The combination of quantitative easing and government accountancy rules is forcing up supposed pension fund deficits, closing schemes that are in fact perfectly viable...

The truth behind the pension fund ‘deficits’

WORKERS, JUNE 2012 ISSUE

In its attack on pensions the government has employed shock and awe tactics – inflating pension fund deficits and claiming these to be based on workers’ longevity. In fact the chief reason for pension deficits has not been longevity but the use of false accountancy standards that were first introduced under Labour in 2000 and since continued by the Coalition. In their struggle to protect pensions, it has been the organised working class who have recognised what has been happening and trade unions have begun to dissect the legitimacy of government claims.

Health visitors on the picket line at Whipps Cross Hospital, northeast London, during the 10 May strike against changes to pensions.
Photo: Workers

To their shame many professional bodies involved with occupational pensions had until recently gone along with the government’s nonsense that pension deficits had been caused through us living longer. But, as with most things, once the “rock begins to roll” those who were previously timid start to join in. For example since November last year the National Association of Pension Funds has been pointing out that the latest round of quantitative easing and the pension funds’ method of deficit accounting (which values assets on short-term market prices rather than taking a longer view, and has led to the closure of perfectly viable funds) “is a recipe that is destroying the value of Britain’s retirement savings. It is a torture for pension funds because it artificially suppresses long term interest rates”.

Even the Confederation of British Industry (CBI) is finding that its covert support of inflating deficits to facilitate the closure of final salary pension schemes has an unwelcome twist. Its member companies are still faced with trying to shore up artificial deficits by having to invest new sums of money into closed final salary funds. A CBI spokesman recently said, “Money which company sponsors might have spent on job creation is instead diverted into filling the deficits. It’s a vicious cycle.”

Undervalued

The fact is that if a more realistic set of financial assumptions were used, our pension funds would be shown to be something like 30 per cent to 40 per cent currently undervalued as a result of having to apply the government’s prescribed accountancy basis. Therefore those pension schemes that have been closed need not have done so. Perhaps this could be something that the social democrats and their paid talking heads in the media could take up when they witter on about the cost of us living longer, “pensions apartheid” and the need for economic growth.

A good example of where things can begin to be addressed is the fact that we currently have over 800,000 people toiling at work beyond age 65, while over a million young people between the ages 18 to 23 are unemployed. Clearly there is a need here for intergenerational planning to match the requirements of young and old, so that both are satisfied during the transition between work and retirement. Yet the only thing on offer from the Coalition is to extend state retirement age to 68 and beyond.

In October 2010 Workers reported that pension liabilities had leapt by £10 billion in one month and in 2012 it is no different. The wild swings in the government’s deficit accountancy measure have been such that the total pensions deficit rose by £10.6 billion in a fortnight during April. How are organisations able to fund pension schemes and plan their annual budgets when faced with this type of accountancy nonsense that has absolutely nothing to do with longevity?

The complete disassembling of the government’s pension position also enables other areas of political economy to be examined. Previously Workers has warned that the government plans to create through “regulatory prudence” a captive savings market in Britain that will be forced to invest in “risk free” government debt (gilt-edged securities, or “gilts”).

This regulatory approach is a classic example of where the attack on workers is orchestrated by the British government hiding behind EU legislation and directives. Concealed behind the noise of deficits is the European Insurance & Occupational Pensions Authority (EIOPA), which is based in Frankfurt. On behalf of the EU and the Westminster Parliament it is EIOPA’s dead hand that prescribes the basis on which our pension liabilities should be measured.

Germany has few pre-funded occupational pension schemes and what schemes there are only represent 16 per cent of its GDP, while Britain has accumulated pension funds worth 85 per cent of our GDP. So why from its EU bunker in Frankfurt does EIOPA dictate how we must measure our pension liabilities, while prescribing how our pension assets should be invested so as to cover useless government debt – that will result in our pension funds incurring a massive capital loss?

The question of pensions runs deep into the political economy of Britain, and the struggle will unfold in a number of ways. Cameron’s recent announcement that he will now make a stand on EU financial diktat (Solvency II) should be watched closely because as a euro team player any stand by him will be about as useful as a chocolate fireplace. Increasingly it is urgent to formulate what we need as British workers and put this in place alongside Britain’s withdrawal from the EU. ■