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.