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Who pays?

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The vultures are circling around number 11 Downing Street this week, as the pandemic – or at least the state response to it – comes to an end.  Unlike the positively lethal attempt at letting the virus rip through an entirely vulnerable population in February last year, the government is gambling that as more than 90 percent of us have antibodies, a herd immunity approach will bring a third wave to an early end.  So long as hospitalisation and death rates remain low, the government will get away with it; although the cost of long-Covid among younger adults will only become apparent months and years from now.

Some version of “back to normal” – in the sense that government support programmes will have been removed by the end of the year – is on the horizon.  And as the support is withdrawn, we will be treated to the unedifying sight of the upper classes making spurious arguments as to why they cannot possibly be asked to contribute toward the final bill.

One such argument is being made about the UK’s far from generous state pension.  In part because older people are more likely to vote Tory, David Cameron’s government introduced the so-called “triple lock” on the state pension.  Every year until 2024, the pension would be increased by the highest of:

  • The increase in average earnings
  • The increase in prices, as measured by the Consumer Prices Index (CPI)
  • 2.5 per cent.

Because of the anomalies thrown up by the lockdowns and restrictions, both earnings and prices are rising far higher than would have been anticipated – potentially providing British pensioners with an eight percent rise next year.  Since pensions account for 19 percent of public spending, the additional cost of sticking to the triple lock would be £3bn more than expected.

Reneging on the triple lock will no doubt be portrayed as penny pinching; in line with the Tory instinct to take money from the poor first.  But it is also based on the erroneous belief that most pensioners have generous occupational or private pensions.  In fact, more than 17 percent of pensioners have only the state pension to fall back on; and many require additional benefits to remain above the poverty line.  Moreover, those private pensions may not be as generous as people imagine.  While 60 percent of pensioners have occupational pensions, the median weekly payment in 2019 was just £181.  Slightly more – 69 percent – have private pensions, with a median weekly payment of £175.  A very wealthy eight percent of occupational pension holders and seven percent of private pension holders enjoyed incomes of more than £750 per week.

Proponents of cutting the state pension point to this minority of high-wealth pensioners in comparison to today’s working people whose taxes are used to pay the pensions bill.  In this way, they exploit and extend a division between the “baby boomer” and “millennials” generations.  Note, however, that these generations are an artificial construct which often obscures more than it clarifies.  There are, for example, huge differences between the early – 1947 – boomers and the late – 1965 boomers; the former enjoying the fruits of the post-war boom, the later reaping the results of the stagflationary crisis of the 1970s.  In the same way, there is a huge gulf between the Eton and Oxford educated millennial who went on to pick up a seven-figure salary in the City, and her counterpart who went straight from school into low-paid work.

The fact is that while a relatively small number of affluent pensioners can afford to treat the state pension as pin money, a growing number at the bottom of the income ladder depend upon it as their sole source of income.  And compared to other developed countries, the UK state pension is among the lowest.  As Claire Elliott at Business for Scotland wrote in 2018:

“The UK has the worst state pension in the developed world – in 2016 it was only worth 29% of average income. It is striking how much less that is than other countries: the EU average is 70.5% meaning that UK pensions receive more than two times less than comparable countries. The only country to receive less is South Africa, where state pension equals 17.1% of average incomes. Considering that South Africa has the highest rates of inequality in the world and more than half the population is living in poverty, it is hardly a nation to benchmark against.”

The UK also spends significantly less – 4.7 percent – of its GDP on the state pension compared to the OECD average of 6.5 percent of GDP.  Our European neighbours spend far more – Germany 8.0 percent; Belgium 8.2; Italy 11.5; France 11.9.

Unlike the majority of European states, the UK is much more dependent upon occupational and private pensions… which is fine on an infinite planet where a growth rate of five percent or more can continue forever.  Unfortunately, that is not the planet we live on.  And much of the supposed wealth locked up in pension funds was used to keep the global economy from collapsing after the 2008 crash.

There are three layers to a growing pensions crisis which is going to heat up in the course of the 2020s.  Most obviously, there are spiv characters like the late “Captain Bob” Maxwell, who use the occupational pension fund as a personal account to be fraudulently dipped into at will.  No doubt as a series of pension funds collapse in the next few years, the media will focus on these types of crook to draw attention away from the broader failure of the sector.  Because the rules allow organisations of all kinds to dip into the pension fund to cover short-term cash shortages.  And it turns out that almost everyone has been doing it.

The last edition of Private Eye reports considerable “financial engineering” in the British Telecom pension fund:

“With pension liabilities (many dating from pre-privatisation days) now at £65bn, or more than three times the value of the company, and a deficit in the fund from which to pay them of £8bn, BT is perhaps better thought of as a pension scheme that does telecoms on the side.”

Nor is BT alone in this.  In an article for This is Money in 2018, Rachel Millard reported that:

“A black hole of nearly £190billion has opened up in the retirement plans of millions of workers.  Two in three pension schemes in the UK are in the red, according to the latest industry figures.

“The biggest pension deficits in the FTSE 100 include BT with £9billion, Shell with £6.9billion, BP with £6.7billion and BAE £6.6billion.”

