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The coming pensions pandemic

Facemasks are back in the news this morning as the UK government attempts to spin its messaging through 360 degrees.  Back in the early days of the Covid-19 outbreak, you will remember, the government was keen to explain that facemasks made absolutely no difference to anything.  This was puzzling to those of us who were old enough to remember a time when everyone carried – and used – handkerchiefs.  Masks cannot guarantee that we won’t get infected.  But if everyone wears one – particularly in enclosed spaces – we reduce the chance of spreading the virus to others.  Why, then, were public health officials so hostile to people wearing masks?

The answer came a few weeks later when it emerged that Britain had privatised the company responsible for maintaining its stock of protective equipment and that – as is the wont of private companies – the stock had been sold to the highest bidder.  As a consequence, UK public health managers found themselves desperately searching the internet for, among other things, supplies of facemasks.  The very last thing they needed was 68 million Britons competing with them for this increasingly scarce resource.  And so they lied.

These things have a habit of coming back to bite you in the arse, however.  In the wake of the 2009 Swine Flu pandemic, the government of the day devised the first version of the pandemic plan which ought to have informed the response this time around.  This set out the essential role of communications in retaining public trust:

“Consistent, clear public messaging, aligned at national and local level, is critical to a successful and collaborative UK-wide response to a pandemic. This will help to maintain public trust and support, as well as in increasing uptake of recommended actions such as good respiratory and hand hygiene practices, effective and responsible use of antiviral medicines, and uptake of vaccination…

“Pandemics require the whole of society to respond, and this response will be improved if everyone has access to the information they need, in a form which works for them. This is not an easy task, but one which all organisations should strive towards…

“Openness and transparency is central to an effective pandemic response. People are likely to respond better and are more likely to take effective and appropriate action if they trust both the advice given and the person or organisation offering it.”

On this, as with many other areas, government failed to level with the public; seeking at every turn to feign omnipotence and then, when the evidence changed, seeking to claim that they had never said or done what everyone could see they had done.  Understandably, public trust has collapsed as a consequence.  Which is why, over the weekend, we have seen images of the Prime Minister wearing a facemask while government ministers argue about whether wearing facemasks in confined spaces is going to be enforced by law.

As I always remind my readers, the two key questions that we have to ask of any news reporting are:

  • Why this? and,
  • Why now?

Why are the establishment media suddenly exercised with facemasks?  Because June’s retail data is being trailed; and is expected to show that after a brief upward spike as the lockdown was relaxed, footfall plummeted once more.  This suggests that once people had picked up the items they needed during the lockdown, they were content to revert to their lockdown habits.  This is a particular problem for city centres where demand collapsed during the lockdown as large numbers of workers either worked from home or were furloughed.  It appears that despite the lockdown ending for all but the most vulnerable, we are witnessing a permanent change in the way we operate.  For their part, government ministers see a law making facemasks compulsory as a potential means of encouraging people back to their workplaces and back to the city centre stores, bars and restaurants.

Why now?  Because the government has just weeks before its various support schemes come to an end.  And so if the economy is still in the doldrums, they face a choice between even more eye-watering bailouts or with allowing even more businesses to join the growing list of bankruptcies caused by the response to Covid-19.

This is where another piece of government obfuscation is coming home to roost.  Lockdown was touted as being about saving lives.  But saving lives was only ever a secondary consideration.  The primary reason for the lockdown was that government needed to prevent critical infrastructure – including but not limited to the NHS – from being overwhelmed.  This is why, for example, infected people were moved from hospitals (considered critical) to care homes (not considered critical) with such catastrophic results.  Once, however, government had convinced people to “socially distance” on the altruistic grounds that this would prevent them from infecting and possibly killing vulnerable family, friends and neighbours, it was going to require some clinical change in the situation to bring social distancing to an end.  For the moment, at least, no such change has occurred.  And so government finds itself having to reverse course solely for economic reasons.

The fly in this ointment is that businesses have themselves woken up to the benefits of downsizing and remote working.  Just last week, for example, Reach – the owner of several UK newspapers – which had already been shedding jobs, opted to downsize its London offices; encouraging most of its remaining workforce to work remotely.  Many other employers have also noticed both the increase in productivity brought about by home working together with the huge savings which can be made on the rental of city-centre office space.  Retail companies have made the same calculation.  Those which have already gone bust included mostly firms with little internet presence beyond advertising for physical stores.  At least some of those with their own online stores – and those who have bitten the bullet and supplied goods via Amazon – have fared considerably better.  As a consequence, the survivors of the Covid-19 lockdown are already announcing High Street closures as they seek to adjust to the new conditions.

