The Bank of England has been forced into emergency action to halt a run on Britain’s pension funds after the impact of Kwasi Kwarteng’s ill-received mini budget prompted fears of a 2008-style financial crisis.
Threadneedle Street said the fallout from a dramatic rise in government borrowing costs since the chancellor’s statement had left it with no choice but to intervene to protect the UK’s financial system.
City sources said the surprise move, less than a week after Kwarteng’s unfunded tax giveaways, was needed to halt a “doom loop” in the bond markets that risked draining pension funds of cash and leaving them at risk of insolvency.
Interest rates on government bonds, or gilts, have risen sharply since the chancellor’s £45bn package of tax cuts – making it punitively expensive for thousands of pensions funds to fund their hedging activities.
Officials in the Financial Services Group of the Treasury were at an away day – said to have been held at the Oval cricket ground in London – on Wednesday, but returned to their desks that afternoon. A source said they were not working on the response to the Bank of England’s announcement.
The Bank’s action helped provide Kwarteng with some respite from the financial markets after three days of turmoil that has seen sterling hit its lowest ever level against the dollar, strong criticism of the mini-budget from the International Monetary Fund, about 1,000 mortgage products pulled and interest rates on UK government bonds hit their highest level since 2008. Bond yields fell while the pound recovered in the currency markets after Threadneedle Street’s announcement.
Author(s): Larry Elliott, Pippa Crerar and Richard Partington
The measures sparked a sharp rally in the market for the 30-year gilts that pension funds had been forced to sell. The cost of such borrowing fell by more than 1 percentage point, a significant downward move. Meanwhile the pound fell initially after the Bank’s announcement on fears of further inflation but recovered to finish roughly flat at nearly $1.09 against the dollar.
French president Emmanuel Macron has decided against pushing through a rise in the retirement age to 65 in a budget bill, backing off an idea that had angered labour unions and divided his centrist alliance.
The move signals how Macron has been forced to contend with a stronger opposition in his second term after his party lost its majority in parliament in June.
Prime Minister Élisabeth Borne told Agence France-Presse on Thursday that the government would start negotiations with labour unions, employers and other political parties with a view to passing a law over the coming months.
The government still wants to raise the retirement age from 62 at present to 65, one of Macron’s campaign promises that he sees as key to fixing France’s public finances.
Canada’s government acknowledges that the significant investments they seek in Canadian businesses and infrastructure must come mostly from the private sector. But in fact for decades, the country’s pension funds have been considerably reducing their domestic investments, a trend the feds and regulation are being taken to task for.
Tony Loffreda, independent senator from Quebec and former vice chairman of RBC Wealth Management, on May 12 asked the government’s representative in the Senate, Marc Gold, what the feds could do to incentivize Canada’s pension funds to invest more in Canada “without necessarily regulating free enterprise.”
The CPPIB’s 2021 annual report showed that in 2006, 64 percent of its assets were invested in Canada and the remaining 36 percent invested globally. But by 2021, the mix had changed to 15.7 percent in Canada and 84.3 percent globally.
The report outlined some of the reasons for the trend, singling out regulation.
“Plan sponsors are reacting in very predictable ways to their regulatory environment and the only way to change this behaviour is to change the environment,” LetkoBrosseau said.
It said regulation has over-emphasized short-term fluctuations in asset values, resulting in a shorter investment time horizon for pension fund assets. In contrast, pension savings, which represent 30 percent of Canadian savings, are typically invested for the long term and are meant to be managed such that they can take more risk to earn greater rewards.
Separate SPAs for men and women were introduced in 1940 — age 65 for men and 60 for women, with a decision to equalise the SPA for men and women trailed in the 1993 white paper ‘Equality in state pension age’. Now that the same age applies for both men and women, at 66, there is still huge controversy over the notice period and quality of information given to women over the age of 50 on the exact timetables for this change.
Demography has increasingly put the whole system under strain. Andrew Tully, technical director at Canada Life, warns: “By 2045, the number of people of pensionable age will grow to 15.2mn, an increase of 28 per cent on the level in 2020. The ‘oldest old’ cohort is also increasing, with the number of people aged 85 and over projected to almost double to 3.1mn by 2045.
