Something of a death spiral

Pension promises to 29,000 past and present staff are weighing on investor sentiment. The company has promised them £3.38 billion of retirement payments, but the pension schemes have assets of only £2.57 billion. The shortfall after tax has doubled in the past year from £318 million to £663 million because of the fall in bond yields.

The company is committed to making deficit-filling payments of as much as £47 million a year up to 2029, but its deteriorating financial strength could oblige the trustees to demand faster or bigger payments.

Just when you need all the cash you can in the business is exactly when the pensions trustees come knocking. And a goodly part of this is QE caused of course. Which is rather why, contrary to the Dicktater, we are going to reverse QE at some point.

39 thoughts on “Something of a death spiral”

  1. Bloke in North Dorset

    “And a goodly part of this is QE caused of course.”

    How so? I think I understand it as having to buy low yealeing gilts, is that right?

  2. The gilts you already own rise in value as interest rates fall. But they also only last 10-30 years, at which point they pay out at par. You then reinvest at the new, lower interest rate.

    However, the amount of capital you need to ensure the future payout is determined by the average life of a pension in the scheme. These days very much longer than the low end of that 10-30 year gap. The Ogden Rate (not entirely the same thing, but related, this is the discount rate for injury payouts) is now negative, minus 0.75 % from memory. Thus the capital amount to ensure that future income has leapt as a result of QE. Something similar has happened to pensions schemes.

    The capital required has risen faster than the value of the assets.

  3. This all started under Thatcher.

    Stopping companies from building up pension surpluses (for the inevitable rainy day) because the tax allowable expenditure was hurting corporation tax receipts.

    Without the pension holidays that then resulted, this would all very likely have taken (for better or worse?) a quite different route.

  4. @ PF
    The main impact of the limit on pension fund surpluses was during the tech bubble in the 1990s, after Mrs Thatcher was persuaded to retire. What it did was stop the Trustees buying shares which fell in value after 2000. So pension holidays were not such a bad idea.
    The limit on pension fund surpluses dates back a long way (pre-Thatcher IIRC) but only became an issue under Major and Blair.
    Yesterday’s FT says that the real return on gilt-edged is -2.21% so if you are entitled to £10 in 25 years time, the Trustees need to invest £17 today – a year ago it was -1.97% so they would “only” have needed £16 – compared with £4.78 if we lived in “normal” circumstances with a yield of 3%. QE has *trebled* the cost of some pensions.

  5. Thus is demonstrated that QE is not painless. And yet another demonstration that the State’s financial policies favour borrowers over savers. For the State really has no money. It’s savers have had to rescue the economy & “Save the World!”. Not some monocular fucking Jockster.

  6. @PF
    Maybe the last 60 years – you could say Macmillan and Wilson’s immigration policy caused the recent terrorist attacks.

  7. pensions were also damaged when governments dictated that surpluses should be paid out in enhanced benefits, instead of returned to the company, which was, after all, fulfilling its side of the bargain.

  8. As many others have pointed out linking pension fund valuations to gilt yelds is stupid and self defeating. A long run average return from a range of assets such as equities, commercial property and some gilts would be more realistic. Anybody know any good jokes about actuaries?

  9. “The limit on pension fund surpluses dates back a long way (pre-Thatcher IIRC) but only became an issue under Major and Blair.” My memory is that Lawson took a leading role in the, so Thatcher’s time.

  10. J77

    You are probably absolutely right, but I thought the 1986 Finance Act was the catalyst for a number of those changes (particularly wrt to assessing and responding to surpluses)?

    Yes, no doubt lots of other stuff in addition. FRS 17 didn’t exactly help either when it came to defined benefit schemes.

  11. @john77
    “Yesterday’s FT says that the real return on gilt-edged is -2.21% so if you are entitled to £10 in 25 years time, the Trustees need to invest £17 today – a year ago it was -1.97% so they would “only” have needed £16 – compared with £4.78 if we lived in “normal” circumstances with a yield of 3%. QE has *trebled* the cost of some pensions.”
    Great explanation – amazing that those figures are not on the BBC website anywhere.

