Newspaper article The Evening Standard (London, England)

We Must Cool This Alarmist Talk over Pensions; City Comment

Newspaper article The Evening Standard (London, England)

We Must Cool This Alarmist Talk over Pensions; City Comment

Article excerpt


PETER Thompson, chairman of the National Association of Pension Funds, delivered a robust warning over the weekend that a growing number of occupational pension schemes are running up against their solvency margins.

His remarks were immediately interpreted as being a veiled warning that the fall in stock markets since the terrorist attacks on the US has undermined the ability of funds to meet their pension obligations.

But that is surely wrong.

The whole basis of actuarial valuation for pension funds is driven by the income derived from the assets in the fund and the key numbers on the asset side are therefore the gilts yield and the dividend yield. Rises and falls in share prices play only a minor part, for reasons that are now obvious - they create too much volatility. Funds are, or should be, relatively immune to short-term fluctuations.

However, there are other reasons not to be complacent. Thompson was right to say that some pension funds are feeling the strain but the reasons for this are not the ones attributed by him and are much more long term.

First there has been an unexpectedly large jump in life expectancy in recent years, which means those who retire will collect a pension for longer, thereby increasing the amount of money the funds need to generate. Second, long-term interest rates have fallen steadily for almost a decade and this affects the income of funds. Third, the taxes imposed on pension fund income shortly after Labour came to power cut the amount available for reinvestment.

The bite of these taxes increases with time, like a negative compound interest, and

the cumulative effect is now beginning to show.

There is no doubt that when their funds are valued - normally every three years - a growing number of companies will find that their liabilities potentially outstrip their assets. …

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