{"id":20092,"date":"2013-04-15T10:01:58","date_gmt":"2013-04-15T09:01:58","guid":{"rendered":"http:\/\/www.taxresearch.org.uk\/Blog\/?p=20092"},"modified":"2013-04-15T10:01:58","modified_gmt":"2013-04-15T09:01:58","slug":"pension-deficits-are-an-issue-but-the-real-problem-is-the-deficit-of-thinking-about-what-pensions-funds-do","status":"publish","type":"post","link":"https:\/\/www.taxresearch.org.uk\/Blog\/2013\/04\/15\/pension-deficits-are-an-issue-but-the-real-problem-is-the-deficit-of-thinking-about-what-pensions-funds-do\/","title":{"rendered":"Pension deficits are an issue but the real problem is the deficit of thinking about what pensions funds do"},"content":{"rendered":"

As the FT notes this morning<\/a>:<\/p>\n

UK companies reporting annual results for the year to March are expected to report an increase of more than \u00a3100bn in their aggregate pension scheme deficits, according to actuarial forecasts.<\/p>\n

This year\u2019s reporting season is likely to expose larger, not smaller, pension shortfalls than existed a year ago, despite sharp rises in stock and bond markets where retirement schemes have invested their assets.<\/p>\n

That is because investors, including pension schemes, have\u00a0piled into corporate bonds<\/a>\u00a0in recent months, seeking higher yields than those on risk-free debt.<\/p>\n

The effect of all that buying has driven down yields on high-quality corporate debt that are used to calculate corporate pension liabilities that show up on company balance sheets. The lower the interest rate used to discount the value of future pension promises, the higher the current level of liabilities.<\/p><\/blockquote>\n

And so the mad merry go round of large company pensions being invested in large companies who can't meet their pension obligations goes on. It's very hard to see this is anything else but MAD - Mutually Assured Destruction.<\/p>\n

There is an alternative. I wrote it with Colin Hines in our paper 'Making\u00a0Pensions Work<\/a>'. As we explain in that report:<\/p>\n

99% of all investment in corporate shares\u00a0and bonds made by pension funds is in what might best be called \u201csecond hand\u201d shares or bonds\u00a0already in issue. The purchase or sale of such shares or bonds provides the issuing companies\u00a0nominally responsible for these assets with no direct benefit at all from their purchase. It was of\u00a0course true that when first issued such shares and bonds would have provided funds to the company\u00a0that issued them, and whose name they bear, but thereafter whenever they are bought and sold \u2014\u00a0as they are day in, day out by pension funds \u2014 not one penny of the money traded goes to the\u00a0benefit of that company. Instead all of it goes to the previous owner of the share or bond in\u00a0question. That may be a pension fund, of course, but the point is that none of this speculative\u00a0activity does in any way benefit the productive economy. As such a pension funds purchase of these\u00a0assets creates no new investment or employment opportunities. In economic terms these pension\u00a0fund \u201cinvestments\u201d are, therefore, savings activities and not investment activities.<\/p><\/blockquote>\n

In other words; pensions are not invested. And since large companies aren't investing either right now, pension money is in effect being\u00a0poured\u00a0down a giant sink. That's despite some \u00a380 billion a year going into pensions and the subsidy to the pension sector, when we prepared our report, being some \u00a338 billion a year form the state - despite which it\u00a0still\u00a0could not make a positive pension return (which shows just how bad they are at what they do).<\/p>\n

That's for a good reason. As we\u00a0explained, the existing pension model is fundamentally flawed:<\/p>\n

The reform of\u00a0pensions required at this time must be based upon recognition of the fundamental pension contract\u00a0that exists within any society. This is that one generation, the older one, will through its own efforts\u00a0create capital assets and infrastructure in both the state and private sectors which the following\u00a0younger generation can use in the course of their work. In exchange for their subsequent use of\u00a0these assets for their own benefit that succeeding younger generation will, in effect, meet the\u00a0income needs of the older generation when they are in retirement. Unless this fundamental\u00a0compact that underpins all pensions is honoured any pension system will fail.<\/p>\n