  12. “real return on gilt-edged is -2.21% so if you are entitled to £10 in 25 years time, the Trustees need to invest £17 today – a year ago it was -1.97% so they would “only” have needed £16 – compared with £4.78 if we lived in “normal” circumstances with a yield of 3%. QE has *trebled* the cost of some pensions.”

    I missed the full impact of that.

    Absolutely remarkable when you consider that the Murf wants people to gamble their pensions on “investments” upon which those in the future “might” choose to offer / provide a rent or return…

  13. John77

    Silly, I know, but if you were to translate those figures for public sector pensions, what would that liability add up to? And would your calculator have space for the zeros?

  14. So are they chasing after the company chief executive to personally make up a shortfall in the pension?
    After all that worked before.

  15. @ Recusant
    Applied to a 21-year-old joining the Local Government Pension Scheme (now a career-average scheme), the value of the pension earned in a year’s service is greater than the nominal salary.
    Under the old final salary scheme, the value of the pension of a Permanent Secretary at his retirement date would be more than £5 million at these rates,
    I don’t have the data necessary to work out the current value of the cost of Civil Service pensions and, frankly, I prefer not to know as I cannot do anything about it.

  16. @ dearieme
    *My* memory is that there were requirements by the Inland Revenue to reduce surpluses before Thatcher, let alone Lawson.
    See also my immediately preceding post.

  17. Following on from John77’s point, when I am with the Army Reserve, I get around £150 a day pay and over £3p.a. (1/47) in pension.

    If I was 65, annuity rates appear to be about 1/20th of the fund (loads of variables not taken in to account) so my pension provision is worth somewhere between 1/3 and 1/2 of my gross nominal pay. It’s quite good (although the new pension doesn’t pay out until 67.)

  18. The number of defined benefit (DB) schemes in the private sector is shrinking very rapidly and almost none are open to new entrants. Almost all are Defined Contribution (DC) schemes. Unlike the public sector of course, where it is DB all the way to the money tree and back. Second the discount rate for many of these schemes shifted a while back to corporate bonds rather than gilts, which makes things a bit easier, although not great. Third, the cap on private pension pots of 1.2m would only buy a pension of around 30k for a private sector pensioner, but a public sector pensioner receiving 30k is only judged to have a pension ‘worth’600k. How does that work then if not to favour the public sector even more than we already do? What’s Cameron’s pension pot worth on a private sector basis? Or Bercow’s?
    The reason for Brexit et al is that the political class, with their tax free perks and allowances combined with their generous pension schemes suffer almost none of the consequences of their own terrible policies.

  19. “Third, the cap on private pension pots of 1.2m would only buy a pension of around 30k for a private sector pensioner”

    Lifetime allowance is £1m now.

    Can’t have these filthy rich private sector pensioners being subsidised by the state.

    After all, the state needs to be able to afford to subsidise pensions for public sector workers.

  20. Mark T,

    I just looked up the published annuity rates for my calculation above and, at 65, £100,000 was buying £5200 and bits? So your £1.2m would buy £62k?

    Also, it’s very close to the 20 times multiplier HMRC use for all DB schemes (I’m lucky to have a few years in a private sector DB scheme as well as all three eras of the MoD scheme.)

  21. I spent 10 years in HMIT leaving in 1997. IIRC my final salary was £36k. I’m 55 in August so will be taking my pension early. £5.8k p.a. plus c£18k lump sum + c£6k refund of widow’s pension contributions as I am single.

    The £5.8k is of course linked to CPI.

    I’m informed that this has been calculated as taking up just about 14% of my LTA.

    I don’t begrudge other public sector workers being defensive about wanting to keep their pensions but FFS they ought to accept how stonkingly generous they are.

