All 1 entries tagged Recession;

Is the recession made worse by company pensions recovery plans?

Many occupational pension schemes in the private sector are in difficulties because they are in deficit. The value of their investments in such as company shares and government bonds is not sufficient in present circumstances to cover their projected pensions to their members.

The consequence is that the companies sponsoring them are being required by the Pensions Regulator to make additional payments as part of a recovery plan - over and above their normal contributions.These payments have to come out of either wages, capital investment or dividends. The effect is likely to be heavily deflationary, taking spending power out of an already depressed economy, making the recession worse.

Although many defined benefit or final salary pension schemes are now closed to new members, they still represent over half of the assets in private funded pension schemes.

There is evidence that the effect in the whole UK economy could be very large. The publication Pension Trends from the Office of National Statistics suggests it might have been of the order of £15 billion per year in 2010.

Also an article on the website Pensions World (Pension Scheme Deficits Double over Last 12 Months) estimates that these payments for the FTSE100 companies alone last year were £11.6billion.

These big payments are a consequence of the rules governing defined benefit schemes. Every pension fund has to be fully funded at all times. But low interest rates (as now) artificially inflate the liabilities creating a funding gap. This is compounded by low asset prices and poor investment returns.

So far there has been no research on the macro-economics effects of these special payments. It would be good to have estimates of their effects on GDP and unemployment.

Dennis Leech : 26 Sep 2012 11:56 |  Tags: Austerity; Pensions; Recession; |  Comments (0) |  Close comments |  Report a problem