In the DB funds, government has over the years been spooked by the large number of pension fund failures. Many of these funds’ assets proved to be inadequate to pay the pensions promised and where the sponsoring firm had failed the Pension Protection Fund – an industry-backed government-sponsored insurer – has had to pick up the pieces. The Pension Protection Fund pays lower pensions than promised to the members of failed funds, but at least they are paid something.Īs a result of this string of DB fund failures, the Government, via the Pension Regulator, has imposed tighter and tighter restrictions on the freedom of pension trustees to choose investments. This has resulted in what Nigel Wilson, CEO of pensions giant Legal and General, recently called “de-equitisation” – funds moving out of “riskier” equities into “less risky” but lower return Government bonds (gilts). I put “less risky” in quotes because the risk is measured by actuaries relative to the pension funds’ liabilities – which are “bond-like” in their financial characteristics. As it happens, bonds aren’t actually less risky in day-to-day parlance, as some of them have fallen in price by 50 per cent in the 18 months. Equities, by contrast, have not in general fallen at all, but equities do not move in step with bond prices, hence the actuaries’ assessment of relative risk. The other type – “defined contribution” (DC) pensions funds are what pretty much everyone in the UK (apart from Government workers) puts their money into for a future pension.
For all but government employees (some 5.5 million), these salary-based pensions are almost all now unavailable and therefore the funds are closed to new members. Employers deem them too expensive, hence their closure. There are now two types of pension fund in the UK – the large, legacy funds which support “defined benefit” (DB) pensions offered by UK employers over the past fifty years. The general public expect them to produce reliable high-value pensions for retirement, and the Government also expects them to support British industry and entrepreneurship, and more recently, the green energy transition. Much is asked or expected of UK pension funds.
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