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  • Penury that unites old and young

    I wish I could say I was overjoyed to be back in the supposedly real world, after a few days being revitalised by the benign winds and periodic sunshine of the Welsh coast.

    But everywhere I look this morning there are gloomy stories about pensions (see the front pages of the Daily Mail and Telegraph, for starters) and, of course, there is a direct relationship between the perceived salience of pension issues and age (which is why they oppress me and my contemporaries, and why younger people can't be bothered to save for a pension at all).

    But here's the good news: the devastation of the savings of those like myself who have put money into pension pots for 20 or 30 years can be seen as healthy "natural justice".

    Readers of this blog will be well aware if they weren't already that the distributional impact of the economic boom and bust of the past decade has been uneven and (in the view of many) deeply unfair: younger people have suffered the most in respect of rising unemployment, and even those lucky enough to have a job still can't afford to buy a home, because house prices remain high relative to earnings (and 100% mortgage finance is no more).

    But at least there's one less reason for impoverished youth to take to the streets to overthrow the pampered baby boom generation, which arguably created the economic mess we're in.

    Unless you happen to be the chief executive of a FTSE 100 company (most of whom have succeeded in retaining the most lavish, platinum plated pension arrangements), or a senior public servant (with their gold plated pension schemes), the pensions outlook for those aged 45 and over no longer looks quite as spectacularly good as it did.

    It's mostly to do with the slashing of interest rates and the unprecedented easing of monetary conditions, engineered by the Bank of England (and other central banks) to prevent the Great Recession turning into a depression.

    The point of near zero Bank Rate and the creation of 200bn of new money was to ease the pain of those who had borrowed too much and prevent the credit tap from being turned off completely: but, as many of you are painfully aware, in the process the thrifty have been punished, whether they had their money in a savings account (whose interest rates have fallen to derisory levels) or a pension pot.

    This has had a devastating effect on the sustainability of final salary savings schemes and on the returns for those putting cash into defined contribution schemes.

    Low interest rates and thus the low returns available from high quality government and corporate bonds means that the income available from annuities which savers in personal pensions have to buy when they want their pensions has dropped by more than 6% over the past year and 45% over the past decade (according to Moneyfacts).

    To translate, if you retire today with a pension pot identical to that accumulated by your older brother when he retired 10 years ago, your pension will be around half what he receives.

    And the same phenomenon of plummeting bond yields and reductions in the so called "discount" rate has the effect of massively enlarging the net liabilities of final salary pension schemes (think of falling bond yields as a reduction in the return available from the supposedly safest investments, which means that companies have to invest more cash each year in their pension schemes to cover a specified quantum of pension commitments).

    According to the KPMG Pensions Monitor, the deficits of FTSE 100 companies have increased by 15bn this year to 65bn and by more than 60% since 2008.

    And as the Institute of Consulting Actuaries has helpfully reminded us this morning employers are soon to face an obligation to "auto enrol" all their staff into funded pension schemes, which will introduce an additional pension burden on them.

    Here's what most of you don't need telling: more and more businesses and institutions are looking at these swelling liabilities and concluding that they're unaffordable so many of them are devising strategies to scale back what they pay to future pensioners (a big hello to my own employer).

    This is true of both the public sector and the private sector.

    So if there's a faint smell of unrest and insurrection in the air, it may be that common cause for protest is being found by the two groups who would see themselves as the innocent victims of the Great Boom and the Great Bust: those so young that they haven't had time to build either career or savings; and those with retirement on their minds, whose savings replica cartier yellow gold love ring income and pensions, they might say, have been deliberately squeezed to bail out the feckless.

    Comment number 1. At 10:18 31st Aug 2010, sharpcj wrote: It's not about old vs young it's about savers vs borrowers and speculators, which cross all age groups.

    Oh and we're in a depression. Nothing's been averted.

    Complain about this comment (Comment number 1)

    Comment number 2. At 10:30 31st Aug 2010, putneytony wrote: I would not advise young people to save. One cannot live long enough to make a return on stocks and shares. At the moment after saving for 30 years I will probably only receive back in cash what I paid. Just to have stood still in value terms is impossible.

    Complain about this comment (Comment number 2)

    Comment number 3. At 10:32 31st Aug 2010, BobRocket wrote: 'Here's what most of you don't need telling: more and more businesses and institutions are looking at these swelling liabilities and concluding that they're unaffordable so many of them are devising strategies to scale back what they pay to future pensioners (a big hello to my own employer)'

    So the only conclusion I can come to is that the whole pensions thing (unless you are at the top devising the scheme) is a bit of a con.

    Fair enough, they can't scale back any entitlement already accrued but they suckered you in as a wide eyed graduate with the promise of an ok wage and a good pension scheme and now 20 years later they are downgrading the last 20 years of your working life.

    Funnily copy cartier yellow gold love ring enough, the wage you were earning when you started was a lot lower than it is now with cartier imitation men ring 20 years experience, now your wages are higher and your pension contributions are worth less. (worthless)

    It has been a con all along because if you had known what they were going to do you would have insisted that fake cartier ring white gold more of your wages would have been paid into the pension scheme at the beginning where it is now ring fenced.

    What we are seeing is the death throes of the pensions industry, it is a long process and will take a working lifetime to happen but why would anyone just starting out buy into the whole pensions thing when it is plain for all to see that the baby boomers have been sold a pup.
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