Proposed Pensions Deficit Cure Would Hurt More Than Help
Financial Times Business Columnist Jonathan Ford said the idea of protecting pensions deficits from short-term massive losses is only a ‘band-aid’ solution to the longer term problem.
He claims that liability-driven investing is “perverse, pro-cyclical and costly”.
The “cure” proposed by pension funds would encourage “de-risking” every single investment, protecting the funds from short-term deficits. By hedging bonds against future interest falls, they more continue the cycle of deficits in the short-term future rather than in the long run.
Mr Ford mentioned about a PricewaterCooper research indicating that the collective deficits in the 6,000 schemes of top UK companies have a huge £100bn hole in a single month. Now, the pension deficits is now at £710bn by the end of August.
The analyst believes that deficit numbers have little to do with the downfall of a pension scheme or the contract listed by its sponsoring company. He attributes the downfall to the UK’s new monetary policy, which had driven down government bonds, increasing deficits by twentyfold.
Mr Ford illuminated that while some pension schemes may struggle to provide for pensioners in the future, the deficit figures are only an ‘early-warning mechanism’ to allow companies to provide proper contribution for their employees.