Wednesday 5 August 2020 4:05 am

Without reform, the government’s Ponzi Pension Scheme will bankrupt us all

Bill Blain is market strategist and head of alternative assets at Shard Capital. He writes a daily market commentary called The Morning Porridge

For the past decade, financial markets have been dominated by the ongoing distortions set in motion by the last financial crisis in 2008. 

Regulatory overkill of City dealing, quantitative easing (QE) and zero interest rate policies (ZIRP) have combined to drive financial assets — stocks and shares — to record prices. Now, the consequences are starting to bite.

Financial asset stagflation is just one of these consequences. A stock that cost $1 dollar in 2010 and made $1 in profit costs $10 today, but still makes $1 in distributable profits results in slashed returns. A bond that yielded 10 per cent in 2010 might pay a miserly 0.8 per cent today. 

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The result of such crashing returns is that a pension pot which would have provided a £50,000 annual pension income 10 years ago will probably pay less than £4,000 today. It’s a grim reality that pensions firms and schemes are struggling to address. 

University staff are particularly furious. They are threatening to strike because their gold-plated final salary schemes are at risk. The University Superannuation Scheme (USS) faces a £20bn funding gap — which will require universities and staff to significantly increase contributions so the fund can maintain its level of pension provision. 

It’s not just the effect of financial asset stagflation on the final salary scheme that is causing the crisis. People are living longer so requiring pension payouts for longer, shifting the actuarial goalposts even as the returns plummet. 

This demographic trend combined with ZIRP and QE Infinity has sparked a voracious appetite for more and more cash from pension schemes just to stand still. 

As long as markets remain distorted by low rates, paying the pensions of retirees will eventually consume all the salaries and contributions of the entire university sector — and there will still be an unfillable hole at the centre of the pension scheme.

No wonder, then, that the richer universities have pulled out of the scheme entirely — unwilling to share risk with the less financially secure institutions that are most likely to struggle as pension liabilities increase just as student numbers (especially lucrative foreign students) are hit by the impact of Covid-19.

Final salary pension schemes may be unsustainable, but no one lucky enough to have one is willing to give it up, hence the protests and strikes by university staff. Those of us outside defined benefit schemes who have saved our own pension pots face the same problem of how to stretch our pension savings in this low return landscape, without the benefit of being able to go on strike at the injustice of it all. Truly, pensions are two-tiered system.

It’s going to get worse. At this rate, within a few years the UK will be paying about 25 per cent more in gold-plated pensions to government workers than it receives in tax revenues — meaning those of us saving for our own pensions will be taxed more to pay for theirs. 

It is grossly unfair that those of us responsible for our own retirement will end up paying for those who are not. But what can the government do? If it tries to undo gold-plated public sector pensions, expect strikes and civil unrest as everyone from firemen and nurses to City Hall bureaucrats demands that they are a special case and entitled to their pensions. It’s going to be difficult to argue that rights which workers have spent a lifetime working towards can be undone. 

But it’s going to be even more difficult to find the money from those of us facing unprotected pension poverty.

The UK faces enormous challenges in coming years. We’ve got Brexit and finding a new place in the world to consider. We’ve got the urgent reform of the NHS and education system to finance to make them fit for the future. We’ve got tired and ailing infrastructure to replace and modernise to cope with the still unknown post-pandemic economic landscape.

How are we going to fund it all when we’ve just spent trillions on Covid?

Some hope that governments will “magic” up the money from Modern Monetary Theory policies based on rebasing national debt. The jury is out on how these might work, but it’s likely that if this were a viable option, some government or other would have tried it already. Without proper reform, unpopular though it may be, the unsustainable pensions black hole will continue to expand.

It sometimes feels like the UK government might just be a massive Ponzi Pension Scheme looking to bankrupt us all.

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Main image credit: Getty

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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