All 6 entries tagged Pensions

Breach of intergenerational social contract

In today's Financial Times Janan Ganesh says that the young should blame bad luck not politics for the fact that they will not have things as good as their parents' generation (Bad luck, not policy is the scourge of the young). This is a lazy piece of writing that seems to be a polemic against the old.

Besides ignoring important evidence that tends to contradict some of his claims (e.g. that the baby boomers were born at a time when government debt was three times what it is now, and that they paid higher taxes), he invokes a false social ontology of intergenerational conflict. It cannot be simply a distributional question of young versus old, as he describes, because the young will also one day become old themselves. So the young have an interest in ensuring good pensions.

What we are in fact witnessing are the consequences of a unilateral rewriting of the intergenerational social contract. The society in which the baby boomer generation has lived is one with a strong element of social solidarity, whereby each generation in work guarantees the welfare of its predecessor in retirement - in the knowledge that they themselves will receive equivalent support in their turn. This ‘pay-as-you-go’ social contract is being scrapped by the neoliberals (because “there is no such thing as society”) so the young generation will miss their turn. Instead they are being told they are in the market place where every individual is required to fund their own pensions from their own savings.

This has two unfortunate consequences for the young. First it is much more costly to provide adequate pensions and other welfare benefits individually in the market than collectively. For example it is known that money purchase DC pension schemes cost at least forty percent more than equivalent collective schemes. Second, it means that many of the transition generation are having to pay twice – for their own ‘pots’ as well as for the guarantees to the old.

But there has never been a collective decision to rewrite the social contract in this way. This is what the young should be angry about. It is deeply political but it is not the fault of the old.

Dennis Leech : 07 Jan 2014 17:36 |  Tags: Pensions |  Comments (0) |  Close comments |  Report a problem

USS 'black hole' scare story is a product of false accounting

Follow-up to Misleading Newsnight story on Universities Pension Scheme from Dennis Leech's blog

This scare story has been repeated in the Times Higher Education supplement and also in an article in the Financial Times who are printing my reply.

John Ralfe is well known in the pensions industry for his sensational views and, as Richard Bryan says in his comment, has a reputation for not having being entirely successful in managing the Boots pension scheme by doing what he wants to foist on the USS. His ideas have an evangelical quality. His fundamentalistt mark-to-market views represent one pole of thought in pensions economics, one which views pensions in purely financial terms, in a neoliberal or Thatcherite political economy. There is a need for more balance in this important debate.

IT DOES NOT MATTER what discount rate is used to calculate the liabilities figure - the pensions that have to be paid remain the same. That is because pensions are DEFINED by the rules of the scheme not by interest rates.

What members have a right to know is whether the USS will have enough income to pay the pensions. All the evidence we have is that it has. Members will get a better view of that if the accounts are provided on a continuing basis rather than as a mark-to-market snapshot.

Dennis Leech : 03 Nov 2013 15:11 |  Tags: Pensions |  Comments (0) |  Close comments |  Report a problem

Misleading Newsnight story on Universities Pension Scheme

Newsnight last night had an item that presents the USS pension scheme as having a 'black hole' that will need to be filled by increased student fees.

We are told the deficit has increased in the past year because, although the value of assets (mainly investments in shares and bonds) has grown by £4.7 billion, the estimate of the value of the pension liabilities - the value placed on pensions currently being paid and future pensions for university academic and related staff - has ballooned by £6.4 billion. We all understand investments go up and down with the stock market and profitability of companies. But why have the liabilities gone up so astronomically? We are entitled to ask.

The Newsnight item was all about how the problem is all to do with the investment strategy - but in fact the investments have actually done pretty well.

No the problem is with the figure for the liabilities. Newsnight did not discuss that - nor did my colleague Bernard Casey who frankly ought to have known better. They just accepted this gross figure as if it were a fact.

We are told that the liabiities figure has gone up by 14.6% in one year. But how is that possible? Has our life expectancy suddenly increased massively - in one year? Remember that our pensions are fixed by the rules of USS and depend on our final salaries, our years of service, future price inflation, our longevity. So what has caused this figure for the pensions liabilities to increase so much?

The truth is that it is an artifact of the accounting method. The calculation of the liabilities figure is driven primarily by the current low interest rates due to government monetary policiy (including quantitative easing). There may or may not be a deficit in the ordinarily understood meaning of the term but this is not it.

