by Jacques Szemalikowski
, ASCL Conditions of Employment Specialist: Pensions
Last autumn, the eventual lift-off of the Artemis moon rocket stoked some nostalgia. I remember teaching space exploration as part of A level physics and watching the movie Apollo 13
with students, any excuse! It brought home the huge risks involved, and the reliance on so many factors needing to function perfectly.
In the pensions arena, the parallel to the “OK Houston, we’ve had a problem here” moment also occurred last autumn, following the so-called mini budget.
So, what just happened?
Most pension schemes rely on the investment performance of purchased funds. These pension funds tend to buy heavily into government bonds or “gilts”. These are traditionally seen as safe havens, to the extent that funds often borrow money to purchase them, providing collateral against the loan.
These government gilts are generally issued at a fixed interest rate, with the rate per cost being termed the “yield”.
So far, so good.
The mini budget drew attention because of its proposed tax cuts to be financed by a surge in government borrowing, essentially by issuing and selling more gilts. This increase in supply then caused yields to rise (as gilt prices fell). Concurrently, interest rate rises (to combat inflation) also make gilts less attractive, increasing the downward pressure on their resale price. A perfect storm. “We have a problem here”.
Many gilts had been purchased “on the margins” via largely borrowed money. Their fall in value resulted in “margin calls” for more collateral from lenders. Pension funds started selling gilts to pay these, which in turn reduced their resale value even further. Some feared that this vicious circle, whereby falling government bond prices prompted collateral calls for pension funds which sold gilts to finance them, so lowering values even further, would lead to a “doom loop” that would crash the market.
A financial equivalent to the Apollo 13 astronauts fashioning a carbon dioxide scrubber from a technical manual was needed. Consequently, that explains why the Bank of England responded to this forced selling of assets by buying up these gilts to stabilise markets.
Whilst the long-term impact is still the subject of debate, it is realistic that it may result in a deterioration in the funds available to some providers to pay pensions in the future.
This is compounded, of course, by the current high rate of inflation not seen for four decades driving the very real cost-of-living crisis.
Cause for concern?
And so, to the Teachers’ Pension Scheme (TPS), where some colleagues have been asking if there is any cause for concern.
Unlike invested schemes, the TPS is one of only eight pension schemes secured by the government.
The TPS does not depend on the stock market performance of any fund. Instead, it will pay you a guaranteed income for life, (annuity), that, grows dependent on your service and salary. It does not vary with gilt values, collateral, or margin calls.
Even better, with the rising cost of living, it is inflation proof. The reformed career average revaluated scheme, as its name suggests, uprates the value of your benefit statement annually by the Consumer Price Index (CPI) measure of inflation plus 1.6% (the legacy Final Salary Scheme is indexed annually by CPI). When you finally get your pension, your annuity is inflation-proofed by index-linking too. Alongside your own contribution (taken from gross salary without taxation), your employer puts in almost a quarter of your salary value on top too.
ASCL colleagues who speak to those with private pensions know how much many envy what must still be the best, and most secure, pension scheme around.
Whilst the Local Government Pension Scheme (LGPS) operates in a slightly different way, Defined Benefit investments are performing well.
Often overlooked, beyond just a pension, in both schemes, you also receive excellent life insurance for your loved ones should the worst happen. This equates to a lump sum of three times your salary, plus ongoing benefits. This comes bundled in with your pension benefits and, importantly, is unqualified – so no medical examination or consideration of pre-exiting conditions.
Finally, you have the additional security of protection should you fall ill and are no longer be able to carry on in your role. Good to know if ever, perish the thought, you have your own “Houston, we’ve had a problem” moment.
is ASCL Conditions of Employment Specialist: Pensions.