Contrary to the received idea, Brexit and its aftershock, the Bank of England’s QE statement , has been good for the pension in people’s pocket.
Ok, we don’t have pensions in our pocket- but if we’re simply valuing our pension pots, the way HMRC asks us to, then most people’s pension wealth will have increased since the Referendum
If they hold bonds as part of their DC pot, then those bonds have become more valuable. If they hold equities, the value of those shares has increased. Cash
is (should be) impervious to market risk and we haven’t seen any failures among deposit takers
The news from estate agencies is that residential sales are holding up. Only in commercial property has there been a right down in asset values and this may be no more than a temporary blip occasioned by some irresponsible selling of property funds by wealth managers.
We are actually more wealthy in terms of our retirement assets (ISAs, pensions, property,cash). So far Brexit has been good for our pensions as my friend Con Keating has pointed out to me.
As you know I am an avid Pro-European, but there a several important positives in Brexit for DB – firstly my foreign investments are up about 12% in sterling terms – that alone accounts for an improvement in funding ratios of nearly 4% in my main fund (just under 40% in foreign equity and bonds) and then there is a dividend effect – not just on the foreign holdings but also on the foreign UK listed companies – many of which are “dollar” dividend payers – this has also been estimated (by coincidence) at a little short of 4%.
So why all the moaning?
Most of the money in the pension system is still backing up guarantees issued by pension funds – supported by employers. The cost of supporting these guarantees is going up as the cost of buying bonds to cover the guarantees increases. The increased cost of buying bonds can also be talked about as widening the theoretical “black hole” in pension funds.
As far as pensioners go, there is no loss at all. The chances of those receiving their pension getting their pension clipped or even of them not receiving their full pension increases, is next to zero.
Again Con is enlightening
The negative has been the reaction of the BoE in cutting rates which is intended as a forestalling device for recession – I happen to think that we will not see recession as a result of Brexit – the likelihood was always quite low and is entirely a confidence/uncertainty thing. The longer it takes to trigger article 50, the less the likelihood. The solvency valuation effect is a nonsense
Where the pain is being felt is on the cash-flows and balance sheets of organisations funding these guarantees. Now here there could be a knock on that impacts ordinary people as employers will have less money to spend on their human resource (us) , having blown part of the budget on increased pension contributions.
This is unfortunate but it is far from clear that pension deficits are driving us into higher unemployment. As Con points out – a lot of the grief is a nonsense.
If there is damage being done, it is being done to the funding of workplace pensions that are taking up the strain for those no longer able to join – or able to build up more rights to the guarantees.
It is counter-productive to bang on about the increased cost of pensions to employers when the point of pensions to employers and employees is to improve confidence in the future.
We have chosen to require companies to guarantee their pension’s solvency, to pay pension contributions in front of dividends and the funding of acquisitions and we must accept that funding these guarantees are is part of a businesses DNA.
The conversation about how bond yields impact cash flow and the solvency of an employer is a different conversation to that about the cash flow and security of someone’s future income.
Unless we are valuing a DB pension promise, as we value a bond (e.g. on the likelihood of it being met) , we should not be telling people that Brexit or lower interest rates or QE is bad for their pension.
The only time it might be , is if the DB scheme is forced into the PPF because it has made the sponsor bust, or because an individual insists on buying a guaranteed pension for themselves (an annuity).
With regards the final point, if it was possible to buy a guaranteed pension at the same price as a non-guaranteed one, we would buy the guarantee -because it was free.
Currently the cost of guarantees is off the scale – it is as far from free as the Yorkshire Ripper.
So for people wanting “low-risk” retirement income, the amount of pension they can buy is very low and we are faced with this planning problem.
- Do we hope that monetary and fiscal policy will come right
- Do we educate people to accept a little more risk
I am not sure that we will ever see DB schemes fully solvent, there will always be enormous reliance on employers to fund deficits. By “always”, I mean for the “faraway“.
I am sure that people don’t understand risk and don’t understand the cost of guarantees. If we buy a diamond with one degree less clarity but at a tenth of the price, we still have a diamond and might have a bigger one.
I’m glad to see that I am seeing some common ground with the Pensions Regulator on these guarantees
If people want the brightest of all diamonds, they may have to settle for a much smaller one. The analogy holds good for the type of certainty we buy at retirement.
We need to start planning to provide people with bigger pensions with lower levels of certainty as an alternative to the highest quality of pensions, which ordinary people (like me) cannot afford.
That means re-opening the debate about collective pensions that was closed by the previous pension minister just over a year ago. She would be much better calling for that, than telling us how bad Brexit has been for our pensions.