The key facts are that all the pensions currently in payment, £1.4 billion last year were covered by the payments of members and institutions of £1.6 billion. In addition to that, the fund's investment income was almost £4.6 billion. This does not look at all bad to me. Whether it is adequate to cover the pensions promises only the actuaries will be able to tell. But the calculations we are expected to swallow using the accounting rules known as FRS17 which produce these mad deficits are highly misleading.

See my letter in the Times Higher about this: accounting_tricks.pdf

The problem is that the accounting methods are based on extreme neoliberal economics which views everything as if the world is just a gigantic perfectly efficient all-knowing market. But we know that markets are very volatile and affected by many factors including human irrationality, speculation, bubbles, and all the rest.

Dennis Leech : 25 Oct 2013 11:08 |  Tags: Pensions |  Comments (3) |  Close comments |  Report a problem

Warwick pensions research has impact on government policy

The government says that university research should have impact on wider society outside the academy. Here, I believe, is an example where Warwick has had an impact on government policy.

Last November I published a letter in the Financial Times calling for a rethink of the way that pension schemes are accounted and regulated. This was based on an analysis of the universities superannuation scheme, the USS (to which all academic and related staff in the pre-1992 universities belong and is the second largest funded pension scheme in the UK).

I found there was a madly fluctuating deficit - although the scheme seemed otherwise fundamentally sound and relatively stable - and concluded that the fault must lie with the way the actuaries do the sums - that the deficit is artificial to some extent. My letter led to a very active debate among pensions professionals, actuaries and accountants.

I published another letter in the FT in March, following a report by the National Association of Pension Funds showing that a side-effect of the government's quantitative easing policy (aimed at stimulating the economy by keeping interest rates as low as possible) was to damage pension schemes right across the private sector (because the deficits are artificially exaggerated due to record low interest rates). I argued "there is an urgent need for government action" on pensions regulation.

Calls for reform were made by the NAPF and the employers body the Confederation of British Industry, CBI.

Now in last Wednesday's Autumn Statement, the Chancellor, George Osborne, has responded to these concerns by taking action. He announced that there would be a consultation by the Department for Work and Pensions on the issue, to consider the desirability of moving away from the mark-to-market approach that is causing such concern and going back to the smoothing methods that actuaries used to use in the past. There is considerable opposition from vested interests, not least the Pension Regulator, who believes that the problem can be addressed by allowing longer periods for pension scheme recovery plans to operate.

I would not claim to have been solely pivotal in persuading the government to take action - I think pressure from the NAPF and CBI would have been crucial - but my contribution has certainly been influential and therefore had Impact.

Dennis Leech : 07 Dec 2012 14:23 |  Tags: Pensions |  Comments (0) |  Close comments |  Report a problem

Universities' Pensions Deficit is not Believable

Writing about web page http://www.timeshighereducation.co.uk/story.asp?sectioncode=26&storycode=421130&c=1

We have been told that there has been an increase in the deficit in the USS pension scheme in the past year that is so large as to threaten its very survival. (See the Times Higher Education report “Deficit puts pension scheme in jeopardy”, 13^th September 2012.)

The funding level has suddenly plummeted from 92 percent to 77 percent between March 2011 and March 2012, but we have been given no explanation as to what is so wrong about it that would cause it to collapse on such a scale, which is far in excess of what would be caused by problems that critics (eg Tom Pike and Jim Naismith) have pointed to.

I think some analysis is needed before we believe some of the alarmist statements being made. There are grounds for believing there is a lot of artificiality in the figures and that they do not reflect fair value accounting.

The deficit is the difference between assets (USS investments) and liabilities (future and present pensions). Assets have INCREASED by 1.5 billion pounds. So the explanation cannot lie in poor investment performance. The problem is with the liabilities that have ballooned by £8.4 billion pounds - IN ONLY ONE YEAR. How is such a change – not only large but astronomical - credible? That is the question we all need to address.

It is all the more astonishing since the rule changes that were introduced last October ought to have reduced the liabilities, not increased them: introduction of the CARE section, increasing normal pension age to 65, flexible retirement, capping inflation adjustment. It cannot be due to increasing longevity since there has not been a major change in predictions of life expectancy.

