Finishing off the pension funds

First came the £5 billion per annum tax. Then came the regulation. Pension funds were crippled. Most private sector companies closed them to new members. Some went on to stop future contributions from existing members. Some went bust. Some pension funds needed so much extra money from their sponsor companies they threatened to bring the company down.

Now the government and the Regulators see pension funds as a ready source of money for the government to borrow. The more mature the fund, the more they demand that the fund “matches” its liabilities by buying government bonds.

How can they believe that a government bond offering an interest rate of between 2% and 4% per annum depending on the maturity date can possibly keep pace with pension requirements?They do not know for sure how long people will live, needing the pension payment. Nor do they know how much inflation governments will unleash as they get out of the present crisis. You cannot “match” liabilities which go up with wage or price inflation by buying low yielding fixed income government bonds.

All you can be sure about is that if you buy government bonds today you will at best get a low return. If you hold them to repayment you will get your 2 to 4% per annum, and a capital loss on repayment. If you sell them before repayment you might make a little more, or you might lose more if interest rates rise. If we have a funding and sterling crisis you could lose a lot at market prices.

The truth of the “matching” doctrine is simple. It’s a way of getting more money into the government’s coffers, and it is a way of keeping companies on the pensions rack for longer. There will be more casualties as a result. Everytime more pension funds get into trouble, so the demands on the Pension Compensation Fund rise. The Regulator in turn imposes a bigger tax on the successful funds, making their task more difficult! No wonder most companies have given up on final salary pension funds. Only twelve years ago we had the best pension scheme in Europe by a mile, and many people could look forward to a pension based on their final salary.

Today the issue is when will the government wake up to the unaffordable promises being made on an ever increasing scale in the public sector? When will there be greater equality of treatment between public and private? When will the public sector rich list have to live in the real pensions world that arrived in the private sector some years ago? It just shows how much damage the wrong kinds of tax and regulation can do. Never have pension funds been so regulated, and never have they been so weak.

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19 Comments

  1. Posted May 2, 2009 at 8:03 am | Permalink

    Just the way Gordon “socialist” Brown wants it. How else will he force a national pension on the middle classes if they have their own schemes that are in the black.

    Witness all other Labour policies to give the rights to the poor and the responsibility to the middle classes. The pension policy is no different, its called redistribution.

    • Posted May 2, 2009 at 12:21 pm | Permalink

      Your far to polite Ian, i call it political theft!

  2. Posted May 2, 2009 at 8:13 am | Permalink

    I am at the risk of becoming a daily contributor because you are raising very unfair issues. The compulsory annuity purchase is quite simply legalised theft. Most retiring today on a non final pension salary scheme will be lucky to see the return of their capital sum spread over their remaining years. The incentive for young people to put significant money into a retirement fund is nil. I feel that most, outside final salary schemes, should ignore the tax relief, put money into endowment schemes and get their employer to make contributions to that policy.

    • Posted May 3, 2009 at 7:30 am | Permalink

      A Sedgwick
      Agree absolutely.
      As a self employed person I contributed for very many years into a Pension scheme, only other contributions help with tax relief, so its all my own money.
      No Company contribution, no final salary scheme, no payment holidays.
      Thought I had a guaranteed anuity rate, but to no avail when Equitable Life had its problems, the members as a whole (most of whom did not have a guaranteed anuity rate) voted to stop any guaranteed rates, even though this was the reason I joined this particular Company at the time.
      We then had, along with many other Companies, Market Value Adjusters which reduced the value of the fund to suit the companies concerned, even though you have supposed to have had guaranteed bonuses.
      No mention of MVA’s in any liturateure I had from the Compan. Then a raid by Gordon on Pensions, which reduced performance of all funds.
      Then of course in my case the final debacle, a closed fund, but with huge financial penalties should you wish to transfer your fund to another provider.

      I was fully aware when I started contributions that any final fund would depend upon fund/company performance and the level of my contributions.
      I did not expect perhaps with some degree of stupidity (i was younger at the time) that the rules could change so much.

