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End the gilt complex for annuities

Peter Amott’s article on the black holes of final-salary schemes is mildly interesting but fails to ask the funda-mental question as to why these black holes have become such a problem in recent times.

Sponsoring employers have managed to cope with the fact that the values of their underlying assets inevitably wax and wane from time to time. What has happened in recent times to have transformed such schemes into such an intolerable albatross around the necks of company balance sheets?

There are two things – Government interference (including the massive knee-jerk over-reaction to the Maxwell business) and falling gilt yields.

If an employer sets up an employee benefit scheme based on a known, albeit potentially variable, ongoing funding require-ment but then a third party (the Government) starts dictating to that employer all sorts of improvements and add-ons and fiscal management disciplines that were never countenanced at the outset, then sooner or later, the cost of maintaining the scheme will become not merely unacceptable but also dangerously unmanageable.

Eventually, the employer will be forced to conclude that maintaining the scheme has become such a burden that to try to continue to do so poses a threat to the very survival of the business.

If no action is taken, members of the scheme will have no jobs, let alone a decent pension to which to look forward. A financially strong company and a solvent, although less than belt and braces, final-salary pension scheme are defin-itely better than a weakened company and eventually a closed or failed pension scheme.

Falling and now perman-ently low gilt yields are a direct consequence of the Government’s laudable aim of conquering inflation.

Unfortunately, no one foresaw the effect of this on pensions or, if they did, no one took any notice. Radical changes are definitely, obviously and urgently required to break the link between pensions and gilt yields (annuities).

Defined-benefit pensions, especially gold-plated ones, cost too much while the income purchasing power of money-purchase funds has fallen to such levels that an increasingly large number of people regard personal pensions as simply very poor

value. Low gilt yields are the absolute core and bedrock of the pension crisis and I have to admit that I have no ready solution but I shall continue to think about it. Unless and until somebody grasps this huge and nasty nettle, I really do not see things getting any better.

Julian Stevens

WDS IFAs

Bristol

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