Defined-benefit pensions: killing our economy for all the wrong reasons

Defined-benefit pensions are fast turning into one of the UK’s biggest problems. But it’s all entirely unnecessary, says Merryn Somerset Webb.


Pensions minister Ros Altmann: funds can focus on a diverse group of investments

I wrote earlier that defined-benefit pensions (the ones where you get paid a percentage of your salary inflation linked for ever on retirement) are fast turning into one of the UK's biggest problems. The conventional view is that this problem is all about the funds not being able to ever fill their deficits, and hence ever meet their obligations.

A press release today from Nigel Green at deVere Group makes the point. Low gilt yields have increased the transfer value of defined-benefit fund. Ask to forfeit your stream of future payments for a one-off payment now and you'll get more than you expected; that's good for you, but bad for the fund (which no longer has that case to invest).

The same falling gilt yields are driving up the pension deficits themselves (the difference between the fund's calculations of its assets and its liabilities); most pension funds assume that their future returns will mirror that of gilt yields so the more they fall, the lower that returned assume and the higher the shortfall looks.

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It is all awful, and I agree that it is awful. But not in quite the same way.

The first thing that I see as awful is not the deficits themselves but the damage that the attempts to fill the pension funds are doing to the UK economy. Every pound poured into a gilt is a pound not poured into real investment for long-term corporate sustainability.

The second is that the deficits the pension funds are in such a twist about aren't real; they are instead, in part at least, a result of an accounting obsession. Trustees, desperate to avoid being blamed for future problems, have become obsessed with matching their liabilities to their holdings so they slavishly use gilt yields to measure their deficits and slavishly pour as much cash as possibly into miserably yielding bonds instead of productive equities.

This isn't necessary. Let me repeat that. This isn't necessary (subscribers can read my interview with Ros Altmann on the subject here). It is perfectly possible and legal for funds to focus instead on a more diverse group of investments and in particular to focus on cash flows from investments rather than the overall return from investments (it is, after all, cash that you pay pensions in).

I'm not alone in thinking this; my column on the matter for the FT has prompted a wave of correspondence (from companies frustrated with the demands of their pension funds, from pensioners concerned their benefits will soon be cut as their funds collapse, and from pension trustees maddened by the stick-with-gilts advice from their advisors). I'll be writing more on it.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.