This compact is ignored in the existing pension system. Indeed, the current pension system does not\u00a0even recognise that it exists. Whilst state subsidised saving for pensions is undoubtedly taking place\u00a0there is no link between that activity and necessary investment in new capital goods, infrastructure,\u00a0job creation and skills. As a result state subsidy is being given with no return to the state appearing\u00a0to arise as a consequence, precisely because this is a subsidy for saving which does not generate any\u00a0new wealth. This is the fundamental economic problem and malaise in our current pension\u00a0arrangement.<\/p>\n

In the meantime, and as importantly, a massive but unproductive industry in managing pensions\u00a0funds has been created, which enormously reallocates wealth to the City of London but which\u00a0appears unable to pay any adequate pension returns.<\/p><\/blockquote>\n

No surprise at the end there, of course. It's ever thus in our economy. But this has to change, and it could. As we argued:<\/p>\n

Most importantly we suggest that if those pension funds are to attract tax relief in future they must\u00a0use a significant part of the \u00a380 billion of contributions they receive each year to invest in new jobs,\u00a0new technology and new infrastructure for the UK so that the wealth that is needed to grow our\u00a0economy, to create jobs and to build the real capital base that must be passed to the next\u00a0generation is built on the back of pension fund investment.<\/p>\n

Next we suggest radical improvements in the transparency of pension funds so that all pension\u00a0investors can hold them to account for the use of the money entrusted to their care \u2014 something\u00a0that is impossible to do at present.<\/p>\n

Thirdly, we recommend that current pension deficits in final salary schemes be cleared wherever\u00a0possible by the issue of new shares in the companies responsible for those funds. This would stop\u00a0the current fruitless drainage of cash out of companies that should be used for real investment and\u00a0which is instead directed via pension funds into the stock market to buy shares in other companies,\u00a0the only benefit of which is to create a spiral of stock exchange boom and bust. We also suggest that\u00a0future contributions to such final salary pension schemes might also be paid, at least in part, by\u00a0issuing new shares in the companies responsible for those final salary pension schemes. This would\u00a0free cash within those companies for real investment in real products and services that create\u00a0wealth in the UK economy. The benefit of that investment in new products and services would then\u00a0be shared with the people working in those companies as a result of the mutualisation of their\u00a0ownership via their pension funds.<\/p>\n

Lastly we recommend that if enforced saving is to be required by the government then that\u00a0government has a duty to ensure that the funds so saved are invested for the common good.<\/p>\n

Pension fund performance over the last decade has a been a history of almost perpetual loss making\u00a0despite the enormous subsidies that pension fund tax relief has provided to the City of London and\u00a0stock markets, all of which they have frittered away. Investment in local authority bonds for local\u00a0regeneration, or in bonds or shares issued by a new Green Investment Bank and in hypothecated\u00a0bonds e.g. to provide alternative funding to replace the inefficiently expensive Private Finance\u00a0Initiative for funding public sector infrastructure projects would have prevented those losses \u2014\u00a0because all of these would have paid positive returns to pension fund investors. It is for exactly this\u00a0reason that we recommend that such assets be the basis for any new state pension fund in the\u00a0future.<\/p>\n

The impact of our proposals would be significant. At least \u00a320 billion a year would be released into\u00a0the UK economy for new investment.<\/p>\n

People would understand what their pension funds were doing, and could hold them to account for\u00a0it.<\/p>\n

State subsidies to pension funds would produce real economic returns for the government.<\/p>\n

And the incentive to save in pensions would be real \u2014 because people would see the benefits of<\/p>\n

doing so for their immediate well being, for their own future income and for the benefit of their children.<\/p><\/blockquote>\n

Pension deficits are an issue, but the real problem is the lack of effective thinking about pensions. That's the deficit that has to really be addressed, and soon. I'd suggest Colin and I have made a start, but real debate is\u00a0needed\u00a0on a vital issue - costing the UK \u00a338\u00a0billion\u00a0a year - and that's really not happening right now.<\/p>\n","protected":false},"excerpt":{"rendered":"

As the FT notes this morning: UK companies reporting annual results for the year to March are expected to report an increase of more than
 Read the full article…<\/em><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[29,1],"tags":[],"class_list":["post-20092","post","type-post","status-publish","format-standard","hentry","category-pensions","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/posts\/20092","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/comments?post=20092"}],"version-history":[{"count":0,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/posts\/20092\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/media?parent=20092"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/categories?post=20092"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/tags?post=20092"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}