The reference to pension debts dating from pre-privatisation days shows that governments themselves have not been shy about dipping into the occupational pension fund when it suits them.  For example, recent media stories about the current government’s treatment of the miners’ pension scheme point to decades of government syphoning money away.  As Miners’ Advice UK explain:

“Since the miners’ pension fund was first formed, the government of the day saw the fund as a goose that laid the golden egg. The Tories took billions of pounds from the fund, creamed off from the profits made from investments. When the fund was first set up nobody had any idea of the vast sums that would be involved. The Labour party, at that time in opposition, vehemently voiced their disproval of the Tories taking such huge amounts of cash from the fund, but once in power they too continued to rake off the profits to the tune of a million pounds a day.”

Even charities have been dipping into their pensions funds.  As Nigel Davies at the Charity Commission discovered recently:

“We know from the collapse of some substantial businesses that failure to manage a pension deficit can pose a serious threat to an organisation’s future, so we carried out some research into charities with pension scheme deficits.

“We began this work by reviewing the financial accounts of 89 randomly selected charities and 11 charities identified through proactive work, each of which reported a pensions deficit. The charities identified had a combined pensions deficit of £557.4m.”

Most of these examples from the giant BT deficit down to the medium size charity involve the second layer of the unfolding pensions crisis.  There is no deliberate fraud; and in most cases the trustees will be following existing practice guidelines.  As Davies puts it:

“The good news is that most were found to be handling this risk appropriately. The bad news is that, even where the risk was being well managed, we found most charities did not report the matter in enough detail in their annual accounts and trustees’ annual report… Only 26% of charities included the pension deficit as a risk in the report and only 28% clearly explained, in our view, how they were handling their pension deficit.”

The deeper problem lies with the guidelines and with the business models on which the pension schemes operate.  Whereas Maxwell was simply trousering the pensioners’ money, most deficits are in the form of preferential loans from the pension fund to the company.  That is, rather than issuing shares or taking out a bank loan, the organisation can borrow from the pension fund against the promise to repay out of future profits.  Whether we should have allowed pension funds to do this is a moot point.  Far more important is that since 2008, repaying these loans has been a lot harder; and this won’t have been helped by the pandemic.  Again, when the proverbial hits the fan, establishment media will no doubt focus on the worst extremes to present the problem in terms of individual folly rather than systemic crisis.  But the fact remains that one of the main ways in which the 2008 crisis was paid for was through the abuse of company pensions funds; without which, many of those organisations would have gone out of business.

The other way in which future pensioners have picked up the tab for the 2008 crash – the third layer of the crisis – is through the central bank policy of zero percent interest rates.  Like so much of what is wrong with our current narrative, pension fund business plans were based upon the once-and-done post-war boom 1953 to 1973; during which returns of 5-8 percent could easily be achieved.  That boom, though, was the one-off result of the European and Asian states making the switch from coal to oil.  As a result, it will never be repeated; so that projected returns on investment are far higher than can actually be achieved.

This is why, for example, university staff are being asked to agree to higher contributions to fill gaps in their pension fund.  As Richard Adams at the Guardian reports:

“The Universities Superannuation Scheme (USS), which is the major staff pension fund for many British universities and academic institutions, announced it wants to increase combined contributions required from staff and employers from 30.7% of payroll to as much as 56%, to cover its projected deficits.”

For the moment, occupational pension schemes appear better than any of the alternatives.  But that assumes that after four decades paying in, members will get anything close to what was promised.  As the crisis deepens and pension scheme managers ask for ever higher contributions, there will come a tipping point where workers opt out; either seeking alternative ways of saving or not bothering to save at all.  And any form of contributions strike will hasten the collapse of many of these schemes. 

The UK Pensions Protection Scheme is the current fall-back for those whose pension scheme collapses:

“We protect the futures of millions of people in the UK who are members of a type of workplace pension scheme called a ‘defined benefit pension scheme’.

“Over 230,000 people already receive benefit payments from us, instead of from their pension scheme. This is because the employer who funded their scheme became insolvent and there weren’t enough funds to secure benefits for its members which were at least equal to PPF compensation.

“Many more people are likely to receive benefits from us in the future.”

Insofar as the UK government can borrow or print new currency into existence more or less at will, these failed pension funds may continue to be underwritten indefinitely.  But this isn’t cost free. Currency borrowed into existence requires some combination of tax increases and public spending cuts.  Direct currency printing, on the other hand, is inflationary – pensioners may receive the nominal amount they were promised but nowhere near the true value.

This suggests that the UK variant of the pensions crisis will first emerge as a political rather than a financial issue.  There is a sizeable and growing population of retirees who depend solely on the state pension and the various top-up benefits that make life bearable.  There is also a growing population of near-retirees who are realising that there is a big gulf between the pension they were promised and the pension they are going to get.  And finally, there is a much larger working population who will be increasingly aware that as the occupational and private pension schemes crash, the meagre state pension is likely all they will have in retirement.  Which is precisely why, of course, the establishment media and the political class are desperate to conjure up an inter-generational conflict to distract from the true nature of the crisis.

As you made it to the end…

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