This is unadulterated class warfare; not only have all private
company pension funds been robbed of £100m but the annuities that
these depleted funds will buy have also fallen in value.
[ It would seem that the figure of reduced pension fund of '£150,000
for every member of a final salary scheme' implies a significantly
lower pension than expected. My rough calculations suggest that the
average new pensioner's fall in pension expectations would be around
£7,000 -included in that Conway suggests a fall of 16% or of £1500
a year from lower annuity rates - NOT funny!]
With MPs and public workers being totally protected from this attack
on their old age the anger and resentment of those who have saved for
their old age will mount. Once this story sinks in and people
realise what is being done to them as a result of the government's
mad gamble with our future the temperature will rise. But the public
sector workers won't give a damn!
In the postscript from his blog Conway takes the scam further
XXXXXXXXXXXXXXXX CS
========================
TELEGRAPH 6.3.09
Retirement plans of millions of Britons at risk after Bank of England
'prints money'
The retirement plans of millions of Britons have been put at risk
after the Bank of England's controversial plan to create money tore
an unprecedented hole in pension schemes.
By Edmund Conway Economics Editor
In a mere 24 hours the size of the pension deficits facing some of
Britain's biggest companies has jumped by around £100 billion to a
record £390 billion - the equivalent of over £150,000 for every
member of a final salary scheme.
The increase is a direct result of the Bank's announcement this week
to create £150 billion and pour it directly into the financial
system, experts said.
The ballooning deficits sharply increase the chance that a swathe of
companies shut down their pension schemes - not only for future
employees but for those already paying into them.
It sparked further criticism of the authorities for endangering the
financial future of Britons' savers in their efforts to bring the
financial crisis to an end. The Government and Bank have already been
accused of obliterating the incentive to save by slashing interest
rates on savings accounts and visibly attempting to stoke up high
inflation in the years to come.
The Bank was accused of hammering the final nail into the coffin for
Britain's final salary pension schemes, which have seen their
deficits climb in recent years, partly as a result of Gordon Brown's
decision as Chancellor to levy a £6 billion tax raid on pension
funds' dividends [ ..each year-cs].
Some 2.5 million workers are currently signed up for these schemes
which provide retirees with a guaranteed annual income when they
reach the appropriate age.
Having enjoyed a small surplus only a year ago, these funds have also
been hit by the fall in the stock market over the past year.
However, the effect of the Bank's scheme has been to increase the
deficit between what is in the funds and what is needed to pay out
future pensioners by an almost instant £100 billion. Although some
expect the deficits to fall in the years ahead as the economy
improves, insiders warned that this could be the final straw that
persuades companies to shut down these schemes altogether and turn
instead to far less generous defined contribution plans.
However, experts warned that even these more parsimonious schemes,
which 8 million workers are subscribed to, will suffer as a direct
result of the Bank's actions. The amount these people receive from
their pension depends not only on the size of pot they amass over
their working life but on the rate of the so-called annuity which
provides them an annual income from the moment of retirement.
Over 600,000 people are due to retire onto these schemes over the
next year. Should annuity rates fall a further percentage point, it
will mean the annual pension of someone with a £100,000 pension pot
may drop from around £7,000 to £6,000. [That's on top of the fall of
the pension pot in the first place! -cs]
Experts said anyone retiring in the coming years may face an instant
decrease in what they could hope to expect from their pension.
Tom McPhail of Hargreaves Lansdowne said: "The sad truth is that
pensions savings are going to be what pays the price for these
efforts to bail out the economy in the short term. The apparent plan
is to try to fix today's problems at the expense of our children - by
paying a shedload of money which will have to be paid back tomorrow.
"It will hammer the final nail in the coffin of final salary schemes,
as well as cutting the annuity rates for anyone with a defined
contribution set to retire imminently."
However, public sector workers, many of whom are on generous final
salary schemes, will be unaffected by the increase in deficits, since
their pensions are paid by taxpayers rather than cash-pressed companies.
The problems stem from the dramatic impact the Bank's plan has had on
Britain's debt markets.
