Evercore Pan Asset

The UK has spent the last few days discussing how to pay for retirement and old age. It has been a strange debate. When it comes to discussing pensions it has been dominated by thoughts of how to curb the costs of future pensions. When it came to discussing who pays for care for elderly people needing to spend their ebbing days in a Care or nursing home, the debate has been about how much extra contribution the state could and should make to paying the bills.
 
The pensions world has become sharply divided in the UK in recent years. The days when most private sector workers could look forward to a final salary based pension when they retired are long gone. Most companies with final salary pension plans have now closed them to new members. Many have gone further, and closed them to further contributions for existing members. They have taken this drastic action because they do not think final salary scheme pensions are affordable. 
 
Companies have faced several difficult pressures on their pension funds. The good news that we are on average living a lot longer is bad news for those who have to pay their bills for the extra pensions. Inflation has been reduced but it is still there, driving up the amounts of money that people need in retirement to pay their bills. Tax increases have hit pension funds, taking tax on the dividend income flowing into the funds. Investment returns in many cases have been disappointing, owing to the poor performance of US, UK, Japanese and European shares over the last ten years. 
 
The answer most companies have concluded is to offer money purchase schemes. The investment risk, the possibility that the person lives longer, and the inflation risk are taken by the employee and pensioner, rather than by the company. If all goes well the money saved swells more quickly than the liability and all will be well. If it doesn’t the individual just gets a worse pension. 
 
It has been very different in the public sector. Final salary schemes have remained commonplace. Some have assets to back them up, others are just promises by the state to pay the pensions with no money saved to do so. The previous government began to ask questions about how affordable all this was. The Coalition government has proposed changes that will reduce the cost of these promises. They are negotiating with the Unions over a higher retirement age, a move to career average rather than final salary, higher pension contributions and a change to CPI instead of RPI indexation. Their aim is to reduce the future liability and the future employer costs.
 
The Unions have not been happy about these proposals. They have claimed that pensions are part of the public service package. In some cases they say it is part of the reward for especially hazardous jobs, in part to compensate for lower remuneration. The government says that the average public sector worker now earns slightly more than the average private sector worker. They have accepted the principle of special treatment for hazardous jobs, and exempted low paid employees from the full rigours of the proposals. 
 
Meanwhile, a Report has arrived suggesting the state should pay some more of the bills of those elderly in care who still own assets. The feeling is that there is some compromise in the air on all these matters. The government may achieve some savings from public sector pensions, but may well give some back in the form of increased spending on care for the elderly. All this could take time, as the care issues may be handled through cross party talks. The message from all this is that cutting public spending is proving difficult. The deficit reduction strategy already relied heavily on rising tax revenue. Day by day it appears that some spending pressures have to be accepted, so we should not expect too much of the deficit control to come on the spending side.

As published in Investment Week