People saving into a pension are being hammered by low gilt yields, making it harder to eke out a decent income in retirement. But could gilt yields also be preventing the UK economy from bouncing back?
On the same day that the Office of National Statistics announced UK GDP had contracted a worryingly steep 0.7% in the second quarter of this year, business group the CBI warned that increasing company pension liabilities are harming growth prospects.
The CBI has the same concerns as the average pension saver; low gilt yields, thanks to the impact of quantitative easing and everyone piling into the safe haven of UK debt following the Eurozone crisis, has dampened returns. Gilts yields have hit historic lows this year, currently at 1.4%, meaning the average saver gets a poor return on their pension fund, but for businesses the impact is much more frightening.
The CBI estimated that for every 0.4% that the gilt yield falls, it increases UK companies' pension liabilities by £100 billion. This increase happens even if the funding of the scheme is unchanged, meaning that a company could be doing nothing differently but could have millions added to its pension deficit overnight.
But, according to the CBI, DB schemes are not dying out quickly enough to not have an impact on the UK economy. With the burden of DB liabilities hanging over them, and indeed increasing with every fall in the gilt yield, companies are unable to invest or grow – leaving the UK economy stagnating.
The CBI wants the government to measure pension liabilities over the long-term, rather than on short-term gilt yields, effectively smoothing the payments employers have to make over a longer period.
This makes logical sense as pensions are a long-term savings vehicle. The government is always telling us to plan for the future and take a longer view of our finances, and it would be nice if it could just once take its own advice and give up the short-termist views that politicians are so keen on holding.