So large is the amount of cash the Bank is creating for its economic
rescue package that the prices of all the assets it intends to buy
jumped at an unprecedented rate in the hours following Thursday's
announcement.
Unfortunately for pension funds, the amount they are compelled to
spend on their pensions over the coming years depends on the interest
rates on government debt. These have fallen since Thursday by the
biggest amount in history. Meanwhile share prices have continued to
fall, further reducing the amount pension funds have already saved in
their pots for tomorrow.
"This is really bad news for pension funds however you look at it," a
senior City analyst said. "This was an unfortunate consequence of
what the Bank has done. Pension funds are now facing some extremely
unpleasant deficits. Likewise if you are planning to get an annuity
in the coming years it will also be lower."
Furthermore, the deficits are likely to balloon even higher for as
long as the crisis continues, experts added.
=-=-=-=-=-=-=-=-=-=-==-=-=-=-=-=-> LATER - Conway adds this from his
blog!
.How printing money could make banks even less willing to lend
Posted By: Edmund Conway
I wrote this morning about how the Bank of England's plan to create
£150bn of cash and spend it largely on government bonds (quantitative
easing to those who like using the phrase) had had the dismally
unfortunate consequence of pushing up pension funds' deficits by
around £100bn to just shy of £400bn, To put this into context, in no
month in recorded history (even in previous stock market crashes)
have deficits jumped by so much as they did in the past 48 hours or
so since midday Thursday.
The problem here refers specifically to final salary pension schemes,
where the worker is guaranteed a certain annual pension based not on
what they contribute but on their annual salary at the company (the
Bank's measures have also hit the more commonplace and less generous
defined contribution pensions too but that's another story, and is
covered in my news story).
Anyway, the issue is not so much the actual pot that companies set
aside to pay their employees' pensions but the amount this is
projected to rise to over the coming decades when the workers retire.
Government regulations mean the companies have to calculate the
amount the money in their pot is likely to rise by over the coming
years by multiplying it by the interest rate on government debt
(gilts). The pension fund's deficit is the shortfall between what
this pot is likely to be worth in, say 25 years' time (based on these
gilt interest rates) and the amount people are due to be paid.
On Thursday and Friday the interest rates on these gilts dropped at
the fastest rate in modern history, after the Bank announced it was
creating enough cash to buy up almost half the core part of this
market and investors piled in in anticipation (gilt yields drop when
the price increases, so fall if there is more demand for gilts). As a
direct result, the implied value of pension funds' pots declined
significantly, opening up this yawning deficit I wrote about.
Now, a massive pension fund deficit should not unduly concern the
holders of these future pensions [but the immediate ones this year
will definitely suffer badly -cs] - provided their company survives.
If the company survives, it is obliged to pay them a particular
pension, so there is no prospect of final salary pension holders
receiving less each year as a result. However, the increase in
deficits will have two major effects. First, it will encourage these
companies to close down these final salary schemes and move instead
to cheaper defined contribution schemes (which most were doing
anyway, but 2.5m people are still members of private sector final
salary schemes). Second, it may force companies to put a bit more
money into the funds to shore them up.
Coming at a time when the economy is already struggling and companies
are investing less than they have for over a decade, this second
point is very important. Moreover, the fact is that the owners of a
large chunk of these pension deficits are none other than British
banks, who have hundreds of thousands of employees who are signed up
to their company final salary pension schemes.
All of which brings me to the worst unintended consequence of all:
this may mean banks are not able to lend out as much as they would
have done otherwise because they are having to put more of their
capital into their schemes. I haven't yet had a chance to look into
the figures, but someone from within the industry tells me the impact
could easily end up being a £100bn reduction in their lending
capacity. For £75bn of cash pumped in by the Bank of England. Whoops.
The implications for companies with mammoth pension schemes - the
British Airways and BTs of this world - are also chilling. These
deficits will make their balance sheets look all the more frightening
and will be one more big problem they would rather wish they didn't
have to deal with.
Of course, there is a supplementary overarching question here about
why on earth the pension funds have to follow these particular and
rather arbitrary accounting regulations on their pension schemes but
that is a debate for another day.
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