Monday, 3 November 2008

Pension crisis - it is a slow burner

After years of overconsuming, undersaving and hoping that the housing market would provide for a comfortable retirement, there is a growing realization that the UK is heading for a massive pension crisis.

The crisis is most acute in the private sector. Today, BT confirmed the extent of the problem. It is looking to minimize their pension liabilities by raising the retirement age and reducing the pension benefit. More ominously, BT might try to push some of their liabilities onto the state. BT hope to interprete "a guarantee in respect of its scheme members to cover not only all pension benefits earned before privatisation, but also benefits earned by those who remained after going public."

It is all coming together; an ageing population, a crashing housing market, collapsing equity prices, and a rising fiscal deficit. Neither the state pension nor private sector schemes can guarantee a reasonable retirement for today's workers.

There is only one solution; those approaching retirement must stop consuming and start saving.

From the FT....

BT is seeking changes to its final salary pension schemes, including raising the retirement age from 60 to 65 and basing benefits on the average, rather than the final salary, earned before retirement.

BT confirmed that talks with its unions had been under way since May and said the moves were unrelated to the 19 per cent fall in its share price on Friday after the group warned that earnings would fall in 2008-09 because of problems at its division serving multinationals.

Analysts speculate that BT may need to cut dividends, in part because it may need to step up significantly contributions to its pension scheme. However, with only 69,000 active members out of a total of 344,000, the changes to the scheme will do little to alter aggregate liabilities.

According to John Ralfe, an independent pensions consultant, these were roughly three times BT’s market value after Friday’s share price fall to its lowest since privatisation in 1984.

Meanwhile, Mr Ralfe, in a report to be released on Monday, says that if BT’s interpretation of terms of the privatisation are correct, British taxpayers could be on the hook for about £16bn of its pension shortfall if it should suddenly become insolvent.

5 comments:

Anonymous said...

During the dot.com boom, BT stopped paying into their fund claiming that capital appreciation made it unnecessary.

Markbaldy said...

Forget your pension funds - there will be no money to pay out in 10 or 20 years time.
Years of partying and living on borrowed money will ensure that our taxes/NI contributions will go to paying interest to the IMF (and anyone else daft enough to lend money to Brown) for decades.
I find it offensive that as a saver, I am (AGAIN !!!) being shafted by bailing out bankers and losers... interest rates should go UP NOT DOWN... but in this World common sense has been long gone.

sobers said...

A nation cannot consume more than it creates in the long run. And we have had a pretty good run of over consumption and under production. Eventually a state runs up against the same barrier an individual does - the credit dries up, or is only available at extortionate rates. It just takes longer for a country than an individual. Adam Smith said "There is a great deal of ruin in a nation", and we are close to the limit of how much more 'ruin' we can inflict on our national and individual finances.
I have visited both China and India, and there is no reason why we should expect any greater standard of living than either really, given our economic output. It is only our historical position that allows us to imagine we somehow deserve greater wealth, rather than actually earn it. We are like a runner who started before everyone else, built up a long lead, but now is at a standstill, and is being caught rapidly by his competitors. We face reductions in our standards of living until we reach a level that we can afford. Only then can we resume a modest, steady growth, based on real productivity.

Nick von Mises said...

Right, so the MSM has finally discovered the demographic issue. Thirty years after it was baked into the cake.

Mark Wadsworth said...

Crisis, what crisis?

Let's just roll all existing taxpayer funded old age crapola into a Citizen's Pension of £130 a week for all over 65s; scrap tax breaks for pensions savings; and have commensurate tax cuts - scrapping Employer's NI, Stamp Duty, CGT and higher rate tax on dividends would be approx. fiscally neutral. Public sector pensions could do with being halved as well.

That's that fixed. From here on in, you're on your own.