Picked by Toby

Earlier this week I blogged on the EC’s worry that pension schemes are falling out of love with owning gilts.

Today, Toby Nangle, the fellow who makes macro-economics accessible to fools like me, backs up the contention that UK pension funds are gong to be sellers from here on out..

OBR projection for pension scheme gilt holdings as % of GDP

What this tells me is that in thirty years time demand for gilts will have risen in DC plans but not that much, it will still be matched by open DB plans – like USS, LGPS and a few others. But put together they will only just exceed a third of the holding of today’s pensions. The big sellers will be closed DB plans and the insurers buying them out, theirs is an end game and if you are young enough to be considering retiring from  2060 or so, then gilts will be a minor feature of your pensions.

Why’s that? Well Toby doesn’t say this in his article, but it’s pretty obvious from reading this straightforward projection that OBR sees everything open by 2060 and in such a world, pensions don’t need to match liabilities like they do today because they will have the cashflows from new members to meet pension calls and the confidence in the future to invest in productive finance and not Government debt.

That’s because in the sensible world of the OBR, we will have reverted to a world envisaged by the Pension Scheme Bill where pensions revert to being about retirement income and not about wealth in pots and de-risking all the work of employers to build pension schemes in the late 20th and early 21st century.

I guess I’d put it rather crudely in saying we’ll be back in a pension system again, albeit with more risk being taken by savers and less by employers. Individuals are used to taking risk , corporates have long been fed up with it. There is some sense in this, there are limits to corporate generosity and taking all the risk of pensions is beyond its limits.

To pay pensions, DC savings schemes will have to look more like DB plans when default decumulation plans kick in. That means more gilts than today, but mainly because right now DC funds are still pretty young and don’t have much in the way of responsibilities to pay out. But these numbers do not suggest to me that we will have the kind of guarantees we had in the past,  I agree with the OBR in assuming that people will live with taking more risk that pensions may pay indexation conditional on markets and may even float the whole pension (CDC).

This of course assumes that sense does return and we move to a best endeavours approach to paying pensions rather than the mark to market accounting we’ve endured over the past quarter of a century. That’s what DC’s decumulation defaults will bring and I never thought I’d be thinking (or writing) that.

It is a beautiful morning and it’s 6 am. It’s the height of summer and I’m back with my girl. You may think I am being a little optimistic but I like my retirement a lot more , when I consider best endeavour pensions and CDC as my options. I hope to still be alive in 2060 and be 100, I wonder if I will look back at the chart and sigh with happiness that what the OBR predicted – worked out!

I do not wish to do the Government out of raising debt but I’m glad that pension’s gilt holdings are predicted to fall from 30% to 10% over 40 years!