This is the headline in the FT this morning , Thursday 3rd September, eight weeks before a looming budget statement.
This is not a good time to prepare your first Budget statement and John Healey is like the Tottenham Manager, inheriting a lack of confidence with a difficult time ahead.
The bond yields that make funded DB pensions look so well funded mean that the cost of borrowing for the country is at memorable highs.
Prime Minister Andy Burnham returned to Westminster on Tuesday facing a global bond sell-off that pushed UK borrowing costs to their highest level since the 2008 financial crash.
The yield on the 10-year gilt — a benchmark for the country’s borrowing costs — jumped to its highest figure since 2008, rising 0.11 percentage points on Tuesday to 5.21 per cent.
The 30-year gilt yield shot up this week as much as 0.12 percentage points to 5.9 per cent, its highest level since 1998.
The rising cost of UK borrowing is hanging over Burnham’s new administration, as chancellor John Healey prepares his first Budget on October 28, with questions being raised about how he will fund plans on social care and living costs.
Although part of the pressure on our bonds is “global” – general to all developed countries, our borrowing costs are higher than our immediate peers.
We differ to my mind in being an economy that has funded pensions that form part of our welfare, provide money to us in retirement in a way that we should be proud of. The surplus of funding in our private sector DB funds and the LGPS results from these funds mainly being invested in bonds and not in UK growth stocks. Were our DB pensions invested for UK growth, we would have a stronger economy but not such rosy surplus figures.
Right now, we can lock into these high borrowing rates by exchanging our DC pots for annuities, which are at the rates that overvalue our DB pensions and create problems for our Chancellor as he tries to fund the country’s economy. I am not advocating buying personal annuities because the deal is good, though many people my age, who pay attention, are buying annuities for a variety of reasons.
I don’t think that investing in bonds , as annuities do, will return me a pension as good as I can get from my pension fund being invested in growth stocks (including UK listed and unlisted equities). I do not think that those who take decisions on DB pensions should exchange their pension funds for a bulk annuity because the price of doing so is low. I can see why “buy in/buy out” seems a bargain, but I think that DB pensions should run on and not sell-out.
John Healy and Andy Burnham must set out on October 28th, a budget that expresses confidence in Britain’s ability to grow. Our DB pension schemes must show that we can run them on and find ways to make them part of the solution to under-investment in British stocks. We must feel confident enough in out own pensions not to cease investing. We need not purchase annuities, tempting as it might be for those of my age with money in the pot.
Whatever the temptation to lock-in, we need to invest for the long term and that is why I see the future for DC pots as they start paying a retirement wage as flex and fix or retirement CDC. Why I see the long term future of workplace pensions as not DC savings but collective pensions. We need to use pension funds capital for investment for growth not for purchasing annuities where much of our money goes abroad and into private credit.
