How the credit crisis affects pensions

by Dr. Ros Altmann

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The 2008 credit crisis and Government's response has some very negative implications for pensions. Firstly, the costs of the bail-out and injections of capital will mean that capital values and dividend income for pension funds are likely to be depressed in coming years as share prices and dividend yields fall. Pension funds will suffer further funding weakness as the economic outlook worsens. The most worrying aspect, however, is that it now seems bank deposits are far safer than pensions. The maximum protection for pension investments is 90% up to a cap, whereas it seems short-term bank or building society accounts are 100% safe. Having rescued all retail depositors in Icelandic banks, even above the £50,000 supposed ceiling, it is impossible to imagine the Government refusing to similarly fully rescue future bank failures, particularly in UK banks. This leaves pensions facing significant new disincentives. Not only is the money locked away for many years and cannot be accessed even in an emergency, but if the worst happens maximum protection is only 90%, not 100%. In an ageing population, we really need to encourage longer-term savings, but unfortunately recent policies do the opposite. Employers also face bigger pension deficits in the remaining defined benefit schemes, as asset values fall and long-dated gilt prices remain relatively stable, which will accelerate closures. The only pensions that have so far remained unaffected by the financial crisis are those of public sector workers. These pensions are guaranteed, irrespective of market moves and, in the case of over 3 million workers in unfunded schemes, future taxpayers must foot the bill. The net result of the 2008 turmoil is that there is a sharply increasing divide between the pensions of private and public sector employees. This may lead to social tensions in future.


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