For its part, government is conflicted between attempting to turn the economic clock back to December 2019 in the hope that consumers and businesses will revert to their old habits; or encouraging and fostering a new economic landscape in which far more people work remotely and far more trade occurs online.  The Prime Minister talks a good fight, but:

“Beyond exhortations to go to the pub and shop for Britain, no one in Westminster and Whitehall seems to know where we might be heading. Whenever I speak to members of the public, there is a strong sense that they feel as if they are being left to drift, with no direction from anyone at the top. We seem to have arrived in the worst of all words: local decision-makers being all but ignored, while power at the centre is proved to be not just distant, but useless.”

The problem is that we may be witnessing less a restructuring of the economy than an unravelling.  As with any complex dynamic system, apparently minor changes – like a butterfly moving its wings in the rainforest… – can have disastrous impacts elsewhere.  Someone owns all of that commercial property that used to be rented out as office and retail space.  They are already in trouble as a consequence of the bankruptcies that have happened to date.  And things can only get worse if the businesses left standing seek to cut their costs by handing back much of the property they had been renting.

At a time when thousands of workers are being fired, few will have sympathy for bread-head landlords who have benefited from jacking up commercial rents at a greater rate than inflation for decades.  However, as Ravi Nevile, Head of Real Assets at the Aztec Group explains:

“In the UK, half of the £500 billion commercial real estate market is owned by UK and offshore real estate funds, as well as property companies whose shareholders are largely institutional investors (pension funds, insurance firms and sovereign wealth funds)…

“It’s no surprise that both retail and office assets have been severely negatively impacted. Before the crisis, retail assets were already finding life difficult, thanks to the continued growth of online shopping and the drop in customer footfall across many high streets and retail outlets. Adding COVID-19 to the mix will likely lead to a wave of restructuring and/or insolvencies of both tenants and landlords.

“Through the end of the first quarter reporting cycle, we are seeing significantly lower rent receipts. Tenants are naturally requesting rent holidays, rent reductions and changing payment schedules. Some are unwilling or unable to pay rent or are refusing to pay for certain service charge items. Again, the length and severity of this is hard to estimate at present.”

Pension and other institutional funds have been wrestling with a slow motion crisis resulting from the 2008 financial crash.  Their investment models depend upon returns of 5-8 percent to break even.  But this has been hard to achieve at a time when government bonds return just 0.5 percent.  And so we have seen a combination of stock market investment, some junk bond trading, a retreat to sectors – like commercial renting – where higher returns persist, and periodic – and hotly disputed – attempts to lower the benefits to existing pension investors.  In the public sector, where many of today’s retired population enjoy generous final salary pensions, the state is de facto bailing out funds that were never robust enough to meet their commitments.  The same issue was impacting private employers pensions even before SARS-CoV-2 put in an appearance.  But the pandemic may well make things a lot worse, as many commercial property investment funds have been “gated” – preventing investors recovering their money.  As Nick Corbishley at Wolf Street explains:

“Never before have so many property funds shut the doors on so many property investors.

“Against this backdrop of unprecedented uncertainty, as tenants of shops, bars, restaurants and offices refuse to pay their rents en masse and almost all commercial property deals fall through, it’s all but impossible to put an accurate price on the current value of commercial real estate.

“Virtually no one can escape the economic fallout from Covid-19. Not even the owners of commercial real estate, who benefited so handsomely from the central bank-engineered bailouts and property bubbles of the past decade, are immune…

“In times of extreme financial stress and uncertainty, it’s not unusual for real estate to be plagued by acute liquidity issues. In June 2016, in the aftermath of the Brexit vote, six commercial real estate (CRE) funds suspended redemptions. But never before have so many real estate funds shut the doors on so many real estate investors.”

The funds begin trading again in September – which is one reason why the government is desperate to get us back to our old working and shopping habits as soon as possible.  If they fail to do so then the millions of pounds of rent arrears which have already built up will turn into a tsunami which could prove unstoppable.  The sheer size of the baby-boomer generation which is now retiring – and which paid into pension funds in good faith – makes the pensions industry too big to save.  Governments have known this for decades, but have preferred to kick the can down the road – shaving benefits off here, raising retirement ages there – in the hope that the crisis will land on someone else.  That “someone else” looks like being the current government; and there is no means by which, having  already run up a public debt of more than 100 percent of GDP, they are going to be able to step in and underwrite the pensions of an entire generation.

To add to their woes, at times of extreme economic stress – such as in the 1930s and the 1980s – governments come under irresistible political pressure to provide employment to younger workers.  This inevitably leads to a call to lower the retirement age or find some other surreptitious (e.g. Thatcher’s use of Incapacity Benefit) means of excluding the over-50s from the workplace.  Which leaves the government with a hard choice between raising the retirement age still further and blocking access to jobs for younger workers, or finding ways of underwriting earlier retirement in order to free up the jobs market.  Both will prove to be eye-wateringly expensive now that Britain has lost its revenue from the North Sea and its banking and finance sectors’ access to the EU.  Might it be that Britain is about to achieve another first? – being the first developed state to experience a pensions crisis which will spread like a virus across the world.

As you made it to the end…

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