Enjoy wallowing in gloom?

Pensioners obtaining student loans for car purchases?

It is rather fun website to read actually. Maybe we should have our own version for UK?

A serious question on this topic. Why are final salary pensions going further and further into deficit even though the Stockmarket has been booming for several years? Is it purely because companies are taking pension holidays or because they will never be profitable since Gordon Brown's taxation changes?

moneyfoolish wrote: »

A serious question on this topic. Why are final salary pensions going further and further into deficit even though the Stockmarket has been booming for several years? Is it purely because companies are taking pension holidays or because they will never be profitable since Gordon Brown's taxation changes?

It's fairly simple.


It is a combination of a couple of factors:


1. increasing longevity, above previously calculated levels. In past times, the value of the scheme liability (how much it would have to pay out, and for how long) for an individual was based on actuarial mortality tables. These show that an individual aged X will live to age Y; from that, the actuaries can calculate the likely number of years over which the pension needs to be paid, and hence value this liability.
However, longevity has been increasing faster than had been predicted, meaning that the actuarial valuation had been too low. As such, the current view of longevity means that this historic shortfall is needing to be made up.


2. gilt / bond rates. In general terms, a DB pension fund will purchase bonds as investments to match the timing, cash flows and duration of the future pension liabilities (calculated in (1) above). However in this low-interest-rate environment and under Quantitative Easing, the price for bonds has rocketed, meaning that cost buying bonds to meet the actuarial valuation of liability is huge.


3. Dividend Tax Credit (1997 (?)) introduction meant that investment income for the pension scheme was subject to tax. Naturally this resulted in a reduction in the overall assets of the scheme, and means that a greater level of assets are required to be held to meet the pension liability.


4. historic choices. In previous generations, and particularly in the '80s and '90s, it seemed common for schemes to encourage early retirement. This was done at nominal or zero reduction in benefit to the recipient (ie retirement 5 years early at 100% of your normal retirement date forecast pension). This had two impacts: the scheme lost a few years of contributions (5 year early retirement would mean 5 fewer years of contributions), and paid significantly more over the life of the pensioner (5 years additional pension payments). At the time, these decisions were fudged through the trustees of the scheme without perhaps full regard to the risk and costs of doing so (I choose my words very carefully here) and it might be argued that the companies were looking to effectively bundle the cost of getting rid of senior staff onto the pension scheme, rather than being borne (and recognised in the accounts) of the employer.
The impact of this is being felt today; the reality is that early retirement over-depleted the schemes and left the remaining assets insufficient to meet the obligations required for future pensioners, and hence grew the liability.




5. As an aside, "holidays" were only ever seen in cases where investments significantly exceeded forecast liabilities - common in the '80s and '90s (where surplus in a scheme was threatened to be taxed). I've not come across many schemes in surplus, and none with holidays, for many years.


6. interest rates. Noone ever predicted we would be in a zero-interest rate environment, artificially supported by QE, as we have experienced since 2008/9.




Of these factors, the overwhelming impact has been interest rate / QE policy and its consequent impact on the price of bonds.