The FT’s Mary McDougall is at her best when talking to those in the bond markets. Here she talks to the Dutch as they anticipate moving from liability matching to what we used to have, pensions that do as well as the market lets them- aka “best endeavour pensions”.

It’s CDC part two with the emphasis for employers on getting savers into funds that grow rather than funds that guarantee. Employers are no longer on the hook for shortfall , they pay a defined contribution while savers get the upside and the downside. We think of this as CDC but for the Dutch it is CDC (2.0) , the first version was sufficiently like DB and that’s why so much of the Dutch government bond market was owned by pensions.

If you want to go into more detail, please use this free link to the FT article  or mail me at henry@agewage.com if the link runs out. Here’s a taster or what Mary McDougall brings us

Between 2025 and 2028 the €1.5tn Dutch pension industry is transitioning from a system in which final payouts to pensioners are guaranteed to a defined contribution framework, in which employers are only tied to the amount they put in.

That will mean holding much less long-term sovereign debt to back their long-term promises and freeing up more funds to invest in higher-returning assets such as equities and credit.

This news is both good and bad for Britain. Good if you are the Government , bad if you’re the Bank of England (scroll down to see why).

The Pension Schemes Bill predicts more saving into DC pots  that pay pensions. This can either be interpreted as the Dutch system, where the DC ends up paying non-guaranteed pensions (CDC to you and me) or running DB pensions funded by our DC savings as NEST is wanting to do.  Here some of the pension is guaranteed, some paid in line with what can be afforded (best endeavours).

Whether a movement from DC to CDC or DC to DB results from the Pension Schemes Act (that follows the Bill) there will need to be steadiness in payment which means a balance of growth and security for NEST and those like it. That will mean a return (in my opinion) to the system of pension payment we had before we decided to guarantee everything.

It will not however mean a return to the kind of lockdown we have with DB pensions run by the like of the Bank of England (see below).

Why are the Europeans worried?

The Dutch and bond-holders in other European countries are seeing the yields on their “European gilts” go up, as the value of the gilts goes down.

It’s now a five year trend and while it makes DB pension liabilities look cheap, it means that those who hold fixed income funds are finding the value of the underlying assets are falling.

British demand for gilts does not look to be increasing. Defined benefit schemes, that hold most of the gilts are selling out to insurers who prefer corporate bonds to gilts. That’s not doing anything for gilt prices and we are seeing our yields at the highest levels for decades.

DC and CDC plans do not look huge buyers of gilts, even if they go the NEST decumulation group. What infact we are seeing is a DC system that does not fund Government borrowing but is urged to invest in British companies and infrastructure instead.

In case you thought we were unique in that, take a look at what’s happening in the Dutch markets and see the connection in the Netherlands with what is happening in the UK. We are not looking at a conservative approach to pension funding, we are looking to an aggressive approach where the money will be spent on our nation growing.

Well that’s what the Government wants, it’s not necessarily what the Bank of England wants but since when have they had all the answers!

Now let me remind myself and readers of this blog of how the Bank of England puts by money to pay pensions…

Bank of England pension schemes investments

Are they taking a lead in “growth”?!

In my opinion, we have to return to a pension investment system that prioritises long term investment and does not , as ours (the BOE’s being extreme) focusses on today’s pensioners.

It will mean that UK gilts will find less people to buy them and will fall in value. This may worry the British gilt markets as it is worrying the European markets. It will have a profound change in how we manage the country’s funds and the Bank of England has to play a part.

I oppose the position the Bank takes when investing its pension and I oppose the position of the Governor of the Bank of England when advising Government.