The cost of pensions crisis is only just beginning.


At yesterday’s Pension PlayPen coffee morning, Con Keating made an important point ab0ut the lag between interest rates rising and those rising hitting household spending.

This came as a surprise to me and many others in the room as the noises off on interest rates suggest they may have peaked. The Bank of England’s rate may have peaked but for most savers, the pain of interest rises is yet to come.

This chart makes the point very well.  Because of the delays created by fixed rate mortgages running on, the impact of rising interest rates is only being felt today, we are currently paying on average 3.07% against nearly 5.7% which is the variable rate and 6% which is the rate at which new 2 year fixes can be bought.

The fixed rate has recently fallen slightly which suggests that the market is counting in some falls in mid 2024 but the underlying message is that the black line will continue to rise over the next twelve months to meet the red and blue lines.

Higher for longer

The implications for pension saving are worrying. So far, people have not stopped saving because of the rise in inflation, because the big ticket item in their shopping basket, the mortgage, has remained low.

But when fixes fall away and people refix or go to variable, the pain will start.

Which is why I think it highly unlikely that the Government will get on with requiring increases in the auto-enrolment rate anytime soon.

The 2017 reforms, due to be implemented in the “middle of the 2020s” are now enabled by legislation but they are very far from being on the Chancellor’s priority list.

While all the evidence from Australia is that people are comfortable to be nudged into higher contributions, there is precious little evidence that the dramatic increases proposed by the 2017 auto-enrolment review can be implemented in one go.

I expect to see the Chancellor push back the implementation of any increase of AE contributions till after the next election , handing the problem to a future Government.

I also expect to see middle England households wince with pain when the high levels of household mortgage debt bite. An increase on a fixed mortgage from say 2% to 6% will dwarf any other increase to household budgets. I fear that many households have allowed this elephant to sit quietly in the corner of the room , but it will make its appearance at some time and when it does, mortgage holders will look to voluntary expenses to cut

Nobody should suppose the public doesn’t know their pension contribution is a voluntary expense.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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6 Responses to The cost of pensions crisis is only just beginning.

  1. conkeating says:

    The related question, what is likely to happen to house prices also needs to be asked.

  2. John Mather says:

    In the 1980’s when mortgages were at 5% the average mortgage cost 11% of average wages to finance.

    When mortgages were 2% last year the average mortgage for the average earner cost 41% of wages to finance.

    I used this in a lecture I gave in London in October 2022 but can’t put my hand of the source so figures from memory.

    House prices must be over 7 times earnings now up from 4 times. The idea that “my house is my pension” should be an assumption soon to be shown as false, (Don’t invest in an equity release company.)

    Back in 2016 I did say at one of Henry’s lunches that I was contemplating selling in Marylebone at €20,000 per Sq M and buying in Funchal at €3500 so as to release capital and able to delay taking my pension for at least 10 years. (Delighted that I took my own advice.)

    This allowed illiquids to be contemplated and RPI linking an obvious strategy to have adopted with helicopter money predictably fueling inflation.

    This is also helped with the cost of living in Madeira being half of the London cost of living. (300 days of sunshine and a functioning health service also helps)

    Change of jurisdiction, where socially possible, remains one of the dimensions wealth Managers ignore

    Now if I can only work out how to secure an unchallengeable domicile of choice, I can forget about IHT.

    Of course, the adviser world is not taught to adopt lateral thinking in fact it is actively discourage. After 50 years of advising glad to be out of the advice business and enjoying my retirement building a few houses.

    Being classified as an outlier I now realise was a compliment.

  3. John Mather says:

    typo the 1988 mortgage rate was 8% not 5%

  4. conkeating says:

    Not all believe the higher for longer rates narrative – for example Savills.

  5. John Mather says:

    Consider the US market. Here is a recent note from my economics studygroup sorry for the loss of formatting.

    Letting alone the Middle East war, a number of reasons suggest the equity exposure should be kept below norm, probably until Mar.

    The biggest threat to the equity market comes from the 100bps surge in 10Y Treasuries since July. The stock market cannot surpass the previous peak of 4,750 on the S&P 500 with the 10Y hovering above 4.75%.
    Expectations of inflation and the fed funds rate – the short-term interest rate set by the Fed (the instrument of monetary policy) – as well as the supply of Treasuries drive long term interest rates, such as the benchmark 10Y.
    Although the fed funds rate is near the peak, (there is a chance of one more rate hike), the issue for the markets is how long the Fed would keep rates elevated and how deep the cuts would be.

    The Fed published forecasts guide market expectations, perhaps with a lag. The last two forecasts indicated that rates would stay elevated for most of 1H24 and the room for cutting rates in 2024 has narrowed from 100 bps to 50 bps.
    As a result, market expectations of a rate cut have shifted from around year-end before July to Mar and now to May 2024 with just two rate cuts in the remainder of 2024.

    Therefore, the bond market rout has been triggered by a reassessment of monetary policy – higher interest rates for longer. Higher rates imply a swelling federal debt service that requires a much larger supply of Treasuries to finance it. This is the main cause of the stock market correction since the end of July.
    The threat of a government shutdown would keep long-term interest rates elevated maybe until Feb, continuing to undermine the stock market.

    In July, the House reached a compromise on the debt ceiling – led by MaCarthy, the Speaker of the House – thus avoiding a shutdown.
    But the issue re-emerged in October, the beginning of the fiscal year, with Republicans refusing to pass the budget. Unfortunately, the whole of the Democratic party joined the 10 extreme Republicans to oust McCarthy and now they will likely face an extremist House Speaker with no mood for a compromise.
    The House has given a funding extension until mid-Nov, but the odds are that they would grant another extension until the new year, so that they would increase their leverage and force the Biden Admin to trim the fiscal stimulus, a key factor in securing high growth and increasing Biden’s chances for re-election.
    The longest shutdown lasted 35-days in 2018-19 during Trump, 21-days in 1995-96 during Clinton and 16-days in 2013 during Obama. So, if this is to be repeated, the bond market rout may last until mid-Feb.
    High long-term interest rates increase the probability of a financial accident – implosion in real estate loans, hedge funds and private equity funds.
    Inflation is abating but there is a risk that sticky inflation – based on prices that change once a year – may prevent inflation from reaching the target of 2%. The Fed expects the target to be met in 2025, thus acting cautiously in 2024.

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