Pensions update

 I was doing a general update on pensions last week for a gathering of pension trustees. I have long been interested in pensions, even before becoming a pensioner! I was the joint secretary of the biggest pension scheme in Scotland, and I am currently a director of a pension fund and have helped others with ESG issues. I am writing this from the STUC in Dundee, which surprisingly has no pension motions on the agenda.

A lot is going on in pensions that workers ought to be concerned about.

The fallout from the Truss economic crash is still felt across the sector. Pension funds have used LDI (Liability-Driven Investment) strategies for around 20 years to protect themselves from adverse movements in interest rates and inflation and reduce the impact on their funding levels when interest rates fall, rather than just the scheme's assets. All was well and good until Truss came along, resulting in many pension schemes struggling to find the required cash in such a short timescale. This also meant that many had to sell gilts, further reducing their value. We now have several reviews of LDI, and some funds are looking at the options for seeking redress for losses. 

The cost of living crisis will impact members' ability to contribute to pension schemes. We should watch the number of opt-outs, as inflation remains stubbornly high. The IFS has suggested that public sector pension schemes should reduce pension contributions as a substitute for inflation-linked pay increases. This strikes me as a short-sighted policy as it would come with reduced benefits and greater pensioner poverty in the long term.

While the Chancellor has been making noises about long-term pension reform, current reforms are going slowly. The much-vaunted pensions dashboard has been delayed again. Even more worrying is that commercial companies can establish their own dashboards. The scope for pension scams is enormous, and pension trustees must communicate effectively. The Statement of Strategy is a technical reform, but we are still awaiting details on the format.

I was at a pensions conference listening to Stephen Timms MP, the very able Chair of the Work and Pensions Select Committee. He highlighted the need for a political consensus around higher pension contributions and reducing the age for auto-enrolment from 21 to 18. He welcomed the Royal Mail collective DC scheme but argued that DC schemes generally needed to offer better value for money.

Regarding my interest in ESG investment, climate change is still going in the wrong direction. Pension funds need to focus on the genuine risks to their investments and not be fooled by the level of greenwashing being sold. We still have poor data, different regulations and general inertia in assessing corporate action. Pooled funds are a particular challenge. While we should focus on the downside of climate change, we should also focus on the upside of investment opportunities.

There has been a welcome focus recently on the pension gender gap. There is a 40% difference in retirement outcomes caused by unequal pay, career breaks, and greater part-time work. For example, a two-year break can result in an 11% reduction in pension for a worker on £30,000. Pension funds can help by looking closely at the structure of their scheme. The deficient level of state pension provision in the UK means that those with little or no private pension wealth are at a severe disadvantage in retirement. The IFS has published some ideas on the taxation of pensions, and the UK Government have given a giant handout to the wealthiest pensioners in the Budget. Not quite the tax reforms we require.

The State Pension Age has also been in the news, with the UK Government deferring decisions until after the elections. Older people vote! Changes have significant financial implications. According to the IFS, a one-year increase in the state pension age in the late 2030s would likely save around £8-9 billion a year in today’s terms, and delaying the planned rise in the state pension age to 68 by seven years would cost at least £50 billion. In France, huge numbers are hitting the streets over a change in the pension age to 64. While we quietly allow this debate to pass us by when life expectancy is falling.

If there is one message from all this – we all need to pay more attention to pensions.