The chancellor may be cheering the collapse in government bond yields since Mark Carney announced a fresh round of monetary easing last week, but companies with final salary pension schemes certainly are not.
If gilt yields fall, pension fund deficits widen – and the increasing price of government bonds barely counteracts this. According to former pension minister Ros Altmann, for every one percentage point fall in long gilt yields, the average pension fund’s asset values edge up 7-10 per cent but its liabilities jump 20 per cent.
A few companies may fail as a consequence of the extra burden. But falling yields have also impacted individual savers, and threaten to undermine what’s left of Britain’s savings culture.
Annuity rates are directly related to gilt yields, and today annuities pay a miserly income even for those with enormous pots. Financial adviser Tilney says £1m will now buy a 65-year-old an inflation-linked annual income of just £25,000. Many will look at the years of delayed gratification required for a few pennies extra in retirement and, disastrously, judge it not worth the bother.
George Osborne’s pension reforms thankfully mean people can avoid annuities altogether. But if we’re going to head off a broader collapse in saving, there is more the government must do.
First, it should reverse its decision to cut the pension lifetime allowance to £1m. It already penalises those who do the right thing and make wise investment decisions. When £1m no longer gets you very much in terms of income, the lifetime limit makes even less sense.
Second, government must be much clearer about what pension tax reliefs will look like in the future. There was speculation earlier in the year that the current system would be abolished. These plans fell victim to politics, but savers need greater certainty if they’re to commit to the long-term task of retirement saving.
Finally, unaffordable pledges like the state pension triple-lock have compounded expectations that government will provide a comfortable income for retirees indefinitely. It won’t. Let’s be honest with younger people: they will be overwhelmingly reliant on money they save themselves. However poor returns might be now, they will be better off with some retirement income than none.