  22. The 20x call appears reasonable when you compare a level non-guaranteed single annuity but that isn’t what the civil service or other DB scheme give. Oh no. Look for an inflation linked spouse survivor paying guaranteed pension. Suddenly the rates don’t seem so good.

    And they wonder why people put the funds into property…..

  23. No, I know the MoD schemes are generous (and I’d love to be on the new CS scheme with my current daily rate, relatively poor though it is to other contracts I have.)

    Equally, my other DB scheme seems really quite good.

    We put 10% employers contributions in, atm, and don’t require matching. It’s nowhere near the same.

  24. Bloke in North Dorset

    I don’t know why anyone would buy annuities now. I’ve just had lunch with an old Army friend who’s just stopped work and we were discussing draw down.

    When I did my spreadsheets for stopping work I planned on needing more money now and less as I got steadily older. The boat will probably go in 5 or 6 years as my back gets worse, saving around £7.5k pa as well as providing a small capital injection. Then the adventure holidays won’t be as adventurous and so cheaper.

    Other expenses will go and if I’m lucky enough to live to 90 then I suppose I’ll have to start selling the house.

  25. I work in this space and I have never understood annuities being purchased by people with large houses. You are insuring against tail risk, the risk that you will live to 90+ and keep going strong. That happens to large numbers of people but they are drawn from a massive popluation. The chances of it happening to you are very small indeed. And if it does…..sell the house and go cruising until the money runs out as a large house will fund years of high living.

    In a low interest rate world with an insurers required return on capital it would be amazing if you got even a zero return on funds paid into an annuity in which case put your pile in cash and draw down. If you take some risk in equities (dividend paying so not too much risk) hen you could live off income and small amounts of capital. Even at 3% return, hardly stellar, my self funded pension will outlast me if I draw at the same rate as an annuity. On top of this if I die early the fund is passed as part of my estate.

    The ECJ ruling on changing spouse definitions retrospectively is (yet) another nail in the coffin of pensions.

  26. Oh and the lifetime allowance being notched down all the time is another massive issue. I am 20 years away from retirement and in peak earning years and it is going to be an issue. And then I compare what I get for my £1m and highly taxed overage with the civil servants and cry. And the bastards complain about paying a few % in as if they are fully funding the liability.

  27. “needing more money now and less as I got steadily older”: until you need to pay for decorating, handyman work, gardening, adapting the house to suit codgers, ……

  28. @jgh.


    Taken at 55. And I only worked for HMIT for 10 years and at a rough guess i’d say my average salary was maybe £26k over those 10 years. And it is indexed. And I’m getting a lump sum of c £18k.

    I’d say that was generous for a non-contributory pension. True I had to make widow’ s pension contributions but I’m single so I am getting those back. With interest.

    If you can find a better private pension do let us know.

  29. Bloke in North Dorset

    “needing more money now and less as I got steadily older”: until you need to pay for decorating”

    Not that bothered and that’s what a son is for.

    “handyman work”

    Ditto, but I also spent the first 5 years making it low maintenance.


    Again it’s low maintenance and Mrs BiND’s job. If she’s not up to it we’re moving.

    “adapting the house to suit codgers, ……”

    We made sure we bought a bungalow on a flat plot. If it come to it a bit of work is needed for wheel chair access to turn a couple of steps in to ramps. Again, if it’s too much we down size because she’ll have had to give up painting and won’t need the studio.

    And yes I know, the best laid plans …. but as I said to my friend, at our age we’re one doctor’s visit away from starting some very uncomfortable conversations.

  30. @ Mark T
    Much of the difference between corporate bond yields and gilt yields is the risk of default and only an idiot or a regulator would ignore the risk of default. It’s perfectly fair to include the higher yield that results from the lesser liquidity of corporate bonds because a pension fund should hold them to maturity (or when the remaining term is so short that pick up yield with no loss of quality by going longer). Just saying things are better by assuming a higher return from taking on extra risk when your actual portfolio is unchanged sounds very Alastair Campbell to me.

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