Triumphs and Failures Of 2008 – Review Of The Year For Pensions World
by Dr. Ros Altmann
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The biggest legislative triumph of 2008 for me was beating the Government in the Court of Appeal case in February which confirmed that Government was responsible for misleading members of final salary schemes into believing their pensions were completely protected by the 1995 Pensions Act measures. This confirmed the verdicts of the Parliamentary Ombudsman, Public Administration Select Committee and High Court. Sadly, however, this triumph has not yet led to proper compensation for many of the victims. In particular, those who are and have been seriously ill for some time have still not been properly included in the Financial Assistance Scheme. The Government is just finishing yet another consultation exercise to try to include them but several have died this year without ever obtaining justice. This was another real eye-opener to me showing how slowly the legal process and Parliament can work when a Government believes it can flout Parliamentary processes and how justice delayed really is justice denied.
The biggest failure of 2008 – wow, there are so many!
Firstly, the bailing out of IceSave retail bank deposits beyond the £50,000 protection, has very worrying implications for pensions. Pension protection is, at best, only 90% and up to a cap, while bank deposits now appear 100% safe with no limit. Why would people bother locking their money away into a pension then? They can never get the money back until retirement, even in an emergency, they pay charges and have little control over their investments and yet if their money were in a bank they will be safer and can spend it if they need to.
Secondly, the decision to plough ahead with personal accounts is another massive failure. Unless state pensions are radically reformed, personal accounts will simply not deliver for many of those at whom they are aimed. Suitability cannot be ignored. Means testing taxes the pension at least at 40% and for many at 100%. Levelling down is an even bigger threat. If a nationally organised personal accounts scheme requires just a 3% contribution from the employer, this those currently running schemes can get rid of the headache of choosing and monitoring pension providers, and organising trustee boards while also cutting pension contributions back to the 3% minimum. Almost all employers contributing to schemes are currently putting in well over 3%, so those who do have an employer scheme are at risk of being worse off.
Thirdly, the Government’s failure to turn its need for record public borrowings into an opportunity to help pension provision is such a wasted opportunity. With billions of pounds of pension and insurance money desperately seeking assets that can help match their liabilities and a shortage of long duration paper, the DMO should tap into the huge domestic pools of money and issue long-dated lpi-linked and longevity/mortality gilts. This would help pension funds and annuity providers to better match their liabilities – insurers have had to back their annuity books with corporate bonds and the losses are a hidden danger in insurers’ accounts. Issuing such gilts directly aimed at pension funds and annuity providers, or even using private placements, would reduce reliance on foreign investors, remove some of the pressure on sterling and allow Government to tap into cheap long-term funding. A win-win situation that has been ignored. What a shame.
As far as financial management is concerned, it has become clear, yet again, just how dangerous it is for long-term investors to rely on long-only equities to deliver all their returns. Diversified portfolios with some downside protection such as swaps, did not suffer as much as most pension funds. The equity risk premium exists, certainly in theory, but it cannot be relied upon. The concept of the risk premium is that investors should have a ‘chance’ of earning more than the risk-free return ‘on average’. However, some will not be rewarded (that’s why there is the risk!). Pension and other long term investors did not pay enough attention to the risk that they might not be rewarded and kept on assuming that they definitely would be. Downside protection relative to the liabilities requires more skills and competence from trustees and also a recognition that not everyone can succeed. The Pension Protection Fund even more essential!