As Sir Fred rides off into the sunset with his financial future secure, are pension funds next in line for a massive bail-out by hard pressed taxpayers?
It may be too early to be sure, but the question being asked increasingly is what effect the downturn and the recent sharp falls on the Stock Market will have on pension funds, the biggest investors.
Most final salary schemes were already in deficit. In January the total deficit was thought to be £190 billion. These latest falls reduce the value of the assets they hold still further. This is concerning for all those with a pension. It also highlights the damaging effects of Gordon Brown’s management of the economy and his Pension Raid in 1998, when he ended Dividend Tax Relief, taking £5 billion per annum out of pension schemes.
Just as asset values are falling, companies sponsoring schemes are facing the most challenging trading conditions for years and in some cases this raises the question of whether they are able to live up to their obligations under the scheme.
With an ageing population and people living longer, occupational pensions are vital to ensure that there is money saved up to pay for retirement, rather than simply relying on state benefits and so that individuals can have the sort of retirement they want.
Over the coming months three yearly valuations will take place of some of the biggest pension schemes and we will see the extent of the losses. We will also be able to gauge the extent to which pension funds have been exposed to “toxic assets”. The Pensions Regulator has suggested that direct exposure is “relatively limited”, but despite this, reports suggest that there is still an unanswered question about how far individual schemes are exposed to derivatives and other complex investments. The example of our biggest banks is not encouraging with each new disclosure adding billions of pounds to the losses.
The Pensions Regulator is helping schemes to make recovery plans over a period of years, but this raises difficult issues for trustees, who must assess the chances of their employer surviving. If a company is given easy terms to rebuild the scheme and then goes bust, there will be less money for members, but if a company is put on tough payment terms, it may be pushed over the edge, resulting in no future pension contributions.
Ministers point to the Pensions’ Protection Fund (PPF) as a guarantee of payment if the employer sponsoring the scheme goes bust. But it is the best pension schemes which pay the levy so the PPF can help out those which fail. If a significant number of companies go down in the recession, there must be a risk that the levy will be increased, adding further burdens to good schemes.
So as the pressures build, there is an assumption that the Government will not let our big pension schemes fail and stands behind the PPF. But the amounts of money involved in the pension funds are huge. We must hope that another massive taxpayer bail-out is not in prospect.