Many years ago I promised myself I would jump off a bridge if I ever got interested in pensions. Then I did briefly get interested in them. This was during the 1980s where Britain’s company pension funds were larger than the rest of Europe’s put together. It seemed like an amazing, far-sighted arrangement. But to save myself from jumping, I quickly lost interest in pensions again – partly due to Nigel Lawson’s tax raid on their surpluses (which should have been left to grow in order to pay the pensions of future retirees) and Gordon Brown’s 1997 stealth-tax raid (which has since taken about £120 bn out of people’s pension funds. Those raids, I figured, were the death knell.
Which they were. Of Britain’s 6,000 company pension schemes, which promise final-salary-linked pensions to 11 million people, around 5,000 are in deficit.
And it’s not just unscrupulous asset strippers milking companies and leaving pensioners’ retirements underfunded. That, mercifully, is the tiny minority. As well as the tax raids (which continue, with another one from George Osborne just this year), and the onerous and expensive governance rules that Gordon Brown also imposed, but the impossibility of predicting things thirty or forty years into the future.
When these funds made their extravagant promises, which induced people to invest up to 20% of their wages in them, times were great. But then we had (Gordon Brown again) a massive fake boom followed by the inevitable massive real bust, with investment rates forced down to near zero. Meanwhile, Quantitative Easing has seen the Bank of England buying government bonds and keeping their prices high, which means their returns are low too. And pension funds have a lot invested in government bonds, because they are relatively safe. Add to that greater longevity (with life expectancy now ten years longer than when some of these pension schemes began), people expecting to retire earlier, more people moving jobs (which raises administrative costs) and the regulatory fees, and defined-benefit pension funds have had it.
What is the answer? In most cases, the funds were quite properly managed, with good investment and actuarial advice. But the world changed in major ways, and their promises became undeliverable. You could ask companies to make up the shortfall, but money doesn’t grow on trees, and that means lower wages and pensions for current employees, higher prices for customers, or lower dividends for shareholders (who are - you guessed it - often pension funds).
No, I think we have to have a serious conversation with pension scheme members. The promises were over-optimistic, sunk by a large measure of government greed and ineptitude, but even more by changes in lifestyle, healthcare, and investment returns. Will our politicians initiate such a conversation? Unlikely: they dread doing anything that will annoy pensioners, who are more likely to vote than any other group, and who jealously guard their entitlements.
But actually, the political turmoil we have seen in the UK, the EU and the US tell me that in fact, people no longer want politicians telling them that the world is rosy. They would much rather see politicians telling them the truth. In company pensions, bygones are bygones, the damage has been done, and we need to grit our teeth and work out what future benefits can be afforded. Not a pleasant conversation, but I think we are grown up enough to have it.