There are plenty of problems faced by pensions and long-term saving

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by Shaun Richards

Even a cursory glance at the news will tell you that there is a lot of rumbling discontent in the pensions arena. There has been the issue over NHS doctors pensions, the WASPI women and today a strike over pensions by those who work at universities. I rarely directly dealt with them as they were a colleagues responsibility but back in the day the Universities Superannuation Scheme had a very good name. In many ways these are symptoms of credit crunch themes so let us take a look at them. But our musical theme is provided by Queen and David Bowie.

This is ourselves under pressure
Under pressure

Low and negative interest-rates

Pressure was applied by the initial cuts to official interest-rates but this was ramped up when the bond purchases of QE were added to it. This was a deliberate attempt to reduce bond yields which in many ways are the lifeblood of many types of pension.As ever we were promised it would be temporary as this from Bank of England Deputy Governor Sir Charles Bean from September 2010 shows.

 “It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.”

I am afraid that he took us for Charlies back then as over nine years later we are still waiting and as I shall explain in a moment matters deteriorated. As to Sir Charles he is “doing very well” as not only did he retire with a large Bank of England pension that somehow managed to be fixed to the “flawed” RPI measure of inflation but he is now at the Office for Budget Responsibility.

If we moved forwards to August 2012 our warning klaxon was triggered as we saw an official denial.

For those approaching retirement in ‘defined contribution’ schemes, lower gilt yields as a result of QE have
reduced annuity rates. But it is crucial to allow for the fact the QE has raised the value of pension fund assets too. Once allowance is made for that, QE is estimated to have had a broadly neutral impact on the value of the annuity income that can be purchased from a typical personal pension pot invested in a mixture of bonds and equities.

There always were issues with that an even it could not avoid pointing out this.

But schemes that were already in substantial deficit before
the financial crisis are likely to have seen those deficits increased.

Also the deflector screens were in operation which is a bit odd don;t you think when there is apparently no problem.

The paper notes that the main factor behind increased pension deficits and falls in annuity incomes has not
been the Bank’s asset purchases, but rather the fall in equity prices relative to government bond prices.

If we look at their last point this remains true and is much of the problem. The UK FTSE 100 has gained over 1600 points since August 2012 according to my monthly chart but the 50-year Gilt yield has plunged from 3.09% to 1.18%. So what we were told was temporary has become permanent. Regular readers will be aware of the bond market surge we have seen and in fact it was even stronger a couple of months ago when the UK 50 year yield went below 1% for a time.

The Problem

Let me now address the consequence of this which twofold. If you have a pension fund to invest in and draw from ( DC or Direct Contribution) then your annuity rate and hence pension will be low. Added to the bit that allows for the risk of you dying ( sorry for the grim bit) is a mere 1% or so. So whilst you can take 25% as a lump sum and it is tax-free the other 75% does not pay much. A single life annuity at 65 pays just over 5% so many will doubt if they will even get the sum invested back and this is with no inflation protection.

Next comes another development which has hammered final salary or Defined Benefit schemes.The trends were against them as we have looked at above but it got worse as some investors noted that you got get more yield from RPI linked Gilts than conventional ones and drove the prices even higher. This meant that the costs of a DB scheme got higher/worse and meant they were likely to continue to thin out in number.

You do not have to take my word for it as here is the Bank of England.Remember it saying in 2012 that things were neutral? Well by 2016 apparently not.

It has emerged that employees, led by the Bank’s governor, Mark Carney, received the equivalent of a 50%-plus salary contribution into their pensions last year, underwritten by the taxpayer.  ( The Guardian )

Pensions Law

Back in the days before the credit crunch I was involved in some pensions work and took the advanced qualification called AF3. I stopped because they kept changing the rules and it would have been a case of perpetual study! But even more seriously the rule changes have tripped over each other and ended in the mess that is doctors pensions. Most would want them to be covered but as the limits were cut no-one seemed to think that it could cost consultants to work for the NHS. As fast as they earned money this raised their pension value and they were/are taxed on it.

NHS England has set out plans to pay off pension tax bills for doctors who breach the annual allowance limit on pension growth in 2019/20. ( GP Online)

So there is an apparent fix but what about others who have been tripped up by changes which have turned out to be in some senses retrospective? I suspect professors are part of the USS dispute although what we have looked at already is an issue.


This is a problem because of the way that they are measured.

The pensions industry uses something called a ’discount rate’ to calculate the present value of the
scheme’s liabilities………….. The liabilities must be measured using the current yield on high quality
corporate bonds – usually AA rated bonds – regardless of how the how the trustees of the pension
scheme invest their assets

What do you think has happened here in the credit crunch era?


The arrow flying into the heart of pension saving has been the persistence of low interest-rates and bond yields.They have been not only “temporarily” low for a decade but have gone even lower. Buying an index-linked Gilt now guarantees you a negative real yield if you make a long-term investment which frankly defeats its/their whole purpose.

If we switch to the WASPI issue there is another mess. Back in the early to mid 1990s it was decided that men’s and women’s state pension ages would be equalised rather than women getting theirs at 60 as opposed to 65. In many ways it seemed fair although of course some would be adversely affected.This was sped up in 2011 but has been a policy in motion under governments including all 3 main parties in the UK. Was this unfair? If so it is hard to see how changes could be made and also what about higher retirement ages generally? Even worse plans to change this seem to mostly benefit the better off. So I have tried to avoid the politics but yet again we end up with short-term manoeuvring around a long-term issue.





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