Pensioners around the world should take note of the controversial new legislation being considered by the UK Parliament’s Work and Pensions Select Committee that would allow private businesses to cut pension costs by suspending contractual inflation-linked benefit increases. Of course, this could be just a crucial first step in the long journey toward cutting pension benefits and finally admitting that many defined benefit pension plans around the globe are nothing more than insolvent, ponzi schemes.
Committee Chairman Frank Field told the Financial Times that the goal of the proposed legislation is to simply create an environment that helps insure the “survival” of defined benefit pension plans for now “which gives you flexibility in the longer run.”
“We should make clear our aim, with any policy changes, is the primary goal of safeguarding, in the best possible form, DB pension schemes,” Mr Field said ahead of the launch of the inquiry into defined benefit schemes.
“The aim is survival now, which gives you flexibility in the longer run,” he said.
Mr Field said his committee would look at what is required to “help create a climate of opinion so scheme trustees would naturally think about introducing flexibility on benefits”, primarily on inflation-matching increases.
The veteran Labour MP said that while it might be difficult for trustees to negotiate flexibility, they should insist they have the right to reverse any agreement on reducing inflation rises “if and when better times come”.
“That might be the price for survival now,” said Mr Field.
Efforts by the UK Parliament to cut pension losses come just as new data from Mercer’s Pensions Risk Survey shows that the underfunding levels of defined benefit pension plans for the UK’s 350 largest companies increased from £98 billion as of May to £119 billion at the end of June. Meanwhile, aggregate funding levels for the UK’s largest private pensions dropped below 85% for the first time since Mercer started measuring the data.
Mercer research also points out that the annual accounting cost for the UK’s largest 350 listed companies has increased by over £2 billion since the start of 2016.
Warren Singer, Mercer’s UK head of Pension Accounting, said: “Our analysis of current low bond yields shows that new DB pension savings now typically have an accounting cost about four times higher than the cost of defined contribution (DC) retirement savings. The impact of over £2 billion on profits is material compared with pre-tax profits of FTSE 350 companies of £84 billion in 2015.
“The key question is whether you expect 30 years of stagnation in the UK, as implied by the UK bond market. We have seen in Japan this scenario is possible but the Governor of the Bank of England has stated that UK bond yields are distorted by an investor community as a whole that is taking out insurance for extreme risk events. He believes there will be adjustment and growth without question. However, if employers believe in a low growth world, they may find it unsustainable to allow employees to continue building up new DB pension savings.”
The first step is admitting you have a problem.