If you are at university or have a child at one in the UK you will know that lots of lecturers have been on strike. Look to our briefing this week and you will see why. The university pension scheme is deeply in deficit. Its sponsors consider this unsustainable, and as a result they want to change the way the scheme works (in a bad way – at least from the point of view of the lecturers). You may be wondering who is to blame for this irritating interruption to the education of Britain’s great hopes for the future. The Bank of England can help with that, since it has just admitted that it is largely responsible.
The Bank has just published a working paper on the matter of pension deficits – now estimated to be £300bn, or the equivalent of 15% of the UK’s GDP – and their effects on corporate behaviour. In this paper, the Bank notes something that we have been telling you here ever since quantitative easing (QE) began: that “monetary policy itself is likely to have contributed to larger pension deficits”. The first £200bn of the Bank’s QE programme probably depressed gilt yields by around 1%, says the Bank, while low interest rates and forward guidance (the Bank has spent much of the last decade telling us not to worry about rates ever rising) have also “played a role in lowering gilt yields”. That matters because “lower long-term interest rates increase the size of pension deficits”. So there you have it. Cross that you or your kid might not get the first you deserve? Write to Mark Carney.
That done, it is worth reading some of the rest of the report. There you will find confirmation of something else that will come as no surprise to long-term MoneyWeek readers – that the desperate attempt by firms to pour cash into their pension schemes to reduce their deficits has had nasty consequences for their dividend payments and, worse, for the long-term investment plans for many of the UK’s companies.
Turns out that “larger pension deficits and recovery contributions in recent years have had large and economically important effects on firms’ spending decisions”, something that matters hugely for the simple reason that one day’s investment is another day’s economic and productivity growth.
And it is worth noting that the UK corporate sector has long been guilty of underinvesting. This week, I interview Simon Edelsten of Mid Wynd, who says that this is one of the reasons he has so little of the investment trust’s money invested in listed companies in the UK. There is plenty of growth in unlisted firms, but the big listed ones have long been so obsessed with keeping dividend payments (and hence share prices) up, overpaying their managers and keeping their pension trustees quiet that they have failed to invest in long-term growth. If you are after that, he says, you are better looking to Japan and the US.