<p>The regulatory system is helping destroy what remains of our once great pension fund system.</p>
<p>A pension fund is like a bath with both taps on and the plug out. In a healthy growing fund money is pouring in from the investment tap, as the investments produce income and gains, and money is pouring in from the contribution tap, as members and the employer make their payments each month for future pensions. Money is also going out of the plug hole, as members retire and need pension payments.</p>
<p>The art is to keep enough money in the bath so it does not run out, until?? all??entitled to money from the scheme??are dead.</p>
<p>At any given time it is a matter of argument how much money needs to be in the fund to be able to pay future pensions. No-one knows for sure how long pensioners will live, how much will be earned on the investments,?? how much future contributions will amount to, and how much people will be earning in the years ahead.</p>
<p>The regulators require actuaries to make an intelligent guess on a regular basis. In the 1990s actuaries generally concluded that pension funds had too much money in them for future requirements. They told the funds to put less in or nothing in to try to adjust. This decade actuaries are telling most funds they have insufficient to pay future pensions, and telling them they have to put large extra sums in.</p>
<p>Why have they changed their minds so much?</p>
<p>1. They have decided based on the evidence that people are now living longer, so funds need more money to cope with that.</p>
<p>2. In the period 2000-2002 stock markets fell sharply, reducing the value of many funds. Shares fell more in the UK than in other major markets, because the UK government introduced large extra tax burdens, especially on dividends. This clearly affected funds badly.</p>
<p>3. The loss of susbtantial tax relief has a?? negative impact.</p>
<p>However, other real things went the other way. Since 2002 stock markets have performed very well, and are now in?? the UK and US up to new high levels. Pension funds in many cases have cut their risk by stopping new members, or agreeing less generous terms in the future for members. Large extra payments have gone in to most funds.</p>
<p>So why haven’t all the deficits gone away?</p>
<p>There are two main reasons.</p>
<p>The first is that the actuaries and regulators urged the funds to switch out of shares when they were low, into bonds (government debt) after they had gone up. This crass piece of advice has meant many funds have not regained so much of the lost value from the market decline, because bonds have performed?? badly in the last three years when shares and property have done so well. I doubt if the actuaries and regulators who did this ??will say sorry or pay compensation!</p>
<p>The second is the way actuaries and regulators?? calculate the numbers. They value the liabilities - their estimate of how much money is needed to pay all the pensions - by reference to the prevailing rate of interest. Because interest rates are very low by historical standards the actuaries tell funds they will need much more money to pay future pensions. If interest rates rose, the actuaries would tell the funds they now needed less money for the same task.</p>
<p>The actuaries and regulators have created a vicious circle for the pension funds, which is a magic circle for the government. They tell pension funds they must buy more government debt. This drives down the rate of interest the government needs to pay on the debt. This then according to the actuaries means the funds need even more money to pay future pensions, which means the funds have to put more money in and buy even more government debt!</p>
<p>??So what should be done?</p>
<p>1. The regulators and actuaries should stop pressurising Trustees and pension managers into buying government debt and driving the rate of long term interest down too much. Pension liabilities are long term and growing - they rise as earnings and prices rise. Interest on ordinary government bonds does?? not go up with wages or prices. Dividends on shares and rents on property do go up rather like?? earnings.</p>
<p>2. The actuaries should look into smoothing their calculations of the liabilities, so we do not get big swings when interest rates change. They may well have underestimated the money needed by funds in the 1990s, when interest rates were on average higher. They may similarly be overestimating the amount of money needed now that interest rates have been on average lower. These deficit calculations are judgements, not right answers. Big swings makes it difficult for fund management, and makes it likely there will be unfairness between generations.People earning well in the 1990s probably underpaid for their pensions. People earning well today are probably overpaying.
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