The response to every pensions crisis sows the seeds of the nextby John Kay / November 14, 2018 / Leave a comment
In 1991 the ebullient fraudster Robert Maxwell disappeared from his yacht and was found to have looted the Daily Mirror pension funds to support his crumbling business empire. The inevitable and appropriate result was a raft of regulations of occupational pensions. Shortly after the turn of the millennium, the dotcom bubble burst, share prices almost halved, and many companies suddenly found the assets they’d earmarked to pay for pensions were woefully inadequate; some found devious ways to wriggle out of paying them. Cue another raft of regulation in the form of the 2004 Pensions Act, that put myriad stipulations on “defined benefit” schemes, which promise payments pegged to past earnings, rather than investment returns.
Government and paternalistic employers have long provided for employees too old to work. But only in the 20th century did many people start enjoying a lengthy retirement. State and private schemes were extended and formalised. From the 1960s on, employers large and small offered their workers pensions. The near-elimination of pensioner poverty in the last 20 years reflects this.
Pensions represent an implicit intergenerational contract. The bread the retired eat is baked by someone working today. Both individually and collectively, we accept responsibility for our parents and grandparents in the expectation that our children and grandchildren will accept analogous responsibilities towards us. The conceptual mistake underpinning regulation after Maxwell was the attempt to turn these relationships between generations into contractual obligations.
But this cannot be done. We do not know what will happen over the next 50 years and we cannot bind our successors. Employers and governments can make promises but if these prove too onerous they can and will renege on, or reinterpret them. And they already have. Ask the women who thought they were going to receive state pensions at 60, or the pensioners who thought their retirement income was linked to RPI.
In the pursuit of illusory certainty, regulation has demanded much higher contribution levels and imposedadministrative burdens. Schemes are required to commission a “technical valuation,” a costly exercise in fantasy that purports to value cash flows over half a century or more by making up matrices of unknown and unknowable numbers. The result? Most private sector employers have closed their final salary schemes to new members; these will be run down…