Pension deficits soar by 33pc as Nick Clegg proposes to punish savers
Nick Clegg (right) and David Cameron
Pension fund deficits – or the difference between the promises they have issued to members and the assets they have available to pay for them – ballooned by a third last month as the shortfall soared from £60bn to £80bn.
That is the daunting conclusion of new calculations by actuaries atMercer, which demonstrate the difficulty of saving to fund old age. It’s a timely warning, coming as it does just as Deputy Prime Minister Nick Clegg proposes new ways to punish people who save for their old age.
He wants to means test benefits that pensioners currently receive on the basis of their age alone and says this is necessary to balance the books. Free bus passes and TV licences are among the targets of Mr Clegg’s cost-cutting brain wave. Such dismal cheese-paring suggests this callow Cabinet Minister must really be running out of ideas.
But the inevitable unintended consequence if Mr Clegg’s weekend wheeze staggers any further toward fruition will be to discourage saving, encouraging more people to live for the moment and forget about the future. That’s not a plan to dig our way out of a debt crisis; it’s a description of how we got here.
Just how hard it is to build up sufficient capital to provide an income for retirement is set out by Mercer’s latest survey of defined contribution or money purchase schemes run by FTSE 350 companies; a broader measure of British industry than the FTSE 100 giants. Unlike unfunded or underfunded defined benefit or final salary public sector schemes, these pensions attempt to match assets and liabilities. But deficits soared to their highest level in 2011 last month.
Bad economic data were to blame. Corporate bond yields, which are used to discount liabilities – or put a present value on funding future promises - fell during November and long-term inflation expectations increased. Ali Tayyebi, a partner at Mercer, said: “We are beginning to see the bad economic news catch up on the accounting numbers which had so far been relatively protected in the midst of the general economic turmoil.
“The relentless fall in gilt yields, due to the eurozone debt crisis and quantitative easing the UK, is now also pushing down the real yield on high quality corporate bonds. If November 30 conditions are mirrored at December 31, then many companies will be seeing an increased deficit on their balance sheet at the year end.”
That’s a dismal prospect which should serve as a reality check and put public sector pension strikes in perspective. While trade unions protest about diminishing inflation protection, losing linkage to the Retail Prices Index and switching to the Consumer Prices Index, fewer than 5pc of private sector pension savers who buy an annuity can afford any inflation protection at all. Meanwhile, 8m of the poorest people in the workplace have just been told they must wait another year before they are given the legal right to any company pension.
Those are the hard financial facts of retirement today. People saving to pay for their old age need all the encouragement they can get; not means-tested deterrents from doing so. Mr Clegg’s mean-minded proposals merely demonstrate that there is no problem so bad that politicians’ intervention cannot make it worse.
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