(Increasing life expectancy is often blamed for deficits but its effect is exaggerated as the last valuation report showed: it increased the deficit between 2008 and 2011 by 0.6 billion pounds - much less than several other items such as the impact of basing inflation indexing on CPI instead of RPI which reduced the deficit by 2.9 billion pounds. The longevity argument is really a con. If members are expected to live one year longer, the liabilities figure increases by 0.6 billion pounds - significant but not an existential threat to the fund.)

WHY, then, has the reported liabilities figure gone up so much in one year? The answer is that the figure is artificial and highly misleading due to the way it is calculated under legislative rules, introduced in the Pensions Act 2004, that now apply to all private sector defined benefit pension schemes (of which USS counts as one). The reasons are technical (but no less controversial for that): it is calculated as a present value capital sum using a discount rate based on gilt rates which are currently very low, hence the large figure.

BUT the ACTUAL liabilities – the monthly payments to USS pensioners and future pensioners - are no different than they were before! So why the change in the liabilities figure? In fact the funding deficit is an artifact, a result of the overcautious regulatory regime brought in by the last government, that was meant to protect private pensions against the insolvency of the corporate sponsor but is having the unintended consequence of forcing perfectly good schemes to close.

It is worth reminding ourselves how a private pension scheme works: a group of employers and workers pay contributions into a collective fund, out of which pensions are paid to retired workers under defined rules, and surplus funds invested to earn dividends and interest for the future. It should be judged simply on whether its income exceeds expenditure on a sustainable basis, taking account of all future foreseeable changes.

From this point of view the USS is not in bad shape. The latest published accounts (2011) show that annual investment returns (including dividends from our investments in highly profitable companies like Shell, HSBC, Vodafone, BP, etc and government bonds) were about £2.4 billion, easily paying the current pensions bill of £1.4 billion per year. On top of that rising contribution income from members and employers brought in another £1.5 billion per year.

This is not the whole story, of course, because the scheme is still growing and it is necessary to make allowance for expected future changes: such as rising life expectancy, expected salary increases, retirement ages, inflation and so on. How this is done is an important issue surrounded by much uncertainty.

But the one thing that is certain is that interest rates on government bonds have nothing to do with it (except to the extent that part of the investment portfolio is in government bonds). What a member receives in pension payments when he or she retires will depend on their years of service, their pensionable salary, inflation and how long they live. The interest rate on gilts does not have any effect on this, so it is really bogus to convert these payments to a liability figure using it.

The same artificial calculation has led to yawning deficits in many company pension schemes. In August the ONS reported the combined UK deficit on this basis was £280 billion which has led to calls for emergency extra funding from employers. The artificiality of all this has led bodies such as the Confederation of British Industry and National Association of Pension Funds to call for government action to change the rules.

The whole emerging fiasco in funded pension schemes like USS is the result of the overeager application of neo-liberal economic thinking during the boom years. What is happening to USS, and the other final salary pension schemes in the private sector, is the logical culmination of a process based on the philosophy that “there is no such thing as society, only individuals and their families”.

What is needed is not to close down the scheme, but to defend it for the success it is, and for the government to look again at the distortionary regulatory rules that have been introduced without sufficient thought.

Dennis Leech : 17 Sep 2012 01:20 |  Tags: Neoliberal Economics; Pensions Uss; |  Comments (0) |  Close comments |  Report a problem

How a small change in the RPI formula can be worth billions

As part of its reform of pension schemes the government changed the way it measures price inflation. Previously pensions used to be uprated annually by the Retail Price Index but George Osborne changed that to the lower Consumer Price Index. The CPI is usually lower than the RPI by an average of 0.7 percent.

This apparently minor technical change has reduced the inflation proofing of pensions in the public sector and most final salary pensions in the private sector. Unions have been fighting this alongside the other pension changes.

Now the Office for National Statistics is revising the formula for the RPI to make it closer to the CPI, so the whole debate will become academic.

Technically it is all to do with whether you use an arithmetic mean or a geometric mean to calculate the average movements in prices.

It is remarkable that such an apparently small change can make a difference of £20 billions of pension liabilities.

See the Financial Times article

Dennis Leech : 12 Jun 2012 14:49 |  Tags: Cpi Pensions Rpi |  Comments (0) |  Close comments |  Report a problem