SCRAPPING index linking for pensions could cut the UK’s £1trillion funding deficit in half at a stroke, a leading accountant and former government advisor claimed yesterday.
City A.M. understands Richard Farr, head of pensions advisory at professional services firm BDO, has written to George Osborne to urge him to abandon the index link and ease the pensions crisis.
It would bring the UK into line with countries like the US, where index-linking does not exist, and the Netherlands, where only well-funded pension pots are typically linked to prices.
The move could prove unpopular, removing an important rule which keeps the value of pension pots steady against a backdrop of sustained inflation.
But Farr, who has written industry guidelines for the Pensions Regulator, argues that taking the hit from inflation still causes much less pain than being left with nothing as funds scramble to fill enormous funding black holes in years to come.
Under his proposal only well-funded pension schemes would choose to return to index-linking, removing an additional pressure from already strained savings funds.
Pension funds have been particularly squeezed by the Bank of England’s efforts to hold down interest rates, with quantitative easing alone blamed for a £100bn increase in their deficits.
The government is already considering other moves to ease this pressure; for example by using average interest rates over a period of several years to discount the funds’ liabilities, artificially moving to a higher interest rate.
But Farr dismisses those ideas as “playing games with the numbers,” removing market values from the process and inserting figures to falsely flatter the funds.