Alan Shipman, editor of FinanceWeek.co.uk: Forecasts of an equity market recovery in this final quarter, as bank sector worries rule out any further interest rate rises, will further ease the immediate funding worries of occupational pension schemes. But there is no release, so far, from the underlying problem affecting UK occupational schemes. Transfers from the working population to the retired population are being replaced by funds set aside by working people for their own retirement. One unlucky cohort – currently in work – ends up footing its own pension bill and the group before.
This double charge applies whether pensions are provided publicly or privately. The pay-as-you-go state pension scheme funds today’s retirees out of taxes and NI contributions from today’s employees. But occupational and private pensions, linked to bond and equity investment, similarly draw on profits and taxes generated by those still working to finance retirement spending. The inter-generational transfer may be achieved more efficiently through financial markets than through the tax and benefits system – which is the logic of pension privatisation – but it must still take place. So the problem remains of one group of staff paying twice.
Britain and America have chosen to tackle the problem by replacing an inter-generational transfer with an inter-regional one. The idea is to get the fast-growing emerging economies, with young populations, to finance retirement income in slower-growing industrial economies with ageing populations. Western governments can’t tax the high-saving workforces of east and south Asia and Latin America, unless they invite economic migration on an unprecedented scale. But they can encourage capital inflow from these regions, which lift returns on the stock and bond markets. That increases the return on domestic employees’ current pension-fund investments, and, with luck, yield enough to top up their seniors’ retirement income as well as their own.
It’s a high-risk gamble, especially as emerging markets’ have their own ageing populations that are already dragging down their savings rate, at a pace that could quicken if their national income growth slows down (as a result of stagnation in the US and Europe). But the alternative – of governments borrowing more to spread the double burden over future generations – is equally unappealing to Western governments. And if the US and UK can (as at present) attract capital inflows from higher-growth economies at comparatively low rates of interest and return on equity, they would be foolish not to do so. Especially with the prospect, created by US deficit spending, of fuelling an upturn in global inflation so that borrowed funds can be repaid in devalued Western currencies.
Inter-generational conflicts over money run both ways. Younger people wonder why they might be taxed to pay their parents’ pensions as well as setting money aside for their own, after paying for a post-school education that their parents (if they qualified for it) probably received grants for. They’re also puzzled as to why they were asked to pay more of the national income as tax, to pay down national debt (including the bit their forebears built up over two World Wars), at a moment when the double pension burden made a case for letting that debt rise.
At the same time, their parents wonder why they are increasingly required to follow-up the pocket money with contributions to private school fees, university fees and first-time house purchases – none of which they’re likely to have received from their own parents – and why a health service and state pension scheme to which most of them contributed all their lives won’t publicly fund the extra care they may need towards the end of their lives. Those currently working are perturbed that their employer may be able to invest less because of the hole that’s opened up in its pension funding for former employees, especially when it’s for final-salary linked benefits to which future access is denied. Those now retired are equally upset that their main reward, for the achievement of living longer, may be to decumulate their hard-earned housing equity and other savings before anyone else steps in to help.
And as these tensions build, scheme trustees are gaining increasing legal scope to fight the pensioners’ corner, against the finance teams seeking other uses for company resources and against any acquirers who might be tempted to neglect the pension commitment. As well as interceding between different departments on the assignment of cash flows over space, finance directors must now mediate between different generations on the assignment of cash flows over time. We’re not yet dealing with never-ending lives, but it must sometimes feel like a never-ending task.
- Alan Shipman is editor of FinanceWeek.co.uk