      I know belive Pensions for anyone else, other than those for whom the employer makes large contributions are a waste of time.
      You are better off saving elsewhere, where no anuity requirement (another profit area for the Insurance Companies with low rates) is forced upon you, and you can do as you will with your own money.

      The whole Pensions system I my view fails many, because the goalposts can move at any time, but you cannot get at your own money to compensate.

      • Posted May 4, 2009 at 11:38 am | Permalink

        Thanks – I feel many young people are at risk because retirement is so far off and they are misinformed how the system works. Successive governments have used pension funds as a gilt tap but Brown has multiplied the problem by his ending of pension fund tax relief, the subsequent end of final salary schemes(except for state employees) and the now horrendous drain of state borrowing. Best wishes

        • Posted May 4, 2009 at 7:34 pm | Permalink

          Agreed.
          Sad fact is that Equitable Life whilst it had some internal problems, was not properly overseen by the FSA for many years
          The FSA allowed the then Chief Executive to also hold the position of Actuary within the business, so there was none of the normal checks and balances on the direction of the business.
          A review on Equitables failure has been completed by the EU and our own Parliamentary Ombudsman and others.
          All investigations and reports agree massive systemic Regulatory failure by the FSA was the main reason for the Companies failure.
          The Government have so far stalled all attempts of compensation to those policy holders who have suffered major financial losses due to this Government Departments (FSA) failure to do its job.
          So far a number of thousands of policy holders have died waiting.
          The Company closed for new business in 2000 and a whole series of reports and investigations have taken place since that date.
          The latest information from Gordon Browns Government is that we will all have to prove hardship on an individual basis in order to get any compensation paid.
          A simply disgusting state of affairs.
          You perhaps now know why I do not trust most Pension schemes. apart from the annuity handcuffs.
          In the meantime Policy holders can only hope that the next Tory Government will adopt a more sensible and honest policy towards the policy holders, and compensate them properly as suggested and outlined in all of the reports and investigations completed to date.

  3. Posted May 2, 2009 at 9:45 am | Permalink

    So the British government is following the lead a few months ago by the Argentinian government and in effect ‘nationalising’ private pension schemes. At the same time, it continues to make zero provision for the payment of public sector pensions. This seems to me like stealing from those people who have made a genuine attempt during their working lives to provide for themselves in retirement, in order to fund the lavish (and unfunded) promises made to Labour’s client state. Utterly reprehensible behaviour, and I trust the Conservatives will pledge to stop this immoral, state-sanctioned theft as soon as they are in power?

    • Posted May 2, 2009 at 8:18 pm | Permalink

      God help us all when the Public Sector pensions and wages start to be cut back.
      Remember the end times of the last Labour government? Dead unburied. Rubbish uncollected. Strikes. TUs in at No 10 for beer and sandwiches? Processions every day. Black outs at night with no electricity………
      And why?
      Because the “new Class” was threatened with pay reductions.

  4. Posted May 2, 2009 at 9:49 am | Permalink

    The present value of public sector pensions exceeds even the official public debt. It is debt just the same – a bill which must be met by future taxpayers. Every day the liability increases, especially on those days when the state appoints to a new useless bureaucratic post. At the least a new Conservative Government must close public sector final salary schemes to new entrants on its first day in office. Preferably they should attempt to convert existing public sector employees to money purchase schemes – give them the newly issued gilts and give them an incentive to keep inflation down. This is a ticking bomb.

  5. Posted May 2, 2009 at 9:54 am | Permalink

    This is evil theft, no more no less. Ayn Rand’s Cuffy Meigs would no doubt approve.

  6. Posted May 2, 2009 at 10:47 am | Permalink

    One can only hope for a Great Repeal Bill that includes all or most of Gordon Brown’s pension raids.

    I do hope the Conservatives realise that pensions should be completely free from government interference and endeavour to get private pension funds back in the black. If you can get firms offering final salary pensions once again by the time you next leave office, you time will have been a success.

