From Ros Altmann:economist and pensions,
    investment and retirement policy expert

  • pensionsandsavings.com

    MPs should grasp the chance to protect pensions and boost growth

    MPs should grasp the chance to protect pensions and boost growth

    MPs have a chance to protect pensions or put them more at risk – what will they do?

    • Cross-party MPs will try to reinstate Lords measures to help private sector schemes use their assets to boost the economy, rather than buying more gilts.
    • Remaining private sector final salary-type schemes are under threat from rules that will encourage reckless conservatism.
    • Pensions are a better way to boost growth than relying on QE!

    The Pension Schemes Bill will have its final session in the House of Commons on Monday and MPs will be voting on important changes that could make or break many people’s private pensions.

    Measures could undermine remaining open defined benefit schemes: The Government and Pension Regulators have chosen to remove important amendments passed by cross-party Peers which were considered crucial to helping defined benefit schemes to remain open. The Lords debates highlighted concerns from many open schemes that the new funding code, recently consulted on by the Pensions Regulator, poses an existential threat to open schemes. 8% of private sector schemes are still open to ongoing pension accruals but trustees of these remaining schemes fear they will be unable to continue if MPs do not vote for amendments to ensure open schemes are still able to invest in higher expected return assets that can help the economy too.

    QE worsened pension scheme liabilities and deficits, creating a vicious spiral: Quantitative Easing monetary policies aim to boost economic growth, by lowering long-term bond yields and encouraging cheaper borrowing. However, the side-effects of this policy have caused significant increases in pension scheme deficits, as liabilities increase when gilt yields fall. The more gilt yields drop, the more the liabilities grow. This has led many scheme sponsors and trustees to have to increase pension contributions and try to stem to rising tide of deficits. Because of actuarial methodology which uses gilt yields as a proxy for pension liabilities, trustees have been encouraged to buy more gilts and bonds, rather than investing directly in growth-producing, higher expected return assets. This has seen pension schemes competing with central banks to buy ever-more-expensive bonds, which adds to the upward price pressure, which then further worsens the deficits in a classic vicious circle.

    Private pension schemes could boost growth directly but are buying unproductive low-return gilts in an effort to ‘reduce risk’: In recent years, employers have ploughed billions of pounds into their pension schemes, continually trying to repair deficits and reduce their balance sheet pension risk. However, in their efforts to ‘reduce risk’ the Regulators have decided all private sector schemes (but not those in the public sector!) should buy more bonds and gilts, rather than investing directly in assets that directly increase economic growth. This may reduce risk, but it also reduces expected returns, so the pension scheme has less chance of paying promised pensions. 70% of private funds are now in long-term bonds, of which three quarters are UK gilts (60% of public sector scheme assets are in equities, unquoted private equity and alternatives). As QE increases, this undermines pensions further.

    Gilts or bonds cannot meet long-term pension liabilities: Forcing pension schemes away from assets with higher expected returns seems like reckless conservatism and is a waste of resources. Sponsors should be investing in their businesses not in gilts. Schemes need higher returns than fixed income to overcome rising deficits and pay pensions and companies need investment to recover from the pandemic. For example, index-linked gilts have a negative 2% yield! That means other assets have to deliver more than gilts in order to have a chance of keeping up with liabilities. Infrastructure, social housing, fast-growing companies and even assets that mitigate against climate change should deliver much better long-term expected returns. But the Regulator’s new rules may prevent private sector schemes from investing in these assets.

    Lower investment risk may not increase pension security: The Government and Regulators seem to confuse the concept of lowering investment risk (by reducing the volatility of returns relative to gilt yields) with increased security of pension promises. One large open scheme trustees estimate the new code will require £15billion in extra contributions (double the current rate) because the new funding ‘bespoke’ rules will still be judged relative to ultimate annuity purchase. This will hardly improve the security of members’ benefits and is likely to remove their future pensions.

    Using pension assets for climate change mitigation and growth is better than more QE: Not only is this code a risk to sponsors, it is also a wasted opportunity to harness the power of pension assets to boost the UK economy directly as we recover from the pandemic. Indeed, using pension assets to invest in infrastructure and growth assets, and to enhance the green growth agenda, can deliver better expected long-term returns and also directly benefit  UK economic growth by more than QE itself.

    MPs could amend Pension Schemes Bill to better protect open schemes: MPs could vote for a cross-party amendment designed to replicate the measures inserted by the House of Lords. This would ensure recognition that those schemes which are still open will have their funding assessed differently from schemes which are closed completely and aiming to buy annuities.

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