“At the same time, the working age population will increase by much less — around 4.5 per cent up by the mid-2030s, but then remaining around that level by 2045. Meanwhile, we are seeing a decrease in the number of children, with those aged 0 to 15 projected to fall by nearly 9 per cent by mid-2030.”
Peru, Chile and Bolivia have allowed early withdrawals from their funds as a source of relief for households and to support recoveries during the pandemic and the global price shock. But these have had negative financial and confidence ramifications, contributing to downgrades of Peru in 2021 and Chile in 2020. Longstanding private pension funds have been important supports for sovereign creditworthiness where they exist in Latin America.
Peru’s Congress approved a sixth withdrawal from private pension funds in May. Prior rounds due to the pandemic led to withdrawals of USD17.8 billion or 8% of 2021 GDP. In Chile, a fourth withdrawal proposal failed in April 2022, but Chileans have already withdrawn about USD50 billion (16% of 2021 GDP) in 2020-2021. Bolivia allowed early withdrawals once in 2021 for more limited amounts (0.4% of 2021 GDP).
Millions of people born in the 1970s may have to wait longer to collect their UK state pensions if a government review, which was announced this week, recommends bringing forward plans for a retirement age of 68.
The state pension age rose to 66 last year, with two further rises planned, meaning that by 2046 those born on or after April 1977 would need to wait until 68 before they can draw the benefit.
However, the review will look at bringing forward that change by eight years, so that the increase is phased in between 2037 and 2039.
The State pension system is “not sustainable” and there is “no getting away from that fact”, Minister for Social Protection Heather Humphreys has said.
Ms Humphreys also said there are “no easy options” when it comes to reforming the State pension.
The OireachtasJoint Committee on Social Protection, Community and Rural Development and the Islands said in its report, published on Wednesday, that the State pension age should not rise beyond the age of 66.
Its view runs counter to the stance of the Pensions Commission which argued the pension age should rise in steps to 67 by 2031 and then to 68 by 2039.
“Today we have 4.5 people working for every one pensioner, by 2050 we will have two people working for every pensioner,” Ms Humpreys said.
When communist Vietnam recently introduced private retirement funds, it was taking a step not only closer to capitalism, but also toward changing a young pension system that some worry may buckle if citizens get old before getting rich.
Last year marked the first time workers could put part of their paychecks into private retirement accounts, on top of the share contributed to the state pension. But analysts say bigger, systemic change is needed to enable retirement for all, even as the International Labor Organization says the state fund is robust.
Retirees would seem to be the envy of the neighborhood, receiving payouts worth 75% of their prior wages — the fifth-highest among 70 countries in the Allianz Global Pension Report 2020.
But Vietnam’s system covers just 40% of the elderly, which explains why women keep working longer there than in all but five other countries, the report shows.
At present, the state pension increases each year in line with the rising cost of living seen in the Consumer Prices Index (CPI) measure of inflation, increasing average wages, or 2.5%, whichever is highest.
As people come off furlough and return to full pay, this is recorded as a large rise in average earnings. Job losses have also affected those in low-paid work too.
This leads to a unique situation, and one which economists describe as an anomaly.
Predictions by the Bank of England suggest that average earnings could go up by 8%, hence the equivalent rise in the state pension.
The 2020 census reported that there are some 18 million pensioners in Iran, who form part of the 96% of the population who live under the poverty line. Even the regime’s own statistics advise that over 75% of pensioners cannot afford the most basic goods, like food and shelter. This is because the average pension is 25 million rials per month even though some parts of the country have a poverty rate of 100 million rials after the economic crisis caused by the pandemic.
Means tests must always turn regressive at some point in the income or wealth distribution. Because the means test withdrawal cannot exceed the benefit amount, the implicit tax can only rise with income or wealth so far. From there, it turns into a fixed sum tax, like the notorious Thatcher poll tax albeit phased-in at the lower end.
Consider the Australian Government’s Age Pension assets test, which functions as an implicit wealth tax targeted at the middle class. The single Age Pension benefit is approximately $953 a fortnight. The maximum implicit tax amount can then only be $953 per fortnight – whether you’re worth $600,000 or $600 million. The implicit tax amount payable by wealth (excluding the family home) for a single person is shown below.