In my piece on Port Talbot yesterday, I mentioned the whopping pension deficit as part of the problem. It seems to be a very big part of the problem: the current shortfall looks to be around £485m, but, says the Times, the rising life expectancy of the scheme's 100,000-odd members means that it is forecast to end up at over £2bn. To close that "will require annual contributions of about £200m a year for 15 years." Too much for any buyer to contemplate taking on.
Tata hasn't been ignoring this problem: it has put £90m into the scheme over the last three years. However, the deficit has just kept growing. Why? This brings us to much the same thing that most major financial problems now seem to bring us to: super-low interest rates.
I've written about this before here and here. But the key point is that pension trustees tend to use the rates on government bonds as proxies for the returns they will make on the assets they hold in their funds (bonds are thought to be the only matching assets for pension liabilities). If rates are where they are now 0.5% the present value of the assets is going to be significantly lower than when they were, say, 5%. The lower rates go, the higher pension deficits get.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
So, Tata isn't alone in its pension problems: the latest reports on the matter suggest that the UK's largest 350 companies have a combined deficit of £64bn. And it isn't just big companies that are being dragged down by this: watch my interview with Gervais Williams this week, and you will hear him talking about a company that got a great deal on an acquisition. Its target the main business of which was profit making had ended up in administration as a direct result of being unable to fund its pension scheme.
The authorities are in a tricky situation here. They need the pension funds to keep thinking that bonds are the only game in town for them (someone has to be prepared to keep buying the things at these low yields). But they clearly don't want that to mean the total collapse of the UK's industrial base. So what do they do? The obvious answer is to put up interest rates. Port Talbot is just one more message from corporate Britain to the Bank of England: low rates aren't working anymore.
-
Beating inflation takes more luck than skill – but are we about to get lucky?Opinion The US Federal Reserve managed to beat inflation in the 1980s. But much of that was down to pure luck. Thankfully, says Merryn Somerset Webb, the Bank of England may be about to get lucky.
-
Rishi Sunak can’t fix all our problems – so why try?Opinion Rishi Sunak’s Spring Statement is an attempt to plaster over problems the chancellor can’t fix. So should he even bother trying, asks Merryn Somerset Webb?
-
Young people are becoming a scarce resource – we should value them more highlyOpinion In the last two years adults have been bizarrely unkind to children and young people. That doesn’t bode well for the future, says Merryn Somerset Webb.
-
Ask for a pay rise – everyone else isOpinion As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why you should do that too.
-
Why central banks should stick to controlling inflationOpinion The world’s central bankers are stepping out of their traditional roles and becoming much more political. That’s a mistake, says Merryn Somerset Webb.
-
How St Ives became St Tropez as the recovery drives prices sky highOpinion Merryn Somerset Webb finds herself at the epicentre of Britain’s V-shaped recovery as pent-up demand flows straight into Cornwall’s restaurants and beaches.
-
The real problem of Universal Basic Income (UBI)Merryn's Blog April employment numbers showed 75 per cent fewer people in the US returned to employment compared to expectations. Merryn Somerset-Webb explains how excessive government support is causing a shortage of labour.
-
Why an ageing population is not necessarily the disaster many people think it isOpinion We’ve got used to the idea that an ageing population is a bad thing. But that’s not necessarily true, says Merryn Somerset Webb.
