major problem – banking industry instability – has made the
pensions crisis “a whole lot worse”, warns independent policy
adviser Ros Altmann.
Quite simply, she explained, by providing a 100 percent
guarantee on bank deposits it is now far safer for consumers to put
their money into a bank than a pension or any other long-term
investment where protection provided by the Financial Services
Compensation Scheme and Pension Protection Fund only cover about 90
percent of investments up to a capped amount.
“With markets in turmoil and banks being propped up, perhaps it
is hardly surprising that pensions are not the focus of attention,”
said Altmann. “However, there are huge dangers.”
Among dangers is that almost all private defined contribution
(DC) pensions are invested in shares and will have lost a big
portion of their value.
“That means smaller pensions and potential poverty in old age,”
she warned. “With the lowest state pension in the developed world,
the UK is very poorly placed to survive the coming bulge in
Underscoring her view employee benefits specialist Aon
Consulting reports that the value of DC pension scheme assets have
plummeted by 28 percent between October 2007 and October from £552
billion ($850 billion) to £395 billion. This fall came despite
total contributions of £6.7 billion made by employers and the 3.7
million members of DC pension schemes over the period.
Even defined benefit pension schemes are “in deep trouble,” said
Altmann, and added: “Any employer with a scheme invested in
equities or corporate bonds, or indeed property or anything else
except gilts, will have suffered severe losses recently. Deficits
will be far worse and employers are unlikely to have spare cash to
fill those holes.”
She added that annuity rates are also likely to decline because
assets backing insurers’ liabilities have fallen in value.
“Most [insurance] companies hold corporate bonds or
mortgage-backed securities which have plummeted in value, rather
than gilts,” said Altmann. “This will leave a big hole in their
Pension funds need urgent help and given that there will be big
increases in public debt there are some measures the government can
take that could benefit pensions and help public finances, said
One of these is to issue much more long-dated conventional and
inflation index-linked gilts. In the latter, semi-annual coupon
payments and the principal payment are adjusted in line with
movements in the UK’s General Index of Retail Prices.
“The yields on this paper are at historic lows and demand from
pension and annuity providers is growing,” said Altmann. It should
prove a cheap source of funding for the government, should help
pensions and improve annuity rates, she added.
Offering another suggestion Altmann said the government should
also issue mortality and longevity bonds as soon as possible.
“It is clear that the ultimate risk of supporting increasing
numbers of older people must lie with the government,” she
stressed. “By helping the private sector to hedge that risk, it
will be far easier to manage.”