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Occupational Pensions

Of course conditions changed; the main change was the tax increases that did all the damage. Subsequently, actuaries decided that they wanted to make more provision for longevity, which needed to be paid for. There is a certain symmetry in the figures. My £100 billion guesstimate—a rough guess based on a simple calculation—has been turned into a much firmer figure by people who have made sophisticated calculations. They are trained actuaries—unlike me—and they say that £100 billion is not a bad estimate of the damage done by the tax changes. The longevity problem created a potential extra deficit, which is being taken care of by the increased contributions. The symmetry is interesting because the cumulative aggregate deficits are about £75 billion—they were about £100 billion but the stock market has performed better recently, which has helped—which is similar to the figure that many actuaries say would be the discounted cost of forgoing the £5 billion or more of income in the form of the tax credit that is being removed year after year. One of the things that Government could do to help the debate is to provide proper information so that we can calculate the figures more accurately. I have often asked them to give me the run of numbers for the imputation tax credits forgone over the past 10 years. I believe that the £5 billion included charity funds, so perhaps in the early days the figure was not £5 billion for pension funds overall, but I suspect that it is rather more now because the distribution rate has gone up, as have profits and dividends, so one would expect the credit to be worth more. I assume that is the reason why the Government will not give me the figures, because if the amount were lower they would want people to know. However, it would be good if they published the run of figures so that we can run proper actuarial figures again, based on the actual figures that the Government can work out from the state of the funds and the dividend incomes flowing into them. Funds today have less equity dividend flowing into them proportionately than 10 years ago when this dreadful business started, because many funds have been forced by regulatory, actuarial and other pressures to switch quite a lot of money from equities into bonds, so the figures would need adjusting for that factor, too. When the crisis hit, UK pension funds, quite reasonably, had two thirds or more of their assets in equities. They were growing assets, which, taking the normal run of years, outperformed bonds, but because of the crisis pension funds have now been talked into a much higher bond ratio, at a time when bonds are expensive and yields are low, partly due to the bubble effect of the regulatory pension fund crisis. We could now be seeing the beginnings of another crisis in pension funds, because they can no longer make as much on investment gain to get out of trouble as they could 10 years ago before so many of them were switched into bonds. Why are they being switched into bonds? Because the actuarial profession is becoming very cautious and primarily, of course, because so many of the funds are now closed funds. There is a case for saying that we need to be more cautious with a closed fund than with a growing or open fund. It is a tragedy that many of our young people will now have no access to final salary schemes—and it was an avoidable tragedy. It means that the remaining population of pension funds are being run in a much more defensive and negative way. That means, paradoxically, that they have a bigger problem with meeting future liabilities, because asset growth is less and the calculation of assets versus liabilities is even more unfavourable. In today’s debate, we have heard estimates of the deficit ranging from £75 billion to £550 billion. That shows that we are dealing with an imprecise science and also tells us that there are different bases for working out the figures. The £550 billion figure was based on the assumption that all the funds are now going to be wound up and annuities purchased through insurance companies based on long bonds. That shows what a difference there is between trusting a bond investment and the £75 billion to £100 billion deficit figure that is based on the assumption that healthy funds can continue and will continue to grow along with growing investments. Of course, investment gain is very important in these funds, but it is quite ridiculous of Government Members to try and argue that having £5 billion or so less a year to invest does no harm whatever to investment funds. They need more money and the main reason for that is that the Government took the money away.