Pensions crisis is back on the boardroom agenda

Shrinking credit, regulation and longer lives are seriously eroding pension returns, warns Alex Brummer. Forget the Riviera – it’s Worthing that awaits

When the credit crunch erupted on 9 August 2007, no one envisaged that nine months later the money markets, where banks lend to each other, would still be closed. The impact of that closure and the torrent of losses cascading through the financial system is having a dramatic impact on all of our lives.

Credit card limits have been slashed, mortgages for first time buyers have become all but extinct and pensions – already severely strained – have been skewered. A combination of turbulence on equity markets, the relatively low yields on gilt-edged stocks and constantly changing mortality assumptions and accounting rules mean a return of the pension fund deficits which have been the curse of corporate Britain since the turn of the 21st century.

Investment bankers Morgan Stanley estimate that falling asset prices alone, notably commercial property and equities, have added £40 billion to the deficits of the companies which make up the FTSE 350, the top 350 quoted enterprises. This worsening of the condition of corporate pensions is only partially offset by the surge in corporate bond yields, as markets have become increasingly distrustful of company debt. Rising corporate bond yields have allowed company pension funds to claw back £29 billion of value.

Even so, for many firms including BT (which has one of Britain’s largest pension funds), Northern Foods and AGA Foodservice, pension deficits are a liability that has now reached 7 per cent of market capitalisation or more.

This is not all. The regulatory environment for pensions is never at a standstill. Indeed, many people argue that ever-changing government regulation – which has required gold plating of occupational schemes to fund inflation adjustment and generous widows’ benefits – have proved as detrimental to pensions as the then chancellor Gordon Brown’s 1997 tax raid on dividend income.

The tax hike was estimated to have raised up to £6 billion a year for the Exchequer and back-of-the- envelope actuarial calculations put the total cost of that measure to occupational funds at £100 billion and climbing. At the time, Brown was warned by Treasury officials that the measure would have a detrimental effect on occupational schemes, which were in healthy surplus, but he chose to ignore it.

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