove it in the high court...

Nah, better just to hedge myself internationally.. QPROPS rocks

[RDMcG]

I think the fundamental flaw in defined benefit plans is that the underlying assumption is that the company will grow, and that there will always be many more active employees than pensioners. This worked well when everyone worked to 65 and obligingly died at 72. However, downsizing and early retirements caused the situation to reverse in may companies, which meant that the tail began to wag to dog, and a serious reversal in the markets was dangerous for the survival of the related company because of the large unfunded liability.
Defined contribution plans put essentially all of the risk on the employee and none on the company and are now the norm outside of public service who have a simply amazing deal in many countries.