  7. Posted May 2, 2009 at 11:00 am | Permalink

    The government wishes to boost consumption. Pensioners largely spend a lot of their disposable incomes on consumption rather than saving or paying mortgages etc. However, private sector pensioners are being hammered. Public sector pensioners, many of whom only have modest or limited sums, have seen a progressive reduction in real terms because of the way increases are calculated in relation to pensioner expenses. The very old in sheltered housing are being hammered by huge cost increases. The cost of care generally, for those in need, has also gone up sharply. The only people who can spend more and more are those who are able to avoid tax, either by going off shore, or by engaging in extra legal activities. Oh yes, and those with very fancy untaxed expenses arrangements.

  8. Posted May 2, 2009 at 11:09 am | Permalink

    You are absolutely right on the prospects of low yields, capital losses and the risk of even greater losses in the event of a further devaluation of the pound. Foreign investors are just as important as domestic pension funds when it comes to selling gilts though and having recognised these facts themselves must be expected to act accordingly.

    Where therefore are the vast sums of money Alistair darling so confidently announced in the budget that he intends to raise to plug the black hole in this government’s cashflow going to come from?

  9. Posted May 2, 2009 at 12:18 pm | Permalink

    Brown has ruined private sector pension schemes whilst allowing the public sector to stack up unaffordable liabilities on the taxpayer. This has not been accidental but deliberate action. Millions of prudent people have suffered as a consequence but Brown is allowed to continue to wreak his havoc. When he is finally forced out he will enjoy benefits way beyond those of most people particularly those he has effectively impoverished. He often says there should be “no reward for failure”. I agree and suggest that his pension be reduced accordingly ( how about zero?) by our parliamentarians.

  10. Posted May 2, 2009 at 12:50 pm | Permalink

    Go John, there will come a day of reckoning on this issue. You cannot protect one group of workers retirement age and pension rights (including your own Mr Brown) whilst decimating the other group and expect them to take it for long.

  11. Posted May 2, 2009 at 3:00 pm | Permalink

    Can I plead with everyone to remember the public sector workers at the bottom of the pile – the soldiers, nurses, teachers and so on, for whom the public sector pension was originally intended.
    I thoroughly agree that there needs to be a savage, across the board, reckoning for much of the public sector.
    But I think this must be directed at the upper end of the pay scale. The lower end should remain untouched.
    Let us not throw out the baby with the bathwater.

    • Posted May 3, 2009 at 10:50 am | Permalink

      Freddy, what we want is fairness and equality which is not what has been happening with Labour pension taxation policies. There are plenty of low paid private sector workers who have been contributing to stakeholder, and other private pensions that have been “touched”. Any taxation removal on pensions is only paid by the private sector and the big cheeses at the top don’t pay it, the large companies that have final salary schemes have to pay the extra taxes, which leaves less for reinvestment and the other workers.

      No changes should be made to accrued benefits up to the point of change, a line in the sand should be drawn on that specific point in time. Unlike what has happened to private sector low paid workers (under 50) who can’t now get their pensions at 60 (women) or 65 (men) no they’ve got to work on until 68 – where is the fairness in that. Why is a cleaner in the public sector untouched when a cleaner in the private sector has been hammered?

      I don’t believe our children will be able to afford this public sector pension committment and politicians should be planning ahead rather than planning just to be re-elected. If the payments do go ahead without being ‘touched’ the rewards will have to be highly taxed. There is no need for “savage” anything, a fair system should be set up for all workers.

      • Posted May 3, 2009 at 11:00 am | Permalink

        no they’ve got to work on until 68… please add

        because their private sector pension has just crashed and burned and their is no group of taxpayers jumping in to shore them up – where is the fairness in that?

  12. Posted May 2, 2009 at 8:15 pm | Permalink

    “Just about everyone in Great Britain will deal with the Department or one of its eight businesses at some point in their lifetime.
    “All this is part of building a fair and inclusive society.”

    Mission statement of the DWP.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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