Pensions News (PN) was going to write an article about anti-franking for today’s edition. PN chose this as his subject matter because he considers it one of the most mind-bending subjects that one could choose in the pensions sector to write or talk about. As you, the reader, may have gathered, mind-bending is something that PN rather admires.
The reader will note that PN said that he “was” going to write about anti-franking. PN was going to write about anti-franking right up to, but not including, the point he heard a report on BBC Radio 4’s Today programme (broadcast on the morning of Wednesday 12 October) which informed listeners that an individual pension fund valued at the current lifetime allowance (i.e. £1m) would purchase an annual pension (or annuity) of slightly over £20,000 “with protections” or else approximately £43,000 per annum “without protections”. After dropping that metaphorical bombshell, former pensions minister and MP, Mr Steven Webb, was placed behind a microphone to tell listeners that he was worried and that he felt that the current regime discouraged people from saving for a pension. Well; PN supposes there is something in that. Mr Webb had previously stated (in the Financial Times (FT) of 8/9 October) that he was worried that a large number of people had ceased to put money into their pension funds (the word “pot” was used in the article but PN has consistently declined to use this word when it comes to his specialism and isn’t about to depart from that stance) because the low (in relative terms) lifetime allowance had caused around 100,000 people to stop contributing to their pensions. This (i.e. the 100,000 – not the £1m lifetime allowance), said Mr Webb, felt like a “massive” number. 100,000 is a massive number if compared to 4 or 44 or the 40,000 persons who, allegedly, stopped contributing to a pension plan a year ago. 100,000 is not (however) a massive number if compared to the several millions of persons who do not contribute to a pension plan at all (primarily because they cannot afford to) and, therefore, will be reliant on the state pension. Sitting in his car while waiting for the person in the car in front of him to perform a twenty-four point manoeuvre to get his ten foot vehicle into a nine foot space at the train station, PN mouthed, through gritted teeth, that he thought certain persons might not be getting the point about pensions. (Shortly after, PN had to explain to the sweaty driver of the car in front of him that he had been mouthing expletives at the radio.)
The lifetime allowance is low if one has, relatively speaking, more than a reasonable amount of money saved or to save however a lifetime allowance of £1m is an irrelevance to the majority of the population. This principle somehow reminded PN of the general approach of the relatively well off during the days before the June referendum when the country voted, by a majority, to leave the European Union (EU). The FT had declared that, economically, the choice was a “no-brainer”. Many (relatively well off) intelligent persons declared themselves in agreement with the FT and declared the referendum a foregone conclusion or the nearest thing to it. The majority of the population ignored the FT (mainly through the cunning device of not reading it) and then appeared to consider the EU an irrelevance by voting to leave it - something we are unlikely to be allowed to forget.
Back to pensions; the fact that investment returns and annuity rates are poor seems to PN more likely to put people off than the level of the lifetime allowance itself – particularly where such people are advised that their pension fund of around £150,000 (a not untypical value these days) is likely to yield an annual pension of less than £6,000 (without any protection against inflation) at today’s prices.
By the time he had stepped on to the train, PN had decided that anti-franking would have to wait – probably until a time where someone else dealt with it. Instead, he talked to a fellow passenger who was or seemed to be deeply disturbed about the exchange rate. Further to certain speeches made during the Conservative Party conference about a week ago (speeches which, with the benefit of hindsight, appear to PN to have been particularly ill-judged), the value of our irrevocably British pound has fallen significantly against the US Dollar and the Euro. PN’s train friend was about to go on a holiday to the USA and was visibly upset that the few hundred pounds he had saved was likely to obtain him the same number of US Dollars. The friend remarked that if he decided, instead, to go to Europe, the same amount of pounds would get him approximately the same number of Euros; it would make for some very simple arithmetic when it came to the basic principle of working out the price of something in the EU or USA against the price of the same something here but the even simpler arithmetic was that buying anything “over there” would be materially more expensive than it would have been a month ago.
The uncertainty which financial markets (and other markets) clearly do not enjoy appears to have caused consternation in the corporate world and one of the casualties has been pensions. If a relatively rich company such as BMW can point to increased pension costs caused by uncertainty as one of the main reasons behind the closure of its pension scheme, there seems little chance of less well-off companies being able to afford their schemes. BMW is a company which prides itself in producing prestigious motor cars which cost a lot of money. In a statement to the press, BMW stated that it (also) prided itself in providing “excellent pensions” for its staff. It went on to explain that this strategy meant that it was to close its pension scheme. It proposed to do this, it said, to protect pensions already earned and to protect its business from spending increasingly and unpredictably large amounts of money on its scheme. The trade union Unite appeared to have little sympathy with BMW. Its officer for automotive industries seemed to think that it was ironic that, at a time that the company’s profits were rising, it should be closing its pension scheme and pointing to the cost of supporting that scheme as one of the main reasons for the closure. Readers can expect to hear more about this proposed closure.
Not to be outdone in the large amounts of money stakes, the company which coined the phrase “every little helps” declared that the deficit in its pension scheme had increased from its estimated level in February 2016 of £3.2bn (where “bn” is short for billion) to £5.9bn. How, one might be asking the computer screen as one reads this, does a deficit increase like that in just over six months? Well; according to Tesco (and as reported in the FT of 6 October), the increase in the deficit is down “to quantitative easing and a fall in bond yields since the [so-called – ed.] Brexit vote”. Tesco has said that it will “continue to contribute £270m a year to the pension scheme” to address the deficit.
Moving from scheme closures and large deficits, it seems logical somehow to terminate today’s edition of PN with a reference to a (slightly) higher authority; the International Monetary Fund (IMF). The IMF has produced a half-year report which considers matters such as the low level of interest rates and its effect on financial markets, insurers and pension funds. The IMF’s report concluded that whilst “short-term risks have eased over the past six [sic] months since the [so-called – ed.] Brexit vote, big challenges remain”. Ultimately, the IMF warned that a combination of low interest rates, falling annuity rates, uncertainty in financial markets and (as indicated) this country’s decision to leave the EU was putting (all) pension funds at risk of insolvency. Those individuals whom Mr Webb appears less worried about (namely those who cannot afford to contribute to a pension scheme) have little to lose through this risk and so, with this dose of cool comfort, PN will leave you to your next cup of coffee and, if you’re lucky, slice of cake.
Until next time……..