Credit crisis measures will worsen the pensions crisis

by Dr. Ros Altmann

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The Pensions Crisis Just Got A Whole Lot Worse
Pensions are in crisis now. Pensioners will be in crisis soon!

The Government's response to the credit crunch is dreadful for pensions. This knee-jerk panic reaction shows no sign of understanding how we got into the mess, nor how to get out of it. It's far safer now to put your money into a bank than a pension or any other long-term investment, because there is suddenly a 100% guarantee, whereas the Financial Services Compensation Scheme or Pension Protection Fund only cover around 90% up to a capped amount. This can only serve to further undermine confidence at the very time when we will need pensions more.

With markets in turmoil and banks being propped up, perhaps it's hardly surprising that pensions are not the focus of attention. However, there are huge dangers.

All private pensions hit. Almost all private pensions are invested in shares and will have lost a big chunk of their value. That means smaller pensions and potential poverty in old age. With the lowest state pension in the developed world, the UK is very poorly placed to survive the coming bulge in over 60's.

PPF risks. Even defined benefit pension schemes _ the traditional final salary arrangements _ are in deep trouble. As recession spreads and companies start to fail, there will be more strains on the Pension Protection Fund in the coming months. 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.

Annuity rates likely to worsen. Insurance companies will come under pressure as the assets to back their annuities have fallen in value. Most companies hold corporate bonds or mortgage backed securities which have plummeted in value, rather than gilts. This will leave a big hole in their annuity reserves.

Public sector pensions immune Of course, workers in a public sector pension scheme are unaffected, they are fully guaranteed by the taxpayer.

What could be done?
Pension funds need urgent help. Given that there will be big increases in public debt, there are some measures that could benefit pensions and help public finances.

  1. Issue long-dated gilts Government could issue much more long-dated conventional and index-linked gilts. The yields on this paper are at historic lows and demand from pension and annuity providers is growing. It should prove a cheap source of funding for the Government and should also help pensions. It will also improve annuity rates.
  2. Issue mortality/longevity gilts 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. By helping the private sector to hedge that risk, it will be far easier to manage.

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