Toby Nangle is a flagbearer for a new kind of pension journalism that reaches beyond the bubble to a wider audience. His work has been featured in the Financial Times and I’m pleased to see that he has a new 2000 word piece published this week. (you can read this for free using instructions at the end of this article)
Nangle’s magnum opus includes an ambitious visual pun on SCAPE , the discount rate created by the Treasury (with help Government Actuary) as a best guess at the affordability of public sector pensions in the future. Steve McQueen’s great escape is doomed to fail over the houses of parliament rather than the Swiss border fence.
The article is , like the picture, a little too elaborate for its own good. Toby has one important point but this needs to be made up front. The point is that changes in the Scape rate are to the benefit of the public purse making public pensions a short-term win for public finances
November’s forecast will see employer contributions jump and we reckon this could push public service pensions from being a use of cash to a source of Treasury funding.
If we had started with this statement, we might have been ready for the bizarre fusion of financial economics and the images of South Park
With the debt-to-GDP up at around 100 per cent, and long gilt yields bobbing around 5 per cent, the fiscal challenge is non-trivial. This has made the Institute for Fiscal Studies sad.
Are the pages and readership of the FT ready for this kind of thing?
What’s more important for now is that to reduce the debt-to-GDP ratio you need
I found myself siding with the Sex pistols just couldn’t figure becoming pretty vacant
I got no reason, it’s all too much
You’ll always find us out to lunch
I fear that many of the FT’s readers need nursing on pensions! For the die-hards, the public consultation on how SCAPE works can be accessed from this link.
A Herculean task
Toby’s point in getting us to understand the Scape rate goes beyond pensions. He suggests that the rate is a means of dampening UK economic expectations as a form of financial repression. We all tighten our belts and inflation goes away.
But when applied to public sector pensions, a low discount rate balloons the problem facing the Government and has the propensity to scare the horses, making Britain look even more in a pickle than we know it is.
The latest bean count as to the value of public service pension promises to nurses, teachers, tax inspectors, soldiers and coppers (and their colleagues) was around £2.2tn. The latest bean count as to the value of financial assets backing these promises was around zero/zilch/nada.
Government has been making promises without the financial assets to secure them ever since it introduced the state pension, public sector pensions are a big promise paid for out of future tax revenues, what financial economists call Ponzi and the rest of us accept as the twin certainties of “death and taxes”.
Here I declare myself an undoubted fan of Toby Nangle who talks us through why the Government is increasing the future costs of its pension liabilities , while funded pension schemes do precisely the opposite.
He explains that if the Government were to use a gilts plus discount rate, public sector liabilities would have plunged in 2022
He concludes that if valuations had followed the method used by the private sector, the UK government would “may be the biggest mark-to-market winner of rising bond yields in the world”.
The happy smiles and complacent conversations about the use of “surpluses” , in evidence at last week’s PLSA Conference would fast disappear if DB liabilities used the Scape rate. Much of our optimism is bogus and of no more value than the special pleading for deficit contributions, the investment of which was blown away in the LDI crisis. We have very little to be proud.
The radical conclusion that Nangle comes to is that far from using public sector pensions as a means to show UK PLCs in a rosey light, The Government boffins have shown themselves as genuinely independent and measured the state of our pensions based on our “means to pay”. Our means to pay pensions out of the public purse is diminishing because future tax revenues won’t keep up with the inflation linked pension promises. It’s a cashflow issue and it means that the Government is going to have to put more into public pensions today, to meet the bills tomorrow. The Government should be proud of itself, listening to the boffins (as they didn’t last year).
Employer contributions to most public sector pensions went up in 2018 and they will go up again after the next review in November 2023. Because Government offsets the impact of these increases to its own departments, the impact on departmental finances will be zero, but the impact on the Treasury will be negative.
And negative in a big way, so big that it looks like one of the reasons the Chancellor is so reluctant to make tax cuts.
I have always puzzled when the Chancellor at each budget promises more to departments , only for them to find themselves the poorer for his generosity (could that be “her” generosity this time next year?), Nangle explains why we should be sceptical
if the chancellor chooses to make out that this increase in spending is a big deal, point and laugh. With the market rate moving rapidly towards the SCAPE rate, it just aligns the cost of pension provision more closely with the market, and in any case leads to no new resources.
Nangle’s conclusion is that the Government is being prudent on pensions, there is no imminent Ponzi and if we actually got some growth into the UK economy, the Scape rate might be a little too prudent.
But prudence comes at a cost and we can see that cost wherever we go – rotting infrastructure , underfunded public services and strikes from people who can’t afford to pay the pension contributions that are the cause of lower wages.
This is a deeply serious dive into the nature of the public sector pension promise and it explains the extreme tetchiness of the Treasury to give away any further tax-relief to those who benefit from them.
His conclusion that the Scape rate is a doom loop of negativity that creates the low-productivity it predicts is only about the veneer that the Chancellor can apply at the Autumn Statement. While he will give more in departmental grants, he will take it back in increased pension contributions. Meanwhile, organisations such as independent schools and higher education institutions that use the Teacher’s Pension scheme rather than USS, will be in for a very nasty increase in pension contributions, with no mitigation from Government at all.
Nangle’s frustration (expressed on linked-in) is that not enough FT readers are paying attention and reading to the end. The lesson is to put the story to the front and get your readers to read on – if they want. Hopefully, a few of his lost readers, baffled by the fancy stuff that started this blog, will spend the time on the tough stuff later on – they missed out on earlier.
But in truth, Toby is pushing water up hill, to educate the general public about public sector pension finances is a job Jove wouldn’t